JOHN HANCOCK GROWTH & INCOME FUNDS SUPPLEMENT
Effective December 2, 1996, for Sovereign Balanced Fund and Sovereign Investors
Fund, the Registrant name for the funds on pages 8 and 10 has been changed to
John Hancock Investment Trust. For Sovereign Balanced Fund, Sovereign Investors
Fund and Growth & Income Fund, the date of the prospectus is December 2, 1996.
The financial highlights below for Sovereign Balanced Fund and Sovereign
Investors Fund have been updated from those shown on pages 9 and 11 to include
unaudited figures for the six months ended June 30, 1996.
<TABLE>
<CAPTION>
SOVEREIGN BALANCED FUND
- ---------------------------------------------------------------------------------------------------------------------------------
Class A - year ended December 31, 1992(1) 1993 1994 1995 1996(9)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.19 $10.74 $9.84 $11.75
Net investment income (loss) 0.04 0.46 0.50 0.44(2) 0.21
Net realized and unrealized gain (loss) on investments 0.20 0.68 (0.88) 1.91 0.41
Total from investment operations 0.24 1.14 (0.38) 2.35 0.62
Less distributions:
Dividends from net investment income (0.05) (0.45) (0.50) (0.44) (0.21)
Distributions from net realized gain on investments sold -- (0.14) (0.02) -- --
Total distributions (0.05) (0.59) (0.52) (0.44) (0.21)
Net asset value, end of period $10.19 $10.74 $9.84 $11.75 $12.16
Total investment return at net asset value(3) (%) 2.37(4) 11.38 (3.51) 24.23 5.31(4)
Total adjusted investment return at net asset value(3,5) (%) 2.22(4) -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 5,796 62,218 61,952 69,811 70,458
Ratio of expenses to average net assets (%) 2.79(6) 1.45 1.23 1.27 1.27(6)
Ratio of adjusted expenses to average net assets(7) (%) 2.94(6) -- -- -- --
Ratio of net investment income (loss) to average net assets (%) 3.93(6) 4.44 4.89 3.99 3.48(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 3.78(6) -- -- -- --
Portfolio turnover rate (%) 0 85 78 45 15
Fee reduction per share ($) 0.0016 -- -- -- --
Average brokerage commission rate(8) ($) N/A N/A N/A N/A 0.07
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class B - year ended December 31, 1992(1) 1993 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.20 $10.75 $9.84 $11.74
Net investment income (loss) 0.03 0.37 0.43 0.36(2) 0.17
Net realized and unrealized gain (loss) on investments 0.20 0.70 (0.89) 1.90 0.42
Total from investment operations 0.23 1.07 (0.46) 2.26 0.59
Less distributions:
Dividends from net investment income (0.03) (0.38) (0.43) (0.36) (0.17)
Distributions from net realized gain on investments sold -- (0.14) (0.02) -- --
Total distributions (0.03) (0.52) (0.45) (0.36) (0.17)
Net asset value, end of period $10.20 $10.75 $9.84 $11.74 $12.16
Total investment return at net asset value(3) (%) 2.29(4) 10.63 (4.22) 23.30 5.04(4)
Total adjusted investment return at net asset value(3,5) (%) 2.14(4) -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 14,311 78,775 79,176 87,827 88,344
Ratio of expenses to average net assets (%) 3.51(6) 2.10 1.87 1.96 1.97(6)
Ratio of adjusted expenses to average net assets(7) (%) 3.66(6) -- -- -- --
Ratio of net investment income (loss) to average net assets (%) 3.21(6) 4.01 4.25 3.31 2.78(6)
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.06(6) -- -- -- --
Portfolio turnover rate (%) 0 85 78 45 15
Fee reduction per share ($) 0.0012 -- -- -- --
Average brokerage commission rate(8) ($) N/A N/A N/A N/A 0.07
(1) Class A and Class B shares commenced operations on October 5, 1992. This period is covered
by the report of other independent auditors (not included herein).
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration fee reductions
by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
(9) Six months ended June 30, 1996. (Unaudited.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOVEREIGN INVESTORS FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended December 31, 1986(1,2) 1987(1) 1988(1) 1989(1) 1990(1) 1991(1,3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.31 $12.36 $10.96 $11.19 $12.60 $11.94
Net investment income (loss) 0.58 0.53 0.57 0.59 0.58 0.54
Net realized and unrealized gain (loss) on investments 1.89 (0.45) 0.65 2.01 (0.05) 3.03
Total from investment operations 2.47 0.08 1.22 2.60 0.53 3.57
Less distributions:
Dividends from net investment income (0.55) (0.58) (0.61) (0.61) (0.59) (0.53)
Distributions from net realized gain on
investments sold (0.87) (0.90) (0.38) (0.58) (0.60) (0.67)
Total distributions (1.42) (1.48) (0.99) (1.19) (1.19) (1.20)
Net asset value, end of period $12.36 $10.96 $11.19 $12.60 $11.94 $14.31
Total investment return at net asset value(4) (%) 21.70 0.28 11.23 23.76 4.38 30.48
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 34,708 40,564 45,861 66,466 83,470 194,055
Ratio of expenses to average net assets (%) 0.70 0.85 0.86 1.07 1.14 1.18
Ratio of net investment income (loss) to
average net assets (%) 4.28 3.96 4.97 4.80 4.77 4.01
Portfolio turnover rate (%) 34 59 35 40 55 67
Average brokerage commission rate(5) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - year ended December 31, 1992(1) 1993 1994 1995 1996(10)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.31 $14.78 $15.10 $14.24 $17.87
Net investment income (loss) 0.47 0.44 0.46 0.40 0.17
Net realized and unrealized gain (loss) on investments 0.54 0.39 (0.75) 3.71 1.43
Total from investment operations 1.01 0.83 (0.29) 4.11 1.60
Less Distributions: (0.45) (0.42) (0.46) (0.40) (0.17)
Dividends from net investment income
Distributions from net realized gain on (0.09) (0.09) (0.11) (0.08) --
investments sold
Total distributions (0.54) (0.51) (0.57) (0.48) (0.17)
Net asset value, end of period $14.78 $15.10 $14.24 $17.87 $19.30
Total investment return at net asset value(4) (%) 7.23 5.71 (1.85) 29.15 8.98(8)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 872,932 1,258,575 1,090,231 1,280,321 1,364,566
Ratio of expenses to average net assets (%) 1.13 1.10 1.16 1.14 1.10(9)
Ratio of net investment income (loss) to
average net assets (%) 3.32 2.94 3.13 2.45 1.87(9)
Portfolio turnover rate (%) 30 46 45 46 20
Average brokerage commission rate(5) ($) N/A N/A N/A N/A 0.0688
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - year ended December 31, 1994(6) 1995 1996(10)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.02 $14.24 $17.86
Net investment income (loss) 0.38(7) 0.27(7) 0.10(7)
Net realized and unrealized gain (loss) on investment (0.69) 3.71 1.42
Total from investment operations (0.31) 3.98 1.52
Less distributions:
Dividends from net investment income (0.36) (0.28) (0.10)
Distributions from net realized gain on
investments sold (0.11) (0.08) --
Total distributions (0.47) (0.36) (0.10)
Net asset value, end of period $14.24 $17.86 $19.28
Total investment return at net asset value(4) (%) (2.04)(8) 28.16 8.54(8)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 128,069 257,781 337,938
Ratio of expenses to average net assets (%) 1.86(9) 1.90 1.86(9)
Ratio of net investment income (loss) to
average net assets (%) 2.57(9) 1.65 1.14(9)
Portfolio turnover rate (%) 45 46 20
Average brokerage commission rate(5) ($) N/A N/A 0.0688
(1) These periods are covered by the report of other independent auditors (not included herein).
(2) Restated for 2-for-1 stock split effective April 29, 1987.
(3) On October 23, 1991, John Hancock Advisers, Inc. became the investment adviser of the fund.
(4) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(5) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
(6) Class B shares commended operations on January 3, 1994.
(7) Based on the average of the shares outstanding at the end of each month.
(8) Not annualized.
(9) Annualized.
(10) Six months ended June 30, 1996. (Unaudited.)
</TABLE>
<PAGE>
JOHN HANCOCK SOVEREIGN
INVESTORS FUND
Investment Adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Principal Distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Custodian
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Transfer Agent
John Hancock Investor Services Corporation
P.O. Box 9296
Boston, Massachusetts 02205-9296
Independent Auditors
Ernst & Young LLP
200 Clarendon St.
Boston, MA 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange Call 1-800-755-4371
For Investment-by-Phone
For Telephone Redemption
290CP 12/96
JOHN HANCOCK
SOVEREIGN
INVESTORS
FUND
CLASS C SHARES
Prospectus
December 2, 1996
A mutual fund seeking long-term growth of capital and income without undue
market risks.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
Telephone 1-800-755-4371
[recycle symbol] Printed on Recycled Paper
<PAGE>
John Hancock
Sovereign
Investors
Fund
CLASS C Shares
Prospectus
December 2, 1996
TABLE OF CONTENTS
Page
-------
Expense Information 2
The Fund's Financial Highlights 3
Investment Objective and Policies 5
Organization and Management of the Fund 7
The Fund's Expenses 8
Dividends and Taxes 9
Performance 10
Who Can Buy Class C Shares 10
How to Buy Class C Shares 10
Class C Share Price 12
How to Redeem Class C Shares 12
Additional Services and Programs 14
This Prospectus sets forth information about John Hancock Sovereign
Investors Fund (the "Fund"), a diversified series of John Hancock Investment
Trust (the "Trust"), that you should know before investing. Please read and
retain it for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission (the "SEC"). You can obtain a copy of the Fund's
Statement of Additional Information, dated December 2, 1996, and incorporated
by reference in this Prospectus, free of charge by writing to or by
telephoning: John Hancock Investor Services Corporation, Post Office Box
9296, Boston, Massachusetts 02205-9296, 1-800-755-4371.
Shares of the Fund 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
EXPENSE INFORMATION
The purpose of the following information is to help you understand the
various fees and expenses that you will bear, directly or indirectly, when
you purchase Fund shares. The operating expenses included in the table and
hypothetical example below are based on fees and expenses of Class C shares
of the Fund for the fiscal year ended December 31, 1995, adjusted to reflect
current fees and expenses. Actual fees and expenses of Class C shares in the
future may be greater or less than those shown.
Class C
Shareholder Transaction Expenses Shares*
----------
Maximum sales charge imposed on purchases (as a
percentage of offering price) None
Maximum sales charge imposed on reinvested
dividends None
Maximum deferred sales charge None
Redemption fee+ None
Exchange fee None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management fee+++ 0.58
Other Expenses 0.18
Total Fund operating expenses 0.76
*The information set forth in the foregoing table relates only to Class C
shares.
+Redemption by wire fee (currently $4.00) not included.
+++The calculation of the management fee is based on average net assets for
the fiscal year ended December 31, 1995. See "The Fund's Expenses."
<TABLE>
<CAPTION>
Example: Class C Shares 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
You would pay the following expenses for the indicated
period of years on a hypothetical $1,000 investment,
assuming a 5% annual return $8 $24 $42 $94
</TABLE>
(This example should not be considered a representation of past or future
expenses. Actual expenses of Class C shares may be greater or less than those
shown.)
The management fee referred to above is more fully explained in this
Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the caption "Investment Advisory and Other
Services."
2
<PAGE>
THE FUND'S FINANCIAL HIGHLIGHTS
The following Financial Highlights, for each of the three years in the period
ended December 31, 1995, has been audited by Ernst & Young LLP, the Fund's
independent auditors whose unqualified report is included in the Fund's 1995
Annual Report and is included in the Statement of Additional Information. The
Financial Highlights for the years 1986 through 1992 were audited by other
independent auditors. The Financial Highlights for the six months ended June 30,
1996 are unaudited. Further information about the performance of the Fund is
contained in the Fund's Annual Report to Shareholders that may be obtained free
of charge by writing or telephoning John Hancock Investor Services Corporation
("Investor Services") at the address or telephone number listed on the front
page of this Prospectus.
Selected data for each class of shares outstanding throughout each period
indicated is as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
1996 -----------------------------------------------
(Unaudited) 1995 1994 1993 1992(1)
-------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Class A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 17.87 $14.24 $15.10 $14.78 $14.31
------- ------ ------ ------ ------
Net Investment Income 0.17 0.40 0.46 0.44 0.47
Net Realized and Unrealized Gain (Loss)
on Investments 1.43 3.71 (0.75) 0.39 0.54
------- ------ ------ ------ ------
Total from Investment Operations 1.60 4.11 (0.29) 0.83 1.01
------- ------ ------ ------ ------
Less Distributions:
Dividends from Net Investment Income (0.17) (0.40) (0.46) (0.42) (0.45)
Distributions from Net Realized Gain on
Investments Sold -- (0.08) (0.11) (0.09) (0.09)
------- ------ ------ ------ ------
Total Distributions (0.17) (0.48) (0.57) (0.51) (0.54)
------- ------ ------ ------ ------
Net Asset Value, End of Period $19.30 $17.87 $14.24 $15.10 $14.78
======= ====== ====== ====== ======
Total Investment Return at Net Asset
Value (3) 8.98%(7) 29.15% (1.85%) 5.71% 7.23%
------- ------ ------ ------ ------
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $1,364,566 $1,280,321 $1,090,231 $1,258,575 $872,932
Ratio of Expenses to Average Net Assets 1.10%(8) 1.14% 1.16% 1.10% 1.13%
Ratio of Net Investment Income to
Average Net Assets 1.87%(8) 2.45% 3.13% 2.94% 3.32%
Portfolio Turnover Rate 20% 46% 45% 46% 30%
Average Brokerage Commission (4) $0.0688 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1991(1,2) 1990(1) 1989(1) 1988(1) 1987(1) 1986(1)(a)
--------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Class A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 11.94 $ 12.60 $ 11.19 $ 10.96 $ 12.36 $ 11.31
-------- ------- ------- ------- ------- -------
Net Investment Income 0.54 0.58 0.59 0.57 0.53 0.58
Net Realized and Unrealized Gain (Loss)
on Investments 3.03 (0.05) 2.01 0.65 (0.45) 1.89
-------- ------- ------- ------- ------- -------
Total from Investment Operations 3.57 0.53 2.60 1.22 0.08 2.47
-------- ------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income (0.53) (0.59) (0.61) (0.61) (0.58) (0.55)
Distributions from Net Realized Gain on
Investments Sold (0.67) (0.60) (0.58) (0.38) (0.90) (0.87)
-------- ------- ------- ------- ------- -------
Total Distributions (1.20) (1.19) (1.19) (0.99) (1.48) (1.42)
-------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 14.31 $ 11.94 $ 12.60 $ 11.19 $ 10.96 $ 12.36
======== ======= ======= ======= ======= =======
Total Investment Return at Net Asset
Value (3) 30.48% 4.38% 23.76% 11.23% 0.28% 21.70%
-------- ------- ------- ------- ------- -------
Ratios and Supplemental Data
Net Assets, End of Period (000's
omitted) $194,055 $83,470 $66,466 $45,861 $40,564 $34,708
Ratio of Expenses to Average Net Assets 1.18% 1.14% 1.07% 0.86% 0.85% 0.70%
Ratio of Net Investment Income to
Average Net Assets 4.01% 4.77% 4.80% 4.97% 3.96% 4.28%
Portfolio Turnover Rate 67% 55% 40% 35% 59% 34%
Average Brokerage Commission (4) N/A N/A N/A N/A N/A N/A
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996
(Unaudited) 1995 1994
--------------- ------- -----------
<S> <C> <C> <C>
Class B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 17.86 $ 14.24 $ 15.02
------- -------- --------
Net Investment Income 0.10(6) 0.27(6) 0.38(6)
Net Realized and Unrealized Gain (Loss) on Investments 1.42 3.71 (0.69)
------- -------- --------
Total from Investment Operations 1.52 3.98 (0.31)
--------- -------- --------
Less Distributions:
Dividends from Net Investment Income (0.10) (0.28) (0.36)
Distributions from Net Realized Gain on Investments
Sold -- (0.08) (0.11)
---------
Total Distributions (0.10) (0.36) (0.47)
---------
Net Asset Value, End of Period $ 19.28 $ 17.86 $ 14.24
========= ======== ========
Total Investment Return at Net Asset Value (3) 8.54%(7) 28.16% (2.04%)(7)
-------- -------- --------
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $337,938 $257,781 $128,069
Ratio of Expenses to Average Net Assets 1.86%(8) 1.90% 1.86%(8)
Ratio of Net Investment Income to Average Net Assets 1.14%(8) 1.65% 2.57%(8)
Portfolio Turnover Rate 20% 46% 45%
Average Broker Commission Rate (4) $0.0688 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Six Months Year Ended For the Period
Ended June 30, December 31 May 7, 1993
1996 ---------------- To December 31,
Class C (9) (Unaudited) 1995 1994 1993
--------------- ------ ------ -------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 17.87 $ 14.24 $ 15.11 $ 14.79
------- ------- ------- -------
Net Investment Income 0.21 0.46(6) 0.52 0.27(6)
Net Realized and Unrealized Gain (Loss) on
Investments 1.42 3.71 (0.77) 0.48
------- ------- ------- -------
Total from Investment Operations 1.63 4.17 (0.25) 0.75
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income (0.21) (0.46) (0.51) (0.34)
Distributions from Net Realized Gain on
Investments Sold -- (0.08) (0.11) (0.09)
------- ------- ------- -------
Total Distributions (0.21) (0.54) (0.62) (0.43)
------- ------- ------- -------
Net Asset Value, End of Period $19.29 $17.87 $ 14.24 $15.11
======= ======= ======= =======
Total Investment Return at Net Asset Value (3) 9.12%(7) 29.68% (1.57%) 5.13%(7)
------- ------- ------- -------
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $23,720 $19,946 $15,128 $10,189
Ratio of Expenses to Average Net Assets 0.74%(8) 0.74% 0.81% 0.88%(8)
Ratio of Net Investment Income to Average Net
Assets 2.25%(8) 2.84% 3.53% 3.17%(8)
Portfolio Turnover Rate 20% 46% 45% 46%
Average Broker Commission Rate (4) $0.0688 N/A N/A N/A
</TABLE>
(1) These periods are covered by the report of other independent
auditors (not included herein).
(2) On October 23, 1991, John Hancock Advisers, Inc. became the
investment adviser of the fund.
(3) Assumes dividend reinvestment and does not reflect the effect of
sales charges.
(4) Per portfolio share traded. Required for fiscal years that began
September 1, 1995 or later.
(5) Class B shares commenced operations on January 3, 1994.
(6) Based on the average of the shares outstanding at the end of each
month.
(7) Not annualized.
(8) Annualized.
(9) Class C shares commenced operations on May 3, 1993.
(a) Restated for 2 for 1 stock split effective April 29, 1987.
4
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
[sidebar] The Fund's investment objective is to seek long-term growth of
capital and income without undue market risk.
The Fund's investment objective is to provide long term growth of capital and
of income without assuming undue market risks. The Fund believes that its
shares are suitable for investment by persons who are in search of
above-average long term reward. At times, however, because of market
conditions the Fund may find it advantageous to invest primarily for current
income. The Fund will diversify its investments among a number of industry
groups without concentrating more than 25% of its assets in any particular
industry. The Fund's investments will be subject to market fluctuation and
risks inherent in all securities. There is no assurance that the Fund will
achieve its investment objective.
[sidebar] The Fund will invest primarily in common stocks, although it may
respond to market conditions by investing in other types of securities.
Common stocks will generally represent the major part of the Fund's holdings,
although, for defensive purposes, the Fund may temporarily hold a larger
percentage of high grade liquid preferred stocks or debt securities. The
Fund's portfolio securities are selected 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 or mix of
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 management's judgment of what might best
achieve the Fund's investment objective.
[sidebar] The Fund generally invests in seasoned companies in sound financial
condition with a long record of paying dividends.
While there is considerable flexibility in the investment grade and type of
security in which the Fund may invest, the Fund may only invest in companies
who have (or whose predecessors have) 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.
Investments in corporate fixed income securities may be in bonds, convertible
debentures and preferred convertible or non-convertible stock. Convertible
issues, while influenced by the level of interest rates, are also subject to
the changing value of the underlying common stock into which they are
convertible. Fixed income securities eligible for purchase by the Fund may
have stated maturities of one to thirty years. The value of fixed income
securities varies inversely with interest rates. Although fixed income
securities in the Fund's portfolio may include securities rated as low as C
by Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's") and unrated securities deemed of equivalent quality by John
Hancock Advisers, Inc. (the "Adviser"), no more than 5% of the Fund's net
assets will be invested in debt securities rated lower than BBB by S&P or Baa
by Moody's or unrated securities of equivalent quality. Bonds rated BBB or
Baa normally exhibit adequate protection parameters. However, 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 higher grade bonds. Bonds rated lower than BBB or
Baa are high risk securities commonly known as "junk bonds." If any security
in the Fund's portfolio falls below the Fund's minimum credit quality
standards, as a result of a rating downgrade or the Adviser's determination,
the Fund will dispose of the security as promptly as possible while
attempting to minimize any loss.
5
<PAGE>
Restricted Securities. The Fund may purchase restricted securities, including
those eligible for resale to "qualified institutional buyers" pursuant to
Rule 144A under the Securities Act of 1933 (the "Securities Act"). The Board
of Trustees will monitor the Fund's investments in these securities, focusing
on certain factors, including valuation, liquidity and availability of
information. Purchases of restricted securities are subject to an investment
restriction limiting all the Fund's illiquid securities to not more than 15%
of the Fund's net assets.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements.
The Fund may reinvest any cash collateral in short-term securities. When the
Fund lends portfolio securities, there is a risk that the borrower may fail
to return the loaned securities. As a result, the Fund may incur a loss or,
in the event of the borrower's bankruptcy, the Fund may be delayed in or
prevented from liquidating the collateral. It is a fundamental policy of the
Fund not to lend portfolio securities having a total value in excess of
33-1/3% of its total assets.
Government Securities. The Fund may also invest in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. 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").
The Fund may invest in mortgage-backed securities which 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 the 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 the 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.
Repurchase Agreements, Forward Commitments and When-Issued Securities. The
Fund may enter into repurchase agreements and may purchase securities on a
forward commitment or when-issued basis. In a repurchase agreement, the Fund
buys a security subject to the right and obligation to sell it back to the
seller at a higher price. These transactions must be fully collateralized at
all times, but involve some credit risk to the Fund if the other party
defaults on its obligations and the Fund is delayed in or prevented from
liquidating the collateral. The Fund will segregate in a separate account
cash or liquid,
6
<PAGE>
high grade debt securities equal in value to its forward commitments and
when-issued securities. Purchasing securities for future delivery or on a
when-issued basis may increase the Fund's overall investment exposure and
involves a risk of loss if the value of the securities declines before the
settlement date.
[sidebar] The Fund follows certain policies which may help to reduce
investment risk.
Investment Restrictions. The Fund has adopted certain investment restrictions
that are detailed in the Statement of Additional Information, where they are
classified as fundamental or non-fundamental. The Fund's investment objective
and those investment restrictions designated as fundamental may not be
changed without shareholder approval. The Fund's non-fundamental investment
policies and restrictions, however, may be changed by a vote of the Directors
without shareholder approval. The Fund's portfolio turnover rates for recent
years are shown in "The Fund's Financial Highlights."
[sidebar] Brokers are chosen based on best price and execution.
When choosing brokerage firms to carry out the Fund's transactions, the Adviser
gives primary consideration to execution at the most favorable prices, taking
into account the broker's professional ability and quality of service.
Consideration may also be given to the broker's sale of Fund shares. Pursuant to
procedures established by the Trustees, the Adviser may place securities
transactions with brokers affiliated with the Adviser. These brokers include
Tucker Anthony Incorporated, John Hancock Distributors, Inc. and Sutro &
Company, Inc. which are indirectly owned by John Hancock Mutual Life Insurance
Company (the "Life Company"), which in turn indirectly owns the Adviser.
ORGANIZATION AND MANAGEMENT OF THE FUND
[sidebar] The Directors elect officers and retain the investment adviser, who
is responsible for the day-to-day operations of the Fund, subject to the
Directors' policies and supervision.
The Fund is organized as a separate, diversified portfolio of the Trust,
which is an open-end management investment company incorporated as a Delaware
corporation in 1936, reincorporated in Maryland in 1990 and reorganized as a
Massachusetts business trust in 1996. The Trust reserves the right to create
and issue a number of series of shares, or funds or classes thereof, which
are separately managed and have different investment objectives. The Trustees
have authorized the issuance of three classes of the Fund, designated as
Class A, Class B and Class C. The shares of each class represent an interest
in the same portfolio of investments of the Fund. Each class has equal rights
as to voting, redemption, dividends and liquidation. However, each class
bears different distribution and transfer agent fees and other expenses.
Also, Class A and Class B shareholders have exclusive voting rights with
respect to their distribution plans.
The Fund is not required to and does not intend to hold annual meetings of
shareholders, although special meetings may be held for such purposes as
electing or removing Trustees, changing fundamental policies or approving a
management contract. The Fund, under certain circumstances, will assist in
shareholder communications with other shareholders.
[sidebar] John Hancock Advisers, Inc. advises investment companies having a
total asset value of more than $19 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 Fund, 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 for all of the John Hancock
funds through selected broker-dealers ("Selling Brokers"). Certain Fund
officers are also officers of the Adviser and John
7
<PAGE>
Hancock Funds. Pursuant to an order granted by the Securities and Exchange
Commission, the Fund has adopted a deferred compensation plan for its
independent Trustees which allows Trustees' fees to be invested by the Fund
in other John Hancock funds.
Pursuant to a service agreement withthe Adviser and its affiliate, Sovereign
Asset Management Corporation ("SAMCorp"), SAMCorp furnishes to the Adviser
certain portfolio management services with respect to the securities held in the
portfolio of the Fund. The Adviser supervises SAMCorp's performance of such
services and is responsible for all services required to be provided under the
Adviser's investment management contract with the Fund. The Adviser pays to
SAMCorp 40% of the fee received from the Fund by the Adviser.
John F. Snyder III is primarily responsible for management of the equity
securities of the Fund. Barry H. Evans is primarily responsible for
management of the fixed income securities of the Fund. They are assisted by
Jere Estes and a team of analysts. Mr. Snyder has been a portfolio manager of
the Fund since 1984. He has been associated with the Adviser since 1991 when
the Adviser assumed management of the Fund. He is also co-portfolio manager
of John Hancock Sovereign Balanced Fund. Mr. Evans is Vice President and
Portfolio Manager of the Fund and also leads a team of managers on several
other Hancock funds. Mr. Evans has managed bond funds since he joined John
Hancock in 1986.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser,
SAMCorp and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. 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. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a fee to the
Adviser which is based on a stated percentage of the Fund's average daily net
asset value equivalent on an annual basis as follows:
$0 to 750 million 0.60%
750 million to 1.5 billion 0.55%
1.5 billion to 2.5 billion 0.50%
2.5 billion and over 0.45%
The investment management fee for the 1995 fiscal year was 0.58% of the
Fund's average daily net asset value.
From time to time, the Adviser may reduce its fee or make other arrangements
to limit the Fund's expenses to a specified percentage of average net assets.
The Adviser retains the right to impose such fee and recover any other
payments to the extent at the end of any fiscal year, the Fund's actual
expenses at year end fall below the limit.
The Fund compensates the Adviser for performing necessary tax and financial
management services. The compensation for 1996 is estimated to be at an
annual rate of 0.01875% of the average net assets of the Fund.
8
<PAGE>
Information on the Fund's total expenses is in the Fund's Financial
Highlights section of this Prospectus.
DIVIDENDS AND TAXES
[sidebar] The Fund has paid quarterly distributions continuously since 1937.
Dividends. Dividends from the Fund's net investment income are declared and
paid quarterly. Capital gains if any, are generally distributed annually.
From time to time, the Fund may declare a special dividend at year's end.
Dividends are reinvested in additional shares of your class unless you elect
the option to receive cash. If you elect the cash option and the U.S. Postal
Service cannot deliver your checks, your election will be converted to the
reinvestment option.
Taxation. The Fund has qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, the 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 at least annually.
For institutional investors who are not exempt from Federal income taxes,
dividends from the Fund's net investment income, certain net foreign currency
gains, and net short-term capital gains are taxable to you as ordinary
income. Dividends from the Fund's net long-term capital gains are taxable as
long-term capital gain. These dividends are taxable whether you receive cash
or reinvest in additional Class C shares unless you are exempt from taxation
or entitled to tax deferral. Certain dividends paid in January of a given
year may be taxable as if you received them the previous December. Corporate
shareholders may be entitled to take the corporate dividends received
deduction for dividends received by the Fund from U.S. domestic corporations,
subject to certain restrictions under the Internal Revenue Code of 1986, as
amended (the "Code"). The Fund will send you a statement by January 31
showing the tax status of the dividends you received for the prior year.
When you redeem (sell) or exchange Class C shares, you may realize a taxable
gain or loss.
On the account application, you must certify that the taxpayer identification
number you provide is correct and that you are not subject to backup
withholding of Federal income tax. If you do not provide this information or
are otherwise subject to backup withholding, the Fund may be required to
withhold 31% of your taxable dividends, and the proceeds of redemptions and
exchanges.
In addition to Federal taxes, you may be subject to state, local or foreign
taxes, with respect to your investments in and distributions from the Fund.
In many states, a portion of the Fund's dividends that represents interest
received by the Fund on direct U.S. Government obligations may be exempt from
tax. Non-U.S. shareholders and tax-exempt shareholders are subject to a
different tax treatment not described above. Under the Code, a tax-exempt
investor in the Fund will not generally recognize unrelated business taxable
income from its investment in the Fund unless the tax-exempt investor
incurred indebtedness to acquire or continue to hold Fund shares and the
indebtedness remains unpaid. You should consult your tax adviser for specific
advice.
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<PAGE>
PERFORMANCE
[sidebar] The Fund may advertise its yield and total return on Class C
shares.
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of the Class C share price. Yield is computed by annualizing the
result of dividing the net investment income per share over a 30 day period
by the net asset value per Class C share on the last day of that period.
Yield is also calculated according to accounting methods that are
standardized for all stock and bond funds. Because yield accounting methods
differ from the methods used for other accounting purposes, the Fund's yield
may not equal the income paid on Class C shares or the income reported in the
Fund's financial statements.
The Fund's total return on Class C shares shows the overall dollar or
percentage change in value of a hypothetical investment in the Fund, assuming
the reinvestment of all dividends. Cumulative total return shows the Class C
shares' performance over a period of time. Average annual total return shows
the cumulative return of the Class C Fund shares divided by the number of
years included in the period. Because average annual total return tends to
smooth out variations in the performance of Class C Fund shares, you should
recognize that it is not the same as actual year-to-year results.
Neither total return nor yield calculations with respect to Class C shares
reflect the imposition of a sales charge. The value of Class C Fund shares,
when redeemed, may be more or less than their original cost. Both yield and
total return are historical calculations and are not an indication of future
performance.
WHO CAN BUY CLASS C SHARES
[sidebar] Class C shares are available to certain institutional investors.
In order to buy Class C Fund shares, you must qualify as one of the following
types of institutional investors: (i) Benefits plans (other than
self-directed plans) not affiliated with the Adviser which have at least
$25,000,000 in plan assets and either have a separate trustee vested with
investment discretion and certain limitations on the ability of the plan
beneficiaries to access their plan investments without incurring adverse tax
consequences or allow their participants to select among one or more
investment options, including the Fund ("participant-direct plans"); (ii)
Banks and insurance companies which are not affiliated with the Adviser
purchasing shares for their own account; (iii) Investment companies not
affiliated with the Adviser; (iv) Tax exempt retirement plans of the Adviser
and its affiliates, including affiliated brokers; and (v) Unit investment
trusts sponsored by John Hancock Funds and certain other sponsors and (vi)
existing full-service clients of the Life Company who were group annuity
contract holders as of September 1, 1994. Participant-directed plans include
but are not limited to 401(k), TSA and Section 457 plans.
HOW TO BUY CLASS C SHARES
[sidebar] Opening an account.
The minimum initial investment is $1,000,000, except that this requirement
may be waived at the discretion of the Fund's officers. You may qualify for
the minimum investment if you invest more than $1,000,000 in Class C shares
in the Fund and Class C shares of other funds in the John Hancock family.
This is discussed in greater detail in the Statement of Additional
Information.
Complete the Account Application attached to this Prospectus.
By Check
1. Make your check payable to John Hancock Investor Services Corporation
("Investor Services").
2. Deliver the completed application and check to your registered
representative or Selling Broker, or mail it directly to Investor
Services.
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<PAGE>
By Wire
1. Obtain an account number by contacting your registered representative or
Selling Broker or by calling 1-800-755-4371.
2. Instruct your bank to wire funds to:
First Signature Bank and Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Sovereign Investors Fund
(Class C shares)
Your account number
Name(s) under which account is registered.
3. Deliver the completed application to your registered representative or
Selling Broker, or mail it directly to Investor Services.
By Telephone
[sidebar] Buying additional Class C shares.
1. Complete the "Invest-By-Phone" and "Bank Information" sections on the
Account Privileges Application designating a bank account from which funds
may be drawn. Note that in order to invest by phone, your account must be
in a bank or credit union that is a member of the Automated Clearing House
System (ACH).
2. After your authorization form has been processed, you may purchase
additional Class C shares by calling Investor Services toll-free at
1-800-755-4371.
3. Give the Investor Services representative the name(s) in which your
account is registered, the Fund name and your account number, and the
amount you wish to invest in Class C shares.
4. Your investment normally will be credited to your account the business day
following your phone request.
By Check
1. Either complete the detachable stub included on your account statement or
include a note with your investment listing the name of the Fund and the
class of shares you own, your account number and the name(s) in which the
account is registered.
2. Make your check payable to John Hancock Investor Services Corporation
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9296
Boston, MA 02205-9296
or deliver it to your registered representative or Selling Broker.
By Wire
Instruct your bank to wire funds to:
First Signature Bank and Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Sovereign Investors Fund
(Class C Shares)
Your Account Number
Name(s) under which account is registered.
Other Requirements All purchases must be made in U.S. dollars. Checks written
on foreign banks will delay purchases until U.S. funds are received and a
collection charge may be imposed. Shares of the Fund are priced at the
offering price based on the net asset value computed after John Hancock Funds
receives notification of the dollar equivalent from the Fund's custodian
bank. Wire purchases normally take two or more hours to complete and, to be
accepted the same day, must be received by 4:00 p.m., New York time. Your
bank may charge a fee to wire funds. Telephone transactions are recorded to
verify information. Class C share certificates are not issued unless a
request is made in writing to Investor Services.
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<PAGE>
[sidebar] You will receive account statements that you should keep to help
with your personal recordkeeping.
You will receive a statement of your account after any transactions that
affects your share balance or registration (statements related to
reinvestment of dividends will be sent to you quarterly). A tax information
statement will be mailed to you by January 31 of each year.
CLASS C SHARE PRICE
[sidebar] The offering price of your Class C shares is their net asset value.
The net asset value per share ("NAV") of a Class C share is the value of one
Class C share. The NAV is calculated by dividing the net assets of each class by
the number of outstanding shares of that class. The NAV of each class can differ
in value. Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or at fair value
as determined in good faith in accordance with procedures approved by the
Trustees. Short-term debt investments maturing within 60 days are valued at
amortized cost which the Trustees have determined to approximate 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 of Class C shares is calculated once
daily as of the close of regular trading on the New York Stock Exchange (the
"Exchange") (generally at 4:00 p.m., New York time) on each day that the
Exchange is open.
Class C shares of the Fund are sold at the offering price based on the NAV
computed after your investment request is received in good order by John
Hancock Funds. If you buy shares of the Fund through a Selling Broker, the
Selling Broker must receive your investment before the close of regular
trading on the Exchange and transmit it to John Hancock Funds prior to its
close of business to receive that day's offering price. No sales charge is
imposed on the purchase of Class C shares.
A one-time payment of up to 0.15% of the amount invested in Class C shares
may be made by John Hancock Funds to a Selling Broker for sales of Class C
shares made by that Selling Broker. A person entitled to receive compensation
for selling shares of the Fund may receive different compensation with
respect to sales of Class A shares, Class B shares and Class C shares of the
Fund. John Hancock Funds, out of its own resources, may pay to a selling
Broker an annual service fee up to 0.20% of the amount invested in Class C
shares by these clients.
HOW TO REDEEM CLASS C SHARES
You may redeem all or a portion of your Class C shares on any business day.
Your Class C shares will be redeemed at the next NAV for Class C shares
calculated after your redemption request is received in good order by
Investor Services. The Fund may hold payment until reasonably satisfied that
investments which were recently made by check or Invest-by-Phone have been
collected (which may take up to 10 calendar days).
Once your Class C shares are redeemed, the Fund generally sends you payment
on the next business day. When you redeem your Class C shares, you may
realize a taxable gain or loss depending usually on the difference between
what you paid for them and what you receive for them, subject to certain tax
rules. Under unusual circumstances, the Fund may suspend redemptions or
postpone payment for up to three business days or longer, as permitted by
Federal securities laws.
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<PAGE>
[sidebar] To assure acceptance of your redemption request, please follow the
procedures.
By Telephone
All Fund shareholders are eligible automatically for the telephone redemption
privilege. Call 1-800-755-4371, from 8:00 A.M. to 4:00 P.M. (New York Time),
Monday through Friday, excluding days on which the New York Stock Exchange is
closed. Investor Services employs the following procedures to confirm that
instructions received by telephone are genuine. Your name, the account
number, taxpayer identification number applicable to the account and other
relevant information may be requested. In addition, telephone instructions
are recorded.
You may redeem up to $5 million by telephone. Redemption proceeds of up to
$100,000 may be sent by wire or by check. Checks will be mailed to the exact
name(s) and address on the account.
Redemption proceeds between $100,000 and $5 million must be wired to your
designated corporate bank account.
If reasonable procedures, such as those described above, are not followed,
the Fund may be liable for any loss due to unauthorized or fraudulent
instructions. In all other cases, neither the Fund nor Investor Services will
be liable for any loss or expense for acting upon telephone instructions made
according with the telephone transaction procedures mentioned above.
Telephone redemption is not available for tax-qualified retirement plans or
for Class C shares of the Fund that are in certificate form.
During periods of extreme economic conditions or market changes, telephone
requests may be difficult to implement due to a large volume of calls. During
such times you should consider placing redemption requests in writing.
This feature may be elected by completing the "Telephone Redemption" section
on the Institutional Account Application that is included with this
Prospectus.
In Writing
Send a stock power or letter of instruction specifying the name of the Fund,
the dollar amount or the number of Class C shares to be redeemed, your name,
class of shares, your account number and the additional requirements listed
below that apply to your particular account.
Type of Registration Requirements
- --------------------------- ------------------------------------------
Corporation, Association A letter of instruction and a corporate
resolution signed by person(s) authorized
to act on the account. The signature(s)
must be guaranteed if redemption proceeds
will be sent by check and exceed $100,000.
Retirement Plan or Trusts A letter of instruction signed by the
Trustee(s). The signatures must be
guaranteed if redemption proceeds will be
sent by check and exceed $100,000. (If the
Trustee's name is not registered on your
account, also provide a copy of the trust
document, certified within the last 60
days.)
Redemptions of $5 million or more must always be made in writing and signature
guaranteed.
If you do not fall into any of these registration categories, please call
1-800-755-4371 for further instructions.
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<PAGE>
[sidebar] Who may guarantee your signature.
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. The following institutions may provide you with a signature
guarantee, provided that the institution meets credit standards established
by Investor Services: (i) a bank; (ii) a securities broker or dealer,
including a government or municipal securities broker or dealer, that is a
member of a clearing corporation or meets certain net capital requirements;
(iii) a credit union having authority to issue signature guarantees; (iv) a
savings and loan association, a building and loan association, a cooperative
bank, a federal savings bank or association; or (v) a national securities
exchange, a registered securities exchange or a clearing agency.
Through Your Broker
[sidebar] Additional information about redemptions.
Your broker may be able to initiate the redemption. Contact your broker for
instructions.
If you have certificates for your shares, you must submit them with your
stock power or a letter of instruction. You may not redeem certificated
shares by telephone.
Due to the proportionately high cost of maintaining smaller accounts, the
Fund reserves the right to redeem all Class C shares in an account which
holds fewer than 50 shares (except accounts under retirement plans) and to
mail the proceeds to the shareholder, or the transfer agent may impose an
annual fee of $10.00. No account will be involuntarily redeemed or additional
fee imposed, if the value of the account is in excess of the Fund's minimum
initial investment. Shareholders will be notified before these redemptions
are to be made or this charge is imposed and will have 30 days to purchase
additional Class C shares to bring their account balance up to the required
minimum. Unless the number of Class C shares acquired by additional purchases
and any dividend reinvestments exceeds the number of Class C shares redeemed,
repeated redemptions from a smaller account may eventually trigger this
policy.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege
[sidebar] You may exchange Class C shares of the Fund only for Class C shares
of another John Hancock fund.
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of
investment goals. Not all John Hancock funds offer Class C. Contact your
registered representative or Selling Broker and request a prospectus for the
John Hancock funds that interest you. Read the prospectus carefully before
exchanging your Class C shares. Exchanges may be made only into Class C
shares of other John Hancock funds.
Exchanges between funds are based on their respective net asset values. No
sales charge or transaction charge is imposed.
The Fund reserves the right to require you to keep previously exchanged Class
C shares (and reinvested dividends) in the Fund for 90 days before you are
permitted a new exchange. The Fund may also terminate or alter the terms of
the exchange privilege upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and
the purchase of shares of another for Federal income tax purposes. An
exchange may result in a taxable gain or loss.
When you make an exchange, your account registration must be identical in
both the existing and new account. The exchange privilege is available only
in states where the exchange can be made legally.
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<PAGE>
Under exchange agreements with John Hancock Funds, certain dealers, brokers
and investment advisers may exchange their clients' Fund shares, subject to
the terms of those agreements and John Hancock Funds' right to reject or
suspend those exchanges at any time. Because of the restrictions and
procedures under those agreements, the exchanges may be subject to timing
limitations and other restrictions that do not apply to exchanges requested
by shareholders directly, as described above.
Because Fund performance and shareholders can be hurt by excessive trading,
the Fund reserves the right to terminate the exchange privilege for any
person or group that, in John Hancock Funds' judgment, is involved in a
pattern of exchanges that coincide with a "market timing" strategy that may
disrupt the Fund's ability to invest effectively according to its investment
objective and policies, or might otherwise affect the Fund and its
shareholders adversely. The Fund may also temporarily or permanently
terminate the exchange privilege for any person who makes seven or more
exchanges out of the Fund per calendar year. Accounts under common control or
ownership will be aggregated for this purpose. Although the Fund will attempt
to give prior notice whenever it is reasonably able to do so, it may impose
these restrictions at any time.
By Telephone
1. When you complete the application for your initial purchase of Class C
shares of the Fund, you automatically authorize exchanges by telephone
unless you check the box indicating that you do not wish to authorize the
telephone exchange privilege.
2. Call 1-800-755-4371. Have the account number of your current fund and the
exact name in which it is registered available to give to the customer
service representative.
3. Your name, the account number, taxpayer identification number applicable
to the account and other relevant information may be requested. In
addition, telephone instructions are recorded.
In Writing
1. In a letter request an exchange and list the following:
--name of the Fund whose Class C shares you currently own
--your account number
--the name(s) in which the account is registered
--the name of the fund in which you wish your exchange to be invested
--the number of Class C shares, all Class C shares or the dollar amount
you wish to exchange.
Sign your request exactly as the account is registered.
2. Mail the request and information to:
Attn: Institutional Services
John Hancock Investor Services Corporation
P.O. Box 9296
Boston, Massachusetts 02205-9296
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<PAGE>
JOHN HANCOCK GROWTH AND INCOME FUND
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
December 2, 1996
This Statement of Additional Information provides information about John
Hancock Growth and Income Fund (the "Fund"), a diversified series of John
Hancock Investment Trust (the "Trust"), in addition to the information that is
contained in the combined Growth and Income Fund's Prospectus, dated December 2,
1996 (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Trust ............................................ 2
Investment Objectives and Policies ................................... 2
Investment Restrictions .............................................. 12
Those Responsible for Management ..................................... 15
Investment Advisory and Other Services ............................... 23
Distribution Contracts ............................................... 25
Net Asset Value ...................................................... 27
Initial Sales Charge on Class A Shares ............................... 28
Deferred Sales Charge on Class B Shares .............................. 31
Special Redemptions .................................................. 35
Additional Services and Programs ..................................... 35
Description of the Fund's Shares ..................................... 36
Tax Status ........................................................... 38
Calculation of Performance ........................................... 43
Brokerage Allocation ................................................. 45
Transfer Agent Services .............................................. 47
Custody of Portfolio ................................................. 47
Independent Auditors ................................................. 48
Appendix A ........................................................... A-1
Financial Statements ................................................. F-1
1
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ORGANIZATION OF THE FUND
The Trust is an open-end management investment company organized as a
Massachusetts business trust under a Declaration of Trust dated December 12,
1984. Prior to December 22, 1994, the Fund was called Transamerica Growth and
Income Fund. The investment objective of the Fund is to obtain the highest total
return, a combination of capital appreciation and current income, consistent
with reasonable safety of capital.
The Fund is managed by John Hancock Advisers, Inc. (the "Adviser"), a
wholly-owned indirect subsidiary of John Hancock Mutual Life Insurance Company
(the "Life Company"), chartered in 1862 with national headquarters at John
Hancock Place, Boston, Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
In selecting equity securities for the Fund, the Adviser emphasize
issuers whose equity securities trade at valuation ratios lower than comparable
issuers or the Standard & Poor's Composite Index. Some of the valuation tools
used include price to earnings, price to cash flow and price to sales ratios and
earnings discount models. The Fund's portfolio will also include securities that
the Adviser considers to have the potential for capital appreciation, due to
potential recognition of earnings power or asset value which is not fully
reflected in the securities' current market value. Attempts to identify
investments which possess characteristics, such as high relative value,
intrinsic value, going concern value, net asset value and replacement book
value, which are believed to limit sustained downside price risk, generally
referred to as the "margin" of safety" concept. The Adviser also considers an
issuer's financial strength, competitive position, projected future earnings and
dividends and other investment criteria. These securities are collectively
referred to as "fundamental value" securities.
The Fund's investment policy reflects the Adviser's belief that while
the securities markets tend to be efficient, sufficiently persistent price
anomalies exist which the strategically disciplined active equity manager can
exploit in seeking to achieve an above-average rate of return.
Each of the investment practices described in this section, unless
otherwise specified, is deemed to be a fundamental policy and may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities.
Investment Foreign Securities. The Fund may invest up to 25% (and up to
35% during time of adverse U.S. market conditions) of its total assets in
securities of foreign issuers including securities in the form of sponsored or
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") or other securities convertible into securities of foreign issuers.
These securities may include debt and equity securities of corporate and
governmental issuers in countries with emerging economies or securities markets.
ADRs are receipts typically issued by an American bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued in Europe which evidence a similar ownership
arrangement. Issuers of unsponsored ADRs are not contractually obligated to
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disclose material information, including financial information, in the United
States. Generally, ADRs are designed for use in the United States securities
markets and EDRs are designed for use in European securities markets.
Investments in foreign securities may involve a greater degree of risk
than those in domestic securities. There is generally less publicly available
information about foreign companies in the form of reports and ratings similar
to those that are published about issuers in the United States. Also, foreign
issuers are generally not subject to uniform accounting, auditing and financial
reporting requirements comparable to those applicable to United States issuers.
Because foreign securities may be denominated in currencies other than
the U.S. dollar, changes in foreign currency exchange rates will affect the
fund's net asset value, the value of dividends and interest earned, gains and
losses realized on the sale of securities, and any net investment income and
gains that the Fund distributes to shareholders. Securities transactions
undertaken in some foreign markets may not be settled promptly, so that the
Fund's investments on foreign exchanges may be less liquid and subject to the
risk of fluctuating currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market
whether through over-the-counter markets or exchanges located in the countries
where principal offices of the issuers are located. Foreign securities markets
are generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation, limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United State's economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiently and balance of
payments position.
The dividends in some cases, capital gains and interest payable on
certain of the Fund's foreign portfolio securities may be subject to foreign
withholding or other foreign taxes, thus reducing the net amount of income or
gains available for distribution to the Fund's shareholders.
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Options on Foreign Currencies. Although the Fund has no current
intention of doing so, the Fund may purchase and write put and call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of portfolio securities and against increases in the dollar cost of
securities to be acquired.
As in the case of other types of options, however, the writing of an
option on foreign currency will constitute only a partial hedge, up to the
amount of the premium received, and the Fund could be required to purchase or
sell foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event of
rate movements adverse to the Fund's position, it may forfeit the entire amount
of the premium plus related transaction costs.
Options on foreign currencies are traded in a manner substantially
similar to options on securities. In particular, an option on foreign currency
provides the holder with the right to purchase, in the case of a call option, or
to sell, in the case of a put option, a stated quantity of a particular currency
for a fixed price up to a stated expiration date. The writer of the option
undertakes the obligation to deliver, in the case of a call option, or to
purchase, in the case of a put option, the quantity of the currency called for
in the option, upon exercise of the option by the holder.
As in the case of other types of options, the holder of an option on
foreign currency is required to pay a one-time, non-refundable premium, which
represents the cost of purchasing the option. The holder can lose the entire
amount of this premium, as well as related transaction costs, but not more than
this amount. The writer of the option, in contrast, generally is required to
make initial and variation margin payments similar to margin deposits required
in the trading of futures contracts and the writing of other types of options.
The writer is therefore subject to risk of loss beyond the amount originally
received and above the value of the option at the time it is entered into.
Certain options on foreign currencies, like forward contracts, are traded
over-the-counter through financial institutions acting as market-makers in such
options and the underlying currencies. Such transactions therefore involve risks
not generally associated with exchange-traded instruments. Options on foreign
currencies may also be traded on national securities exchanges regulated by the
SEC or commodities exchanges regulated by the Commodity Futures Trading
Commission.
Foreign Currency Transactions. The foreign currency exchange
transactions of the Fund 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. The Fund may 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 Fund's dealings in forward foreign currency contracts will
be limited to hedging either specific transactions or portfolio positions. The
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Fund will not attempt to hedge all of its foreign portfolio positions and will
not engage in speculative forward currency transactions.
If the Fund enters into a forward contract it to purchase foreign
currency, its custodian bank will segregate cash or liquid high grade debt
securities (i.e., securities rated in one of the top three rating categories by
Moody's or S&P) in a separate account of the Fund in an amount necessary to
complete the forward contract. These assets will be marked to market daily, and,
if the value of the securities in the separate account declines, additional cash
or liquid securities will be added so that the value of the account will be
equal to the amount of the Fund's commitments in forward 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. These transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the 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 the 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.
Lower Rated High Yield "High Risk" Debt Obligations. The Fund may
invest up to 15% of its net assets in high yielding, fixed income instruments
below investment grade; that is, securities rated as low as Ca by Moody's
Investors Service, Inc. ("Moody's") or CC by Standard & Poor's Ratings Group
S&P.
Securities rated lower than Baa by Moody's or BBB by Standard & Poor's
are sometimes referred to as junk bonds. See the Appendix attached to this
Statement of Additional Information which describes the characteristics of the
securities in the various ratings categories. The Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the above-stated ratings. The credit ratings of Moody's and
Standard & Poor's, such as those ratings described here, may not be changed by
Moody's and Standard & Poor's in a timely fashion to reflect subsequent economic
events. The credit ratings or securities do not reflect an evaluation of market
risk. 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 issuer's ability to make payments of
interest and principal. The market price and liquidity of lower rated fixed
income securities generally respond more to short-term corporate and market
developments than do those 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 on going debt obligations. The
Adviser seeks to minimize these risks through diversification, investment
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analysis and attention to current developments in interest rates and economic
conditions.
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 the Fund's assets. The reduced
availability of reliable, objective data may increase the Fund's reliance on
management's judgment in valuing high yield high risk bonds. In addition, the
Fund's investment in high yield high risk securities may be susceptible to
adverse publicity and investor perceptions, whether or not justified by
fundamental factors. The Fund's investments, and consequently its net asset
value, will be subject to the market fluctuations and risk inherent in all
securities. Increasing rate note securities are typically refinanced by the
issuers within a short period of time. The Fund may invest in pay-in-kind (PIK)
securities, which pay interest in either cash or additional securities, at the
issuer's option, for a specified period. The Fund also may invest in zero coupon
bonds, which have a determined interest rate, but payment of the interest is
deferred until maturity of the bonds. Both types of bonds may be more
speculative and subject to greater fluctuations in value than securities which
pay interest periodically and in cash, due to changes in interest rates.
The market value of debt securities which carry no equity participation
usually reflects yields generally available on securities of similar quality and
type. When such yields decline, the market value of a portfolio already invested
at higher yields can be expected to rise if such securities are protected
against early call. In general, in selecting securities for its portfolio, the
Fund intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Government Securities. As a matter of nonfundamental policy, the Fund's
investments in fixed income securities may include U.S. Government securities,
which are obligations issued or guaranteed by the U.S. Government and its
agencies, authorities or instrumentalities. 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 obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association bonds ("Fannie
Maes"). No assurance can be given that the U.S. Government will provide
financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Short-Term Bank and Corporate Obligations. As a matter of
nonfundamental policy, the Fund's investments in short-term investment grade
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securities may include depository-type obligations of banks and savings and loan
associations and other high quality money market instruments consisting of
short-term obligations of the U.S. Government or its agencies and commercial
paper rated at least P-1 by Moody's or A-1 by Standard & Poor's. Commercial
paper represents short-term unsecured promissory notes issued in bearer form by
banks or bank holding companies, corporations and finance companies.
Depository-type obligations in which the 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 at 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.
Repurchase Agreements. In a repurchase agreement the Fund buy security
for a relatively short period (usually not more than seven days) subject to the
obligation to sell it back to the issuer at a fixed time and price plus accrued
interest. The Fund will enter into repurchase agreements only with member banks
of the Federal Reserve System and with securities dealers. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements. The 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, the
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 decline in value of the underlying
securities or lack of access to income during this period, as well as the
expense of enforcing its rights. The 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 (including restricted securities)
would exceed 10% of the Fund's net assets.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of U.S.Government securities held
in its portfolio to a bank 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
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"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The 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, the Fund will establish and maintain of the
Fund's custodian separate account consisting of highly liquid, marketable
securities an amount at least equal to the repurchase process of the securities
(plus any accrued interest thereon) under such agreements. The Fund will not
enter into reverse repurchase agreements exceeding in the aggregate 33 1/3% of
the market value of its total assets. The Fund will enter into reverse
repurchase agreements only with federally insured banks or savings and loan
associations which are approved in advance as being creditworthy by the
Trustees. Under procedures established by the Trustees, the Adviser will monitor
the creditworthiness of the banks involved.
Options Transactions. The Fund may write listed and over-the-counter
covered call options and covered put options on securities in which it is
authorized to invest in order to earn additional income from the premiums
received. In addition, the Fund may purchase listed and over-the-counter call
and put options. The extent to which covered options will be used by the Fund
will depend upon market conditions and the availability of alternative
strategies.
The Fund will not purchase a call or put option if as a result the
premium paid for the option together with premiums paid for all other securities
options and options on securities indexes (see "-- Options on Stock Indexes")
then held by the Fund exceed 20% of the Fund's total net assets. In addition,
the Fund may not write put options on securities or securities indexes with
aggregate exercise prices in excess of 50% of the Fund's total net assets
measured at the Fund's net asset value at the time the option is written.
The 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 the 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 (a) equal to or less than
the exercise price of the call written or (b) greater 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 securities 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, the Fund would keep both the option premium and the underlying
security. If the covered call option written by the 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
premium it received. If the exercise price, less transaction costs, is less than
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the cost of the underlying security, the Fund's loss would be reduced by the
amount of the option premium.
As the writer of a covered put option, the 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 liquid
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 Fund 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
or later than the put written.
When writing listed and over-the-counter covered put options on
securities in which it is authorized to invest, the Fund would earn income from
the premiums received. If a covered put option is not exercised, the Fund 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, the 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 the Fund's
position will be offset by the Options Clearing Corporation. The Fund may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. There is no guarantee that a closing purchase transaction can be
effected. Although the Fund 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 the 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 the 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 the 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.
The 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 Fund 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
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loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
Over-the-Counter Options. The Fund may engage in options transactions
on exchanges and in the over-the-counter markets. The Adviser does not currently
anticipate investments in options through exchanges other than domestic
securities exchanges. 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. The Fund will acquire only those
OTC options 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 Fund 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 illiquid securities
subject to the restriction that illiquid securities are limited to not more than
10% of the Fund's net assets. The SEC, however, has a partial exemption from the
above restrictions on transactions in OTC options. The SEC allows the Fund to
exclude from the 10% 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, the 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.
Risks of Options on Securities Indexes. The Fund's purchase and sale of
options on indexes of debt securities (if and when such options are traded) and
equity securities will be subject to risks applicable to options transactions
generally. In addition, the distinctive characteristics of options on indexes
create certain risks that are not present with stock options.
Index prices may be distorted if trading of certain securities included
in the index is interrupted. Trading in index options also may be interrupted in
certain circumstances such as if trading were halted in a substantial number of
securities included in the index or if dissemination of the current level of an
underlying index is interrupted. If this occurred the Fund would not be able to
close out options which it had purchased and, if restrictions on exercise were
imposed, may be unable to exercise an option it holds, which could result in
losses to the Fund if the underlying index moves adversely before trading
resumes. However, it is the Fund's policy to purchase options only on indexes
which include a sufficient number of securities so that the likelihood of a
trading halt in the index is minimized.
The purchaser of an index option may also be subject to a timing risk.
If an option is exercised by the Fund before final determination of the closing
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index value for that day, the risk exists that the level of the underlying index
may subsequently change. If such a change caused the exercised option to fall
out-of-the-money (that is the exercising of the option would result in a loss,
not a gain), the Fund would be required to pay the difference between the
closing index value and the exercise price of the option (times the applicable
multiple) to the assigned writer. Although the Fund may be able to minimize this
risk by withholding exercise instructions until just before the daily cutoff
time, it may not be possible to eliminate this risk entirely because the
exercise cutoff times for index options may be earlier than those fixed for
other types of options and may occur before definitive closing index values are
announced. Alternatively, when the index level is close to the exercise price,
the Fund may sell rather than exercise the option.
Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid. The
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid secondary market. It is not certain
that this market will develop in all index option contracts. The Fund will not
purchase or sell any index option contract unless and until in the opinion of
the Adviser the market for such options has developed sufficiently that such
risk in connection with such transactions is no greater than such risk in
connection with options on securities.
Limitation on Transactions in Options on Securities Indexes. The Fund
will write put options on indexes only if they are covered by segregating with
the Fund's custodian an amount of cash or liquid securities equal to the
aggregate exercise prices of such put options or an offsetting option. In
addition, the Fund will write call options on indexes only if, on the date on
which any such option is written, it holds securities qualified to serve as
"cover" under applicable rules of the national securities exchanges or maintains
in a segregated account an amount of cash or liquid securities equal to the
aggregate exercise price of such call options with a value at least equal to the
value of the index times the multiplier or an offsetting option. In the case of
both put and call options on indexes, the Fund will satisfy the foregoing
conditions while such options are outstanding.
Lending of Securities. The Fund may lend portfolio securities to
brokers, dealers, and financial institutions if the loan is collateralized by
cash or U.S. Government securities according to applicable regulatory
requirements. The Fund may reinvest any cash collateral in short-term securities
and money market funds. When the Fund lends portfolio securities, there is a
risk that the borrower may fail to return the securities involved in the
transaction. As a result, the Fund may incur a loss or, in the event of the
borrower's bankruptcy, the Fund may be delayed in or prevented from liquidating
the collateral. The Fund may not lend portfolio securities having a total value
exceeding 33% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which
are securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's
fundamental Investment Restrictions. Generally, warrants and stock purchase
rights do not carry with them the right to receive dividends or exercise voting
rights with respect to the underlying securities, and they do not represent any
rights in the assets of the issuer. As a result, an investment in warrants and
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rights may be considered to entail greater investment risk than certain other
types of investments. In addition, the value of warrants and rights does not
necessarily change with the value of the underlying securities, and they cease
to have value if they are not exercised on or prior to their expiration date.
Investment in warrants and rights increase the potential profit or loss to be
realized from the investment of a given amount of the Fund's assets as compared
with investing the same amount in the underlying stock. No such purchase will be
made by the Fund, however, if the Fund's holdings of warrants (valued at lower
of cost or market) would exceed 5% of the value of the Fund's net assets as a
result of the purchase. In addition, the Fund will not purchase rights or
warrants which is not listed on the New York or American Stock Exchange of the
purchase would result in the Fund's only unlisted warrants on an amount exceed
of 2% of its net assets.
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. As a matter of nonfundamental policy, the Fund
may 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 the Fund's portfolio turnover rate. A high rate of
portfolio turnover (100% or greater) involves correspondingly greater brokerage
expenses and may make it more difficult for the Fund to qualify as a regulated
investment company for Federal income tax purposes.
Restricted Securities. The Fund will not invest more than 10% of its
total assets in securities that are not registered ("restricted securities")
under the Securities Act of 1933 (the "1933 Act"), including securities offered
and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act.
In addition, as a matter of nonfundamental policy, the Fund will not invest more
than 10% of its net assets in illiquid investments, which include repurchase
agreements maturing in more than seven days, securities that are not readily
marketable and restricted securities. However, if the Trustees determines, based
upon a continuing review of the trading markets for specific Rule 144A
securities, that they are liquid, then such securities may be purchased without
regard to the 10% limit on illiquid investments. The Trustees may adopt
guidelines and delegate to the Adviser the daily function of determining and
monitoring the liquidity of restricted securities. The Trustees, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor the Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Fund if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment
restrictions will not be changed without the approval of the holders of a
majority of the outstanding shares of the Fund. A majority for this purpose
means approval by the lesser of: (1) the holders of 67% or more of the Fund's
shares represented at a meeting if at least 50% of the Fund's outstanding shares
12
<PAGE>
are present in person or by proxy at that meeting or (2) more than 50% of the
Fund's outstanding shares.
The Fund may not:
1. Invest in real estate (including interests in real estate
investment trusts) or commodities.
2. Invest in a company having a record of less than three years'
continuous operation, which may include the operations of any
predecessor company or enterprise to which the company has
succeeded by merger, consolidation, reorganization or purchase
of assets.
3. Buy securities on margin or sell short.
4. Purchase securities of a company in which any officer or
trustee of the Trust or the Adviser owns beneficially more
than of 1% of the securities of such company and all such
officers and trustees own beneficially in the aggregate more
than 5% of the securities of such company.
5. Borrow money except for temporary or emergency purposes, and
then not in excess of 10% of its gross assets taken at cost.
Assets taken at market may not be pledged to an extent greater
than 15% of gross assets taken at cost (although this would
permit the Fund to pledge, mortgage or hypothecate its
portfolio securities to the extent that the percentage of
pledged securities would exceed 10% of the offering price of
the Fund's shares, it will not do so as a matter of operating
policy in order to comply with certain state statutes or
investment restrictions); any such loan must be from a bank
and the value of the Fund's assets, including the proceeds of
the loan, less other liabilities of the Fund, must be at least
three times the amount of the loan. (Although the Fund has
never borrowed any money or pledged any portion of its assets,
and has no intention of doing so, in the event that such
borrowing became necessary, the Fund expects that additional
portfolio securities would not be purchased while the
borrowing is outstanding). The borrowing restriction set forth
above does not prohibit the use of reverse repurchase
agreements, in an amount (including any borrowings) not to
exceed 33 1/3% of net assets.
6. Make loans to any of its officers or trustees, or to any
firms, corporations or syndicates in which officers or
trustees of the Trust have an aggregate interest of 10% or
more. It is the intention of the Trust not to make loans of
any nature, except the Fund may enter into repurchase
agreements and lend its portfolio securities (as permitted by
the Investment Company Act of 1940) as referred to under
"Investment Objectives and Policies" above. In addition, the
13
<PAGE>
purchase of a portion of an issue of a publicly issued
corporate debt security is not considered to be the making of
a loan.
7. Purchase any securities, other than obligations of domestic
banks or of the U.S. Government, or its agencies or
instrumentalities, if as a result of such purchase more than
25% of the value of the Fund's total assets would be invested
in the securities of issuers in any one industry.
8. Issue senior securities as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules
thereunder; except insofar as the Fund may be deemed to have
issued a senior security by reason of entering into a
repurchase agreement or engaging in permitted borrowings.
9. Purchase securities which will result in the Fund's holdings
of the issuer thereof to be more than 5% of the value of the
Fund's total assets (exclusive of U.S. Government securities).
10. Purchase more than 10% of the voting securities of any class
of securities of any one issuer.
Nonfundamental Investment Restriction. The following restrictions are
designated as nonfundamental and may be changed by the Trustees with the
shareholder approval.
The Fund may not purchase a security if, as a result, (i) more than 10%
of the Fund's total assets would be invested in the securities of other
investment companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii) more than
5% of the Fund's total assets would be invested in the securities of any one
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. Subject to the above percentage limitations, the
Fund may, in connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase securities of
other investment companies within the John Hancock Group of Funds. In addition,
as a nonfundamental restriction, the 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.
The Fund has also undertaken to one or more states to abide by
additional restrictions so long as its securities are registered for sale in
such states. The most restrictive undertakings presently in effect are that the
Fund shall not invest in oil, gas or other mineral or development programs and
that the Fund's use of margin shall be only for such short-term loans as are
necessary for the clearance of purchases and sales of securities.
14
<PAGE>
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trust's Trustees who elect
officers who are responsible for the day-to-day operations of the Fund 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 or officers
and directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), John
Hancock Investor Services
Corporation ("Investor Services"),
First Signature Bank and Trust
Company and Sovereign Asset
Management Corporation
("SAMCorp."); Director, John
Hancock Freedom Securities
Corporation, John Hancock Insurance
Agency, Inc. ("Insurance Agency,
Inc."), John Hancock Capital
Corporation 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).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
15
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea (until
August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
16
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Anne C. Hodsdon * President and Director (1, 2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds, Investor Services (since
October 1996); Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
17
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, Investor Services, John
August 1937 Hancock Distributors, Inc.,
Insurnace Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp. and NM
Capital; Trustee, The Berkeley
Group; Director, JH Networking
Insurance Agency, Inc.; Director,
John Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993),
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
18
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, Investor
Services, SAMCorp., Insurance
Agency, Inc., Southeastern Thrift &
Bank Fund and NM Capital; Senior
Vice President, The Berkeley Group;
President, the Adviser (until
December 1994);
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Investor Services.
February 1935
Susan S. Newton Vice President and Secretary Vice President and Assistant
101 Huntington Avenue Secretary, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds,
March 1950 Investor Services; Secretary,
SAMCorp; Vice President, The
Berkeley Group, John Hancock
Distributors, Inc. (until 1994).
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Investor Services and John Hancock
July 1950 Funds; Counsel, John Hancock Mutual
Life Insurance Company.
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
20
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Trustees and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of October 31, 1996, the officers and trustees of the Trust as a
group beneficially owned less than 1% of the outstanding shares of the Trust and
the Fund and to the knowledge of the registrant, owner of 5% or more of the
shares of either class of the Fund's shares:
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
either class of the Fund's shares.
As of December 22, 1994, the Trustees have established an Advisory
Board which acts to facilitate a smooth transition of management over a two-year
period (between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser, and the Adviser). The members of the Advisory Board are
distinct from the Board of Trustees, do not serve the Fund in any other capacity
and are persons who have no power to determine what securities are purchased or
sold on behalf of the Fund. Each member of the Advisory Board may be contacted
at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal
occupations during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas; co-
founder, Houston Parents' League; former board member of various civic
and cultural organizations in Houston, including the Houston Symphony,
Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in
various civic and cultural activities in the Washington, D.C. area,
including membership on the Area Board for The March of Dimes and is a
National Trustee for the Botanic Gardens of Washington, D. C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce
Bank; Trustee, Memorial Hospital System; Chairman of the Board of
Regents of Baylor University; Member, Board of Governors, National
Association of Securities Dealers, Inc.; Formerly, Chairman, Investment
Company Institute; formerly, President, Houston Chapter of Financial
Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation);
Member, Board of Managers, Harris County Hospital District; Advisory
Director, Commercial State Bank, El Campo; Advisory Director, First
21
<PAGE>
National Bank of Bryan; Advisory Director, Sterling Bancshares; Former
Director and Vice Chairman, Texas Commerce Bancshares; and Vice
Chairman, Texas Commerce Bank.
Compensation of the Trustees and Advisory Board. The following table
provides information regarding the compensation paid by the Fund and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services. Ms. Hodsdon and
Messrs. Boudreau and Scipione, each a non-Independent Trustee, and each of the
officers of the Trust are interested persons of the Adviser, are compensated by
the Adviser and received no compensation from the Funds for their services. The
compensation to the Trustees from the Fund shown below is for the Fund's fiscal
year ended August 31, 1995.
Total Compensation from
Aggregate all Funds in John
Compensation Hancock Fund Complex to
Independent Trustees from the Fund+ Trustees**
- -------------------- -------------- ----------
James F. Carlin $ 1,718 $ 60,700
William H. Cunningham* $ 2,868 $ 69,700
Charles F. Fretz $ 0 $ 56,200
Harold R. Hiser, Jr.* $ 0 $ 60,200
Charles L. Ladner $ 2,045 $ 60,700
Leo E. Linbeck, Jr. $ 3,518 $ 73,200
Patricia P. McCarter $ 2,045 $ 60,700
Steven R. Pruchansky $ 2,122 $ 62,700
Norman H. Smith $ 2,122 $ 62,700
John P. Toolan* $ 2,045 $ 60,700
------- --------
Totals $18,483 $627,500
+ Compensation made pursuant to different compensation arrangements
then in effect for the fiscal year ended August 31, 1995.
* As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock Fund complex for Mr. Cunningham
was $54,413, for Mr. Hiser was $31,324, and for Mr. Toolan was $71,437 under the
John Hancock Deferred Compensation Plan for Trustees.
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is $627,500 as of the calendar year ended December 31, 1995
All Trustees are Trustees/Directors of 33 funds in the John Hancock Fund
Complex.
22
<PAGE>
Total Compensation from
Aggregate all Funds in John
Compensation Hancock Fund Complex
Advisory Board* from the Fund to Advisory Board*
- --------------- ------------- -----------------
R. Trent Campbell $ 3,714 $ 54,000
Mrs. Lloyd Bentsen $ 3,714 $ 54,000
Thomas R. Powers $ 3,714 $ 54,000
Thomas B. McDade $ 3,714 $ 54,000
TOTALS $14,856 $216,000
* As of December 31, 1995
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199- 7603, was organized in 1968 and currently has more than $19 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,080,000 shareholders.
The Adviser is an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
management of more than $80 billion, the Life Company is one of the ten largest
life insurance companies in the United States and carries high ratings from
Standard & Poor's and A.M. Best's. Founded in 1862, the Life Company has been
serving clients for over 130 years.
The Fund has entered into an investment management contract with the
Adviser. Under the investment management contract, the Adviser provides the Fund
with (i) a continuous investment program, consistent with the Fund's stated
investment objective and policies, and (ii) supervision of all aspects of the
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 the
Fund's portfolio assets.
The Fund bears all costs of its organization and operation, including
expenses of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodian
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
23
<PAGE>
Adviser's employees rendering such services to the Fund; the compensation and
expenses of trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As provided by the investment management contract, the Fund pays the
Adviser an investment management fee, which is accrued daily and paid monthly in
arrears, equal on an annual basis to 0.625% of the Fund's average daily net
asset value.
The Adviser may reduce its advisory fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to re-impose the advisory fee and recover any
other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates provide
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 for other funds or clients for which the 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.
In the event normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any state limit where
the Fund is registered to sell shares of beneficial interest, the fee payable to
the Adviser will be reduced to the extent of such excess and the Adviser will
make any additional arrangements necessary to eliminate any remaining excess
expenses, if required by law. Currently, the most restrictive limit applicable
to the Fund is 2.5% of the first $30,000,000 of the Fund's average daily net
asset value, 2% of the next $70,000,000 and 1.5% of the remaining average daily
net asset value.
Pursuant to the investment management contract, the Adviser is not
liable to the Fund or its shareholders for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
its contract relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of its
duties or from its reckless disregard of the obligations and duties under the
investment management contract.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If the 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
24
<PAGE>
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
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.
For the fiscal years ended August 31, 1993 and 1994 advisory fees paid
by the Fund to TFMC, the Fund's former investment adviser, amounted to $905,355
and $1,322,162, respectively. For the fiscal year ended August 31, 1995,
advisory fees paid by the Fund to TFMC, the Fund's former investment adviser and
the Adviser amounted to $468,939 and $972,142 respectively.
The investment management contract, and the distribution contract
discussed below, continue in effect from year to year if approved annually by
vote of a majority of the Trustees 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, and by either the Fund's Trustees or in the holders of
a majority of the Fund's outstanding voting securities. Each of these contracts
automatically terminates upon assignment and may be terminated without penalty
on 60 days' notice at the option of either party to the respective contract or
by vote of a majority of the outstanding voting securities of the Fund.
Administrative Services Agreement. The Fund was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Fund. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, staff and
office space, facilities and equipment was provided as necessary to provide
administrative services to the Fund. The Services Agreement was amended in
connection with the appointment of the Adviser as adviser to the Fund to permit
services under the Agreement to be provided to the Fund by the Adviser and its
affiliates. The Services Agreement was terminated during the fiscal year 1995.
For the fiscal years ended August 31, 1993, 1994 and 1995, the Fund
paid to TFMC (pursuant to the Services Agreement) $111,174, $153,060 and
$31,385, respectively, of which $92,522, $132,005 and $20,130, respectively, was
retained by TFMC and $18,652, $21,055 and $11,255, respectively, was paid for
certain data processing and pricing information services.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds.
Under the agreement, John Hancock Funds is obligated to use its best
efforts to sell shares of each class of the Fund. Shares of the Fund are also
25
<PAGE>
sold by selected broker-dealers (the "Selling Brokers") which have entered into
selling agency agreements with John Hancock Funds. John Hancock Funds accepts
orders for the purchase of the shares of the Fund which are continually offered
at net asset value next determined, plus applicable sales charge, if any. In
connection with the sale of Class A or Class B shares and selling Brokers
receive compensation in the form of a sales charge imposed, in the case of Class
A shares at the time of sale or, in the case of Class B shares, on a deferred
basis. The sales charges are discussed further in the Prospectus.
Total underwriting commissions for sales of the Fund's Class A Shares
for the fiscal years ended August 31, 1993, 1994 and 1995, respectively, were
$762,955, $883,435 and $899,731, respectively. Of such amounts $56,633, $56,079
and $69,597, respectively, were retained by the Fund's former distributor,
Transamerica Fund Distributors, Inc. and the remainder was reallowed to dealers.
The Fund's Trustees adopted a Distribution Plan with respect to Class A
and Class B shares (the "Plan"), pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Under the Plan the Fund will pay distribution and service
fees at an aggregate annual rate of 0.25% and 1.00%, respectively, of the Fund's
daily net assets attributable to shares of that class. However, the service fee
will not exceed 0.25% of the Fund's average daily net assets attributable to
each class of shares. In each case, up to 0.25% is for service expenses and the
remaining amount is for distribution expenses. The distribution fees will be
used to reimburse the Distributors for their distribution expenses, including
but not limited to: (I) initial and ongoing sales compensation to Selling
Brokers and other (including affiliates of the Distributors) engaged in the sale
of Fund shares; (ii) marketing, promotional and overhead expenses incurred in
connection with the distribution of Fund shares; and (iii) with respect to Class
B shares only, interest expenses on unreimbursed distribution expenses. The
service fees will be used to compensate Selling Brokers for providing personal
and account maintenance services to shareholders. In the event the Distributors
are not fully reimbursed for payments or expenses they incur under the Plan,
these expenses will not be carried beyond twelve months from the date they were
incurred. Unreimbrused expenses under the Class B Plan will be carried forward
together with interest on the balance of these Unreimbursed expenses. The Fund
does not treat unreimbursed expenses under the Plan as a liability of the Fund.
For the fiscal year ended August 31, 1995 an aggregate of $3,463,988 of
distribution expenses of 3.15% of the average net assets of the Class B shares
of the Fund, was not reimbursed or recovered by the Distributors through the
receipt of deferred sales charges or 12b-1 fees in prior periods.
The Plan was approved by a majority of the voting securities of the
Fund. The Plan and all amendments were approved by the Trustees, including a
majority of the trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plan (the
"Independent Trustees"), by votes cast in person at meetings called for the
purpose of voting on such Plans.
During the fiscal year ended August 31, 1995, the Funds paid John
Hancock Funds the following amounts of expenses with respect to the Class A and
Class B shares of the Fund:
26
<PAGE>
<TABLE>
<CAPTION>
Printing and Interest,
Mailing of Compensation Carrying or
Prospectuses to to Selling Other Finance
Advertising New Shareholders Brokers Charges
----------- ---------------- ------- -------
<S> <C> <C> <C> <C>
Class A shares $23,907 $887 $166,264 $ 0
Class B shares $19,812 $804 $652,464 $321,811
</TABLE>
Pursuant to the Plans, at least quarterly, John Hancock Funds provides
the Fund with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
Each of the Plans provides that it will continue in effect only as long
as its continuance is approved at least annually by a majority of both the
Trustees and the Independent Trustees. Each of the Plans provides that it may be
terminated (a) at any time by vote of a majority of the Trustees, a majority of
the Independent Trustees, or a majority of the respective Class' outstanding
voting shares or (b) by John Hancock Funds on 60 days' notice in writing to the
Fund. Each of the Plans further provides that it may not be amended to increase
the maximum amount of the fees for the services described therein without the
approval of a majority of the outstanding shares of the class of the Fund which
has voting rights with respect to the Plan. Each of the Plans provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a majority vote of the Trustees and the Independent Trustees of the
Fund. The holders of Class A Shares and Class B Shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
In adopting the Plans, Trustees concluded that, in their judgment, there is a
reasonable likelihood that each Plan will benefit the holders of the applicable
class of shares of the Fund.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment 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.
27
<PAGE>
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
Short-term debt investments 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 the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank 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 the Fund's NAV.
The NAV for each fund and class is determined each business day at the
close of regular trading on the New York Stock Exchange (typically 4 pm Eastern
time) by dividing a class's net assets by the number of its shares outstanding.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset
value plus a sales charge which, at the option of the purchaser, may be imposed
either at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then they will only be issued for full shares. The Trustees reserve the
right to change or waive a Fund's minimum investment requirements and to reject
any order to purchase shares (including purchase by exchange) when in the
judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund
are described in the Prospectus. Methods of obtaining reduced sales charges
referred to generally in the Prospectus are described in detail below. In
calculating the sales charge applicable to current purchases of Class A shares,
the investor is entitled to cumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund, owned by
the Investor, or if John Hancock Investor Services Corporation ("Investor
Services") is notified by the investor's dealer or the investor at the time of
the purchase, the cost of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to
purchases of Class A shares made at one time, the purchases will be combined if
made by (a) an individual, his or her spouse and their children under the age of
21 purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
28
<PAGE>
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment
laws from paying a sales charge or commission when it purchases shares
of any registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if
it is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, mother, father, sister, brother, mother-in-law,
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan of the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into an agreement with John Hancock
Funds providing specifically for the use of Fund shares in fee-based
investment products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any
or all of his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed defined contribution plans with at least 100 eligible
employees at the inception of the Fund account, may purchase Class A
shares with no initial sales charge. However, if the shares are
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
29
<PAGE>
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Accumulation Privilege. Investors (including investors combining
purchases) who are already Class A shareholders may also obtain the benefit of a
reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or current account value of the Class A
shares already held by such person.
Combination Privilege. Reduced sales charges (according to the schedule
set forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. Reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may opt to make the necessary
investments called for by the LOI over a forty-eight (48) month period. These
qualified retirement plans include IRA, SEP, SARSEP, 401(k), 403(b) (including
TSAs) and 457 plans. Such an investment (including accumulations and
combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Investor Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period
within 13 or 48 months, the sales charge applicable will not be higher than that
which would have been applied (including accumulations and combinations) had the
LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class
A shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
30
<PAGE>
and the proceeds used as required to pay such sales charges as may be due. By
signing the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrow shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional shares and may be terminated at
any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per
share without the imposition of a sales charge so that the Fund will receive the
full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within six years of purchase will be subject to a contingent deferred sales
charge ("CDSC") at the rates set forth in the Prospectus as a percentage of the
dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the current market value or the original purchase cost of
the Class B shares being redeemed. No CDSC will be imposed on increases in
account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution
plans administered by Investor Services or the Life Company that had more than
100 eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six-year CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please
indicate if you require the proceeds to equal the dollar amount requested. If
not indicated, only the specified dollar amount will be redeemed from your
account and the proceeds will be less any applicable CDSC.
31
<PAGE>
Example:
You have purchased 100 shares at $10 per share. The second year after
your purchase, your investment's net asset value per share has increased by $2
to $12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
o Proceeds of 50 shares redeemed at $12 per share $ 600
o Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
o Minus appreciation on remaining shares
(40 shares X 2) -80
--------
o Amount subject to CDSC $ 400
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by John Hancock Funds to defray its expenses related to
providing distribution-related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees facilitates the ability of the Fund to sell the
Class B shares without a sales charge being deducted at the time of the
purchase. See the Prospectus for additional information regarding the CDSC.
32
<PAGE>
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Investor
Services. (Please note that this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC).
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other qualified plans as
described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plan, Profit
Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA accounts that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
CDSC Waiver Matrix for Class B Funds
33
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-retirement
Distribution (401(k), MPP, Rollover
PSP)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Disability Waived Waived Waived Waived Waived
- ----------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually in
distributions or periodic payments
12% of account
value annually
in periodic
payments
- ----------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expec- tancy or value annually in
12% of account periodic payments
value annually
in periodic
payments
- ----------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of account
annuity annuity annuity payments value annually in
payments (72t) payments (72t) (72t) or 12% of periodic payments
or 12% of or 12% of account value
account value account value annually in
annually in annually in periodic payments
periodic periodic
payments payments
- ----------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- ----------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ----------------------------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you
must notify Investor Services at the time you make your redemption. The waiver
will be granted once Investor Services has confirmed that you are entitled to
the waiver.
34
<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the 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, he or she will incur a brokerage charge.
Any such securities would be valued for the purposes of making such payment at
the same value as used in determining net asset value. The 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.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class
of the Fund for shares of the same class in any other John Hancock fund offering
that class.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the
Fund permits the establishment of a Systematic Withdrawal Plan. Payments under
this plan represent proceeds arising from the redemption of Fund's shares. Since
the redemption price of Fund shares may be more or less than the shareholder's
cost, depending upon the market value of the securities owned by the Fund at the
time of redemption, the distribution of cash pursuant to this plan may result in
recognition of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional Class A or Class B shares of the Fund could be
disadvantageous to a shareholder because of the initial sales charge payable on
such purchases of Class A shares and the CDSC imposed on redemptions of Class B
shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Fund shares at the same time as a Systematic Withdrawal Plan
is in effect. The Fund reserves the right to modify or discontinue the
Systematic Withdrawal Plan of any shareholder on 30 days' prior written notice
to such shareholder, or to discontinue the availability of such plan in the
future. The shareholder may terminate the plan at any time by giving proper
notice to Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is
explained in the Prospectus. The program, as it relates to automatic investment
checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any check.
35
<PAGE>
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or another John Hancock mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A shares may be
reinvested at net asset value without paying a sales charge in Class A shares of
the Fund or in Class A shares of another John Hancock fund. If a CDSC was paid
upon a redemption, a shareholder may reinvest the proceeds from that redemption
at net asset value in additional shares of the class from which the redemption
was made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund, 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 Statement
of Additional Information, the Trustees have authorized shares of the Fund and
one other series. The Declaration of Trust also authorizes the Trustees to
classify and reclassify the shares of the Fund, or any new series of the Trust,
into one or more classes. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund, designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective distribution plans. The different
classes of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences resulting from the
36
<PAGE>
facts that (i) the distribution and service fees relating to Class A and Class B
shares will be borne exclusively by that class; (ii) Class B shares will pay
higher distribution and service fees than Class A shares; and (iii) each of
Class A shares and Class B shares will bear any class expenses properly
allocable to that class of shares, subject to the requirements imposed by the
Internal Revenue Service on funds having a multiple- class structure.
Accordingly, the net asset value per share may vary depending whether Class A
shares or Class B shares are purchased.
In the event of liquidation, shareholders of each class are entitled to
share pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund 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 a request for 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 and affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund'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 for the liabilities of
any other series. Furthermore, no Fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock Fund. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
In order to avoid conflicts with portfolio trades for the Fund, the
Adviser and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. 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. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
37
<PAGE>
TAX STATUS
The Fund has qualified and elected to be treated as a "regulated
investment company" under Subchapter M of the Code, and intends to continue to
so qualify in the future. 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, the Fund will not be
subject to Federal income tax on its taxable income (including net short-term
and long-term capital gains) which is distributed to shareholders in accordance
with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to seek to avoid or minimize liability
for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P") will be taxable under the Code for investors who are subject to
tax. If these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's federal tax basis
in Fund shares and then, to the extent such basis is exceeded, will generally
give rise to capital gains. Shareholders who have chosen automatic reinvestment
of their distributions will have a federal tax basis in each share received
pursuant to such a reinvestment equal to the amount of cash they would have
received had they elected to receive the distribution in cash, divided by the
number of shares received in the reinvestment.
If the Fund acquires stock in certain foreign 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"), the 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 Fund to
recognize taxable income or gain without the concurrent receipt of cash. The
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Fund 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 the Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, certain foreign currency options, foreign currency forward
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 the 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 or derivatives held for
less than three months, which gain is limited under the Code to less than 30% of
its gross income for each taxable year, 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 gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed the Fund's investment company taxable income computed without
regard to such loss after consideration of certain regulations on the treatment
of "post-October losses" the resulting overall ordinary loss for such year would
not be deductible by the Fund or its shareholders in future years.
The 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. The Fund does not expect to qualify to pass such taxes through to its
shareholders, who consequently will not take such taxes into account on their
own tax returns. However, the Fund will deduct such taxes in determining the
amount it has available for distribution to shareholders.
The amount of the Fund's net short-term and long-term capital gains, if
any, in any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities or enter into options transactions that
will generate capital gains. At the time of an investor's purchase of Fund
shares, a portion of the purchase price is often attributable to realized or
unrealized appreciation in the Fund's portfolio or undistributed taxable income
of the Fund. Consequently, subsequent distributions from such appreciation or
income may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands and will be long-term or short-term, depending
upon the shareholder's tax holding period for the shares and subject to the
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special rules described below. A sales charge paid in purchasing Class A shares
of the Fund cannot be taken into account for purposes of determining gain or
loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of the Fund or another John Hancock Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Such disregarded load will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to an election to reinvest dividends in
additional shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares.
Although its present intention is to distribute, at least annually, all
net capital gain, if any, the Fund reserves the right to retain and reinvest all
or any portion of the excess, as computed for Federal income tax purposes, of
net long-term capital gain over net short-term capital loss in any year. The
Fund will not in any event distribute net capital gain realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain income in his return for his taxable year in which the last day of
the Fund's taxable year falls, (b) be entitled either to a tax credit on his
return for, or to a refund of, his pro rata share of the taxes paid by the Fund,
and (c) be entitled to increase the adjusted tax basis for his shares in the
Fund by the difference between his pro rata share of such excess and his pro
rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset its 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 Fund and, as noted above, would not be distributed as such
to shareholders. At August 31, 1995, the Fund has a realized capital loss
carryforward of $203,000 which will expire as follows: $152,000 in 1996; and
$51,000 in 1998.
For purposes of the dividends received deduction available to
corporations, dividends received by the Fund, if any, from U.S. domestic
corporations in respect of the stock of such corporations held by the Fund, for
U.S. Federal income tax purposes, for at least 46 days (91 days in the case of
certain preferred stock) and distributed and properly designated by the Fund may
be treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
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shares of the Fund in order to qualify for the deduction and, if they have any
debt that is deemed under the Code directly attributable to such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability, if any. Additionally, any corporate
shareholder should consult its tax adviser regarding the possibility that its
basis in its shares may be reduced, for Federal income tax purposes, by reason
of "extraordinary dividends" received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of the
shares.
The Fund is required to accrue income on any debt securities that have
more than a de minimis amount of original issue discount (or debt securities
acquired at a market discount, if the Fund elects to include market discount in
income currently) prior to the receipt of the corresponding cash payment. The
mark to market rules applicable to certain options and forward contracts may
also require the Fund to recognize income or gain without a concurrent receipt
of cash. However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the 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 these distribution
requirements.
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. The Fund will not
seek to satisfy any threshold or reporting requirements that may apply in
particular taxing jurisdictions, although the Fund may in its sole discretion
provide relevant information to shareholders.
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all taxable distributions to shareholders, as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt recipients, i.e., corporations and certain other investors distributions
to which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. A Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
41
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required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into options, foreign currency
positions, and foreign currency forward contracts.
Certain options and forward foreign currency transactions undertaken by
the Fund may cause the Fund to recognize gains or losses from 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 foreign
currency-related forward contracts or options, as ordinary income or loss) and
timing of some capital gains and losses realized by the Fund. Also, certain of
the Fund's losses on its transactions involving options or forward 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. Certain of such transactions may also cause the Fund to dispose of
investments sooner than would otherwise have occurred. These transactions may
therefore affect the amount, timing and character of the 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 Fund will take into account the special tax rules (including
consideration of available elections) applicable to options and forward
contracts in order to seek to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of Fund shares
may also be subject to state and local taxes. Shareholders should consult their
own tax advisers as to the Federal, state or local tax consequences of ownership
of shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in the Fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
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<PAGE>
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended February 29, 1996, the annualized yields of
the Fund's Class A shares and Class B shares were 1.13% and 0.45%, respectively.
As of February 29, 1996, the average annual total returns of the Class A shares
of the Fund for the one, five and ten year periods were 26.44%, 11.50% and
10.50%, respectively. As of February 29, 1996, the average annual returns for
the Fund's Class B shares for the one year period and since inception on August
22, 1991 were 27.19% and 10.97%, respectively.
The Fund's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price per share
(which includes the full sales charge) 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 maximum offering price per share on the last day of the period
(NAV where applicable).
The 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:
43
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n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment 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, 5 year and life-of-fund periods.
In the case of Class A shares or Class B shares, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC is applied at the end of the period. 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 the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sale charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the 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.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A shares or the CDSC on Class B shares into account. Excluding
the Fund's sales charge on Class A shares and the CDSC on Class B shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the 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 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
also be utilized. The Fund's promotional and sales literature may make reference
to the Fund's "beta." Beta is a reflection of the market-related risk of the
Fund by showing how responsive the Fund is to the market.
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The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the 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
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of
the Fund and the allocation of brokerage commissions are made by the Adviser and
officers of the Fund pursuant to recommendations made by its investment
committee of the Adviser, which consists of officers and Trustees of the Adviser
who are interested persons of the Fund. Orders for purchases and sales of
securities are placed in a manner which, in the opinion of the Adviser, will
offer the best price and market for the execution of each 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." 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.
In the U.S. and in some other countries, debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. In other countries, both debt and
equity securities are traded on exchanges at fixed commission rates. Commissions
on foreign transactions are generally higher than the negotiated commission
rates available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The 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 National Association of Securities
Dealers, Inc. and other policies that the Trustees may determine, the Adviser
may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the 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 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. The receipt of research information is not
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expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser, and
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no commitments to allocate portfolio
transactions upon any prescribed basis. While the Advisers will be primarily
responsible for the allocation of the 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. For the fiscal years ended
August 31, 1995, 1994 and 1993, the Fund paid negotiated brokerage commissions
of $1,135,806, $373,133 and $369,686, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the 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. During the fiscal year ended August 31, 1995, the
Fund did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. ("Distributors"), a
broker-dealer, and an indirect shareholder of John Hancock Freedom Securities
Corporation and its two subsidiaries, Tucker Anthony Incorporated ("Tucker
Anthony") and Sutro & Company, Inc. ("Sutro") (each are "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.
During the year ended August 31, 1995, the Fund did not execute any portfolio
transactions with then affiliated brokers.
Any of the Affiliated Brokers may act as broker for the 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 the Fund as determined
by a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Fund, 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
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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 Fund's portfolio turnover rates for the fiscal years ended August
31, 1994 and 1995 were 195% and 99%, respectively. The Fund's relatively high
portfolio turnover rate was due to changes in asset allocation between U.S.
Treasury securities cash equivalents and GNMA certificates. These changes
reflected the portfolio managers' changing assessment of market conditions and
expectations in interest rate movements.
Other investment advisory clients advised by the Adviser may also
invest in the same securities and the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transaction as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable for
it. On the other hand, to the extent permitted by law, the adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays an annual fee of
$19.00 for each Class A shareholder and $21.50 for each Class B shareholder plus
certain out-of-pocket expenses. These expenses are aggregated and charged to the
Fund and allocated to each class on the basis of their relative net asset
values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and Investors Bank & Trust Company ("IBT"), 89 South
Street, Boston, Massachusetts 02111. Under the custodian agreement, IBT performs
custody, portfolio and fund accounting services.
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INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116,
has been selected as the independent auditors of the Fund. The financial
statements of the Fund for periods prior to August 31, 1995 in the Prospectus
and this Statement of Additional Information have been audited by Ernst & Young
LLP for the periods indicated in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
48
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APPENDIX A
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.
A-1
<PAGE>
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.
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
<PAGE>
JOHN HANCOCK
SOVEREIGN BALANCED FUND
CLASS A AND CLASS B SHARES
Statement of
Additional Information
December 2, 1996
This Statement of Additional Information provides information about
John Hancock Sovereign Balanced Fund (the "Fund") a diversified series of John
Hancock Investment Trust (the "Trust"), in addition to the information that is
contained in the combined Growth and Income Fund's Prospectus dated December 2,
1996 (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus, a copy of which can be obtained free
of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-(800)-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund ............................................. 2
Investment Objectives and Policies ................................... 2
Investment Restrictions .............................................. 18
Ratings............................................................... 21
Those Responsible for Management ..................................... 21
Investment Advisory and Other Services ............................... 30
Net Asset Value ...................................................... 33
Distribution Contracts ............................................... 33
Initial Sales Charge on Class A Shares ............................... 35
Deferred Sales Charge on Class B Shares .............................. 38
Additional Services and Programs ..................................... 40
Description of Fund Shares ........................................... 42
Tax Status ........................................................... 43
Calculation of Performance ........................................... 48
Brokerage Allocation ................................................. 50
Transfer Agent Services .............................................. 52
Custody of Portfolio ................................................. 52
Independent Auditors ................................................. 53
Appendix.............................................................. A-1
Financial Statements ................................................. F-1
1
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ORGANIZATION OF FUND
The Fund is a series of the Trust, an open-end investment management
company organized as a Massachusetts business trust on December 12, 1984. Prior
to December 2, 1996, the Fund was a diversified series of John Hancock Sovereign
Investors Fund, Inc.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment
adviser. The Adviser is an indirect wholly-owned subsidiary of the John Hancock
Mutual Life Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Fund are to provide current income,
long-term growth of capital and income and preservation of capital without
assuming what the Adviser believes to be undue market risks. At times, however,
because of market conditions, the Fund may invest primarily for current income.
There is no assurance that the Fund's objectives will be achieved. The Fund will
allocate its investments among different types and classes of securities in
accordance with the Adviser's appraisal of economic and market conditions.
Shareholder approval is not required to effect changes in the Fund's investment
objectives.
The Fund may invest in any type or class of security. At least 25% of
the value of the Fund's total assets will be invested in fixed income senior
securities. Fixed income securities may include both convertible and
non-convertible debt securities and preferred stock, and only that portion of
their value attributed to their fixed income characteristics, as determined by
the Adviser, can be used in applying the 25% test. The balance of the Fund's
total assets may consist of cash or (i) equity securities of established
companies, (ii) equity and fixed income securities of foreign corporations,
governments or other issuers meeting applicable quality standards as determined
by the Fund's investment adviser, (iii) foreign currencies, (iv) securities that
are issued or guaranteed as to interest and principal by the U.S. Government,
its agencies, authorities or instrumentalities, (v) obligations and equity
securities of banks or savings and loan associations (including certificates of
deposit and bankers' acceptances); and (vi) to the extent available and
permissible, options and futures contracts on securities, currencies and
indices. Each of these investments is more fully described below. The Fund's
portfolio securities are selected 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 or mix of 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.
While there is considerable flexibility in the investment quality and
type of securities in which the Fund may invest, the Fund's investments in
equity securities are limited to securities of companies who have (or whose
predecessors have) been in business continuously for at least five years and
have total assets of at least $10 million. Equity securities, for purposes of
the Fund's investment policy, are limited to common stocks, preferred stocks,
investment grade convertible securities and warrants. In addition, the Fund
utilizes a strategy of investing only in those common stocks which have a record
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of having increased their shareholder dividend in each of the preceding ten or
more years. This dividend performers strategy may be changed at any time.
At least 75% of the Fund's total investments in fixed income securities
(other than commercial paper) will be rated within the four highest grades as
determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or
Standard & Poor's Ratings Group ("S&P") (AAA, AA, A or BBB). Fixed income
securities rated Baa or BBB are considered medium grade obligations with
speculative characteristics; and adverse economic conditions or changing
circumstances may weaken their issuers' capacity to pay interest and repay
principal.
The Fund diversifies its investments among a number of industry groups
without concentrating more than 25% of its assets in any particular industry.
The Fund's investments are subject to market fluctuation and the risks inherent
in all securities. There is no assurance that the Fund will achieve its
investment objectives.
Assuming relatively stable economic conditions, it is anticipated that
the annual portfolio turnover rate will not usually exceed 100%. However, under
certain economic conditions, a higher turnover may be advisable to achieve the
Fund's objectives.
Investment in Foreign Securities. The Fund may invest up to 35% of its
total assets in securities of foreign companies. The actual percentage that will
be allocated to foreign securities will vary depending on the relative yields of
foreign and U.S. securities, the economies of foreign countries, the condition
of such countries' financial markets, the interest rate climate of such
countries and the relationship of such countries' currency to the U.S. dollar.
These factors are judged on the basis of fundamental economic criteria (e.g.,
relative inflation levels and trends, growth rate forecasts, balance of payments
status and economic policies) as well as technical and political data.
Investments in foreign securities may involve a greater degree of risk
than those in domestic securities. There is generally less publicly available
information about foreign companies in the form of reports and ratings similar
to those that are published about issuers in the United States. Also, foreign
issuers are generally not subject to uniform accounting, auditing and financial
reporting requirements comparable to those applicable to United States issuers.
Because foreign securities may be denominated in currencies other than
the U.S. dollar, changes in foreign currency exchange rates will affect the
Fund's net asset value, the value of dividends and interest earned, gains and
losses realized on the sale of securities, and any net investment income and
gains that the Fund distributes to shareholders. Securities transactions
undertaken in some foreign markets may not be settled promptly, so that the
Fund's investments on foreign exchanges may be less liquid and subject to the
risk of fluctuating currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market
whether through over-the-counter markets or exchanges located in the countries
where principal offices of the issuers are located. Foreign securities markets
are generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
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on foreign exchanges are generally higher than negotiated commissions on United
States exchanges. although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, exproporiation,
nationalization or confiscatory taxation, limitation on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States economy in terms of growth of gross national product, rate of
inflaction, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends, in some cases capital gains and interest payable on
certain of the Fund's foreign portfolio securities may be subject to foreign
withholding or other foreign taxes, thus reducing the net amount of income or
gains available for distribution to the Fund's shareholders.
These risks may be intensified in the case of investments 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 on 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 difficult or
impossible at times. The 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.
Forward Commitment and When-Issued Securities. The 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. The 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, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued
transactions, it relies on the seller to consummate the transaction. The failure
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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 the 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, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Repurchase Agreements. In a repurchase agreement the Fund buys a
security for a relatively short period (usually not more than 7 days) subject to
the obligation to sell it back to the issuer at a fixed time and price plus
accrued interest. The Fund will enter into repurchase agreements only with
member banks of the Federal Reserve System and with "primary dealers" in U.S.
Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom it enters into repurchase agreements.
The 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, the Fund could experience delays in or be
prevented from liquidating the underlying securities and could experience
losses, including the possible decline in the value of the underlying securities
during the period while the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and decline in value of the underlining securities or
of access to income during this period as well as expense of enforcing its
rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of U.S. Government securities held
in its portfolio to a bank 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 the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The 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. In addition, the Fund will not enter
into reverse repurchase agreements and other borrowings exceeding in the
aggregate 33% of the market value of its total assets. The Fund will enter into
reverse repurchase agreements only 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 banks involved.
Financial Futures Contracts. The Fund may hedge its portfolio by
selling financial futures contracts as an offset against the effect of expected
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increases in interest rates or declines in security or foreign currency values
and by purchasing such futures contracts as an offset against the effect of
expected declines in interest rates or increases in security or foreign currency
values. Although other techniques could be used to reduce the Fund's exposure to
interest rate, securities market and currency fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
financial futures contracts. The Fund will enter into financial futures
contracts for hedging, speculative and other non-hedging purposes.
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the Commodity Futures Trading
Commission ("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. It is expected that if new types of financial futures contracts are
developed and traded the Fund 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 or
currency 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 the 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 the 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. The 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 the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
Government securities, known as "initial margin." 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 Fund
expects to earn interest income on its 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 Fund but is instead a settlement between the Fund and the broker of the
amount one would owe the other if the financial futures contract expired. In
computing net asset value, the Fund will mark to the market its open financial
futures positions.
Successful hedging depends on the extent of correlation between the
market for the underlying securities and the futures contract market for those
securities or currency. There are several factors that will probably prevent
this correlation from being perfect, and even a correct forecast of general
interest rate, securities market or currency trends may not result in a
successful hedging transaction. There are significant differences between the
securities or currency markets and the futures markets which could create an
imperfect correlation between the markets and which could affect the success of
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a given hedge. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for financial
futures and debt and equity 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 market behavior or unexpected interest rate, securities
market or currency trends. The Fund 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
believes that the use of financial futures contracts will benefit the Fund, an
incorrect prediction could result in a loss on both the hedged securities or
currency in the Fund's portfolio and the futures position 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 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 the price of instruments underlying 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 Fund engages 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 make or take delivery, liquidity
in the market could be reduced. In addition, the Fund 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 the Fund cannot close out a position, it will
be required to continue to meet margin requirements until the position is
closed.
The 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 total
assets. The risk of loss on futures transactions is potentially unlimited and
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may exceed the amount invested or of the premium received.
Options on Financial Futures Contracts. The Fund may purchase and write
call and put options on financial futures contracts. 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 Fund
would be required to deposit with its custodian initial and variation margin
with respect to put and call options on futures contracts written by it.
Options on futures contracts involve risks similar to the risks
relating to transactions in financial futures contracts. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
Restrictions on Use of Futures Transactions and Options. The Fund
intends to comply with CFTC Regulation 4.5 and thereby avoid the status of
"commodity pool operator."
When futures contracts or options thereon are purchased to protect
against a price increase in securities intended to be purchased later, it is
anticipated that at least 75% of such intended purchases will be completed. As
an alternative to this test of bona fine hedging intent, a CFTC regulation
permits the Fund to elect to comply with a different test, under which the Fund
will not enter into a futures contract or purchase an option thereon for
non-hedging purposes if immediately thereafter the initial margin deposits and
premiums required to establish non-hedging positions in futures contracts and
options on futures would exceed 5% of the Fund's total assets.
When the Fund purchases a futures contract, writes a put option thereon
or purchases a call option thereon, an amount of cash or high grade liquid debt
securities (i.e., securities rated in one of the top three ratings categories by
Moody's or S&P will be deposited in a segregated account with the Fund's
custodian which is equal to the underlying value of the futures contract reduced
by the amount of initial and variation margin held in the account of its broker.
Options Transactions. The Fund may write listed and over-the-counter
covered call options and covered put options on securities and foreign currency
in order to earn additional income from the premiums received. In addition, the
Fund may purchase listed and over-the-counter call and put options. The extent
to which covered options will be used by the Fund will depend upon market
conditions and the availability of alternative strategies. The Fund may purchase
listed and over-the-counter call and put options on securities and currency with
an aggregate value not exceeding 5% of the Fund's total assets.
The 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 the Fund will 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, if the exercise price of the covering
call is greater than that of the call written, the difference is maintained by
the Fund in cash, U.S. Treasury bills or high grade liquid debt obligations in a
segregated account with the Fund's custodian, and (ii) the covering call expires
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at the same time as or later than the call written. If a covered call option is
not exercised, the Fund would keep both the option premium and the underlying
security. If the covered call option written by the 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
premium it received. If the exercise price, less transaction costs, is less than
the cost of the underlying security, the Fund's loss would be reduced by the
amount of the option premium.
As writer of a covered put option, the Fund will write a put option
only with respect to securities it intends to acquire for the Fund's portfolio
and will maintain in a segregated account with its custodian bank cash, U.S.
Government securities, 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 Fund can 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 or later than the put written.
In writing listed and over-the-counter covered put options on
securities, the Fund would earn income from the premiums received. If a covered
put option is not exercised, the Fund 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, the 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 the Fund's
position will be offset by the Options Clearing Corporation. The Fund may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. There is no guarantee that a closing purchase transaction can be
effected. Although the Fund 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 the 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 the 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 the 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.
The 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 Fund 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 of the underlying security owned by the Fund.
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Over-the-Counter Options. The Fund 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. The Fund will
acquire only those OTC options 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 Fund 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
illiquid securities subject to the restriction that illiquid securities are
limited to not more than 15% of the Fund's assets. The SEC, however, has a
partial exemption from the above restrictions on transactions in OTC options.
The SEC allows the Fund to exclude from 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 would have an absolute contractual right to
repurchase the OTC options at a formula price. If the above conditions are met,
a Fund must 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.
While transactions in options may reduce certain risks, they may entail
other risks. Certain risks arise due to the imperfect correlations between
movements in the price of options contracts and movements in the prices of the
securities or currency underlying the contracts.
The Fund's ability to use options to hedge or earn income successfully
will depend on the Adviser's ability to predict accurately the future direction
of interest rate changes, currency rate fluctuations and other market factors.
The success of hedging transactions will also depend on the degree of
correlation between the options markets and the securities markets. The risk of
loss on written options transactions is potentially unlimited and may exceed the
amount invested or of the premium received. In addition, the Fund could be
prevented from opening, or realizing the benefits of closing out, an options
position because of position limits or limits on daily price fluctuations
imposed by an exchange.
Lending of Securities. The Fund may lend portfolio securities to
brokers, dealers, and financial institutions if the loan is collateralized by
cash or U.S. Government securities according to applicable regulatory
requirements. The Fund may reinvest any cash collateral in short-term securities
and money market funds. When the Fund lends portfolio securities, there is a
risk that the borrower may fail to return the loaned securities. As a result,
the Fund may incur a loss or in the event of the borrower's bankruptcy may be
delayed in or prevented from liquidating the collateral. It is a fundamental
policy of the Fund not to lend portfolio securities having a total value in
excess of 33 1/3% of its total assets.
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Restricted Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933 ("1933
Act"), including securities offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act. However, the Fund will not invest more than
15% of its assets in illiquid investments, which include repurchase agreements
maturing in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Board of Trustees determines, based upon
a continuing review of the trading markets for specific Rule 144A securities,
that they are liquid, then such securities may be purchased without regard to
the 15% limit. The Trustees may adopt guidelines and delegate to the Adviser the
daily function of determining the monitoring and liquidity of restricted
securities. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Trustees will carefully
monitor the Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in the Fund if qualified institutional buyers become for a time
uninterested in purchasing these restricted securities.
The Fund may acquire other restricted securities including securities
for which market quotations are not readily available. These securities may be
sold only in privately negotiated transactions or in public offerings with
respect to which a registration statement is in effect under the Securities Act
of 1933. Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair market value as determined in good faith by the Fund's
Trustees. If through the appreciation of restricted securities or the
depreciation of unrestricted securities, the Fund should be in a position where
more than 15% of the value of its assets is invested in illiquid securities
(including repurchase agreements which mature in more than seven days and
options which are traded over-the-counter and their underlying securities), the
Fund will bring its holdings of illiquid securities below the 15% limitation.
Government Securities. 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 obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association Bonds ("Fannie
Maes"). No assurance can be given that the U.S. Government will provide
financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Ginnie Maes, Freddie Macs and Fannie Maes are mortgage-backed
securities which provide monthly payments which are, in effect, a "pass-through"
of the monthly interest and principal payments (including any prepayments) made
by the individual borrowers on the pooled mortgage loans. Collateralized
mortgage obligations ("CMOs") in which the Fund may invest are securities issued
by a U.S. Government instrumentality that are collateralized by a portfolio of
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mortgages or mortgage-backed securities. Mortgage-backed securities may be less
effective than traditional debt obligations of similar maturity at maintaining
yields during periods of declining interest rates. The Fund will not invest more
than 50% of its assets in mortgage-backed securities.
Forward Foreign Currency Transactions. The foreign currency
transactions of the Fund 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. The Fund may also enter into forward foreign currency contracts
involving currencies of the different countries in which it will 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 Fund's transactions in forward foreign currency contracts
will be limited to hedging either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency
contracts with respect to specific receivables or payables of the 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. The 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.
If the Fund enters into a forward contract to purchase foreign
currency, its custodian bank will segregate cash or liquid securities in a
separate account of the Fund in an amount necessary to complete the contract.
Those assets will be market to market daily and if the value of the securities
in the separate account declines, additional cash or securities will be added so
that the value of the account will be equal to the amount of the Fund's
commitment in forward 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. These transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the 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 the Fund of engaging in foreign currency 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.
Lower Rated High Yield "High Risk" Securities. Up to 25% of the Fund's
total investments in fixed income securities may be in high yielding, fixed
income securities rated as low as C by Moody's or S&P. These lower rated
securities are speculative to a high degree and often have very poor prospects
of attaining real investment standing. Lower rated securities are generally
referred to as junk bonds. Ratings are based largely on the historical financial
condition of the issuer.
Securities rated lower than Baa by Moody's or BBB by Standard & Poor's
are sometimes referred to as junk bonds. See the Appendix attached to this
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Statement of Additional Information which describes the characteristics of the
securities in the various ratings categories. The Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the above-stated ratings. The credit ratings of Moody's and
Standard & Poor's such as those ratings described here, may not be changed by
Moody's and Standard & Poor's in a timely fashion to reflect subsequent economic
events. The credit ratings of securities do not reflect an evaluation of market
risk. 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 issuer's ability to make payments of
interest and principal. The market price and liquidity of lower rated fixed
income securities generally respond more to short-term corporate and market
developments than do those 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. The
Adviser seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions.
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 the Fund's assets. The reduced
availability of reliable, objective data may increase the Fund's reliance on
management's judgment in valuing high yield high risk bonds. In addition, the
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. The Fund's investments, and consequently its net asset
value, will be subject to the market fluctuations and risk inherent in all
securities. Increasing rate note securities are typically refinanced by the
issuers within a short period of time.
The Fund may invest in pay-in-kind (PIK) securities, which pay interest
in either cash or additional securities, at the issuer's option, for a specified
period. The Fund also may invest in zero coupon bonds, which have a determined
interest rate, but payment of the interest is deferred until maturity of the
bonds. Both kinds of bonds may be more speculative and subject to greater
fluctuations in value than securities which pay interest periodically and in
cash, due to changes in interest rates.
The market value of debt securities which carry no equity participation
usually reflects yields generally available on securities of similar quality and
type. When such yields decline, the market value of a portfolio already invested
at higher yields can be expected to rise if such securities are protected
against early call. In general, in selecting securities for its portfolio, the
Fund intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Investments in corporate fixed income securities may be in bonds,
convertible debentures and convertible or non-convertible preferred stock. The
value of convertible securities, while influenced by the level of interest
rates, is also affected by the changing value of the underlying common stock
into which the securities are convertible. The value of fixed income securities
varies inversely with interest rates.
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Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage
"dollar roll" transactions with selected banks and broker-dealers pursuant to
which the Fund sells mortgage-backed securities and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. The Fund will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a 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 the Fund's borrowing and other senior securities. For financial
reporting and tax purposes, the Fund treats mortgage dollar rolls as two
separate transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar roll transactions that are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset- backed securities which are rated in the highest rating category by a
nationally recognized statistical rating organization (e.g., Standard & Poor's
Corporation or Moody's Investors Services, Inc.) or if not so rated, of
equivalent investment quality in the opinion of the Adviser.
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, the 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 services to retain possession of the underlying obligations. If the service
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.
Rights and Warrants. The Fund may purchase warrants and rights which
are securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's
Fundamental Investment Restriction,. Generally, warrants and stock purchase
rights do not carry with them the right to receive dividends or exercise voting
rights with respect to the underlying securities, and they do not represent any
rights in the assets of the issuer. As a result, an investment in warrants and
rights may be considered to entail greater investment risk than certain other
types of investments. In addition, the value of warrants and rights does not
necessarily change with the value of the underlying securities, and they cease
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to have value if they are not exercised on or prior to their expiration date.
Investment in warrants and rights increases the potential profit or loss to be
realized from the investment of a given amount of the Fund's assets as compared
with investing the same amount in the underlying stock.
Short-Sales. The Fund may engage in short sales "against the box", as
well as short sales to hedge against or profit from an anticipated deline in the
value of a security. When the Fund engages in a short sale, it will place in a
segregated account and mark to market daily, cash or U.S. Government securities
in accordance with applicable regulatory requirements.
Structured or Hybrid Notes. The 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 benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the 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, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the 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.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. 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 payment 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 the Fund's investment exposure from
one type of investment to another. For example, if the Fund agreed 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.
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As a result, swaps can be highly volatile and may have a considerable impact on
the Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
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. The Fund's
investments in participation interests are subject to its 15% limitation on
investments in liquid securities. The Fund may purchase only those participation
interest 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.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-
in-kind, delayed and zero coupon bonds. These are securities issued at a
discount from their face value because interest payments are typically postponed
until maturity. The amount of the discount rate varies depending on factors
including the time remaining until maturity, prevailing interest rates, the
security's liquidity and the issuer's credit quality. These securities also may
take the form of debt securities that have been stripped of their interest
payments. A portion of the discount with respect to stripped tax-exempt
securities or their coupons may be taxable. The market prices in pay-in-kind,
delayed and zero coupon bonds generally are more volatile than the market prices
of interest-bearing securities and are likely to respond to a grater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status."
Brady Bonds. The Fund may also invest in so-called "Brady Bonds." The
Fund may invest in Brady Bonds and other sovereign debt securities of countries
that have restructured or are in the process of restructuring sovereign debt
pursuant to the Brady Plan. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external indebtedness (generally, commercial bank debt). In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the World Bank and the International Monetary Fund (the "IF"). The Brady
Plan framework, as it has developed, contemplates the exchange of commercial
bank debt for newly issued bonds (Brady Bonds). The World Bank and/or the IF
support the restructuring by providing funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to repurchase outstanding bank debt at a discount. Under these
arrangements with the World Bank and/or the IF, debtor nations have been
required to agree to the implementation of certain domestic monetary and fiscal
reforms. Such reforms have included the liberalization of trade and foreign
investment, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs seek to
promote the debtor country's ability to service its external obligations and
promote its economic growth and development. Investors should recognize that the
Brady Plan only sets forth general guiding principles for economic reform and
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debt reduction, emphasizing that solutions must be negotiated on a case-by-case
basis between debtor nations and their creditors. The Adviser believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries which have issued or have announced plans
to issue Brady Bonds an attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of the date of this Statement of Additional Information, the Fund is not
aware of the occurrence of any payment defaults on Brady Bonds. Investors should
recognize however, that Brady Bonds have been issued only recently, and,
accordingly, they do not have a long payment history. Agreements implemented
under the Brady Plan to date are designed to achieve debt and debt-service
reduction through specific options negotiated by a debtor nation with its
creditors. As a result, the financial packages offered by each country differ.
The types of options have included the exchange of outstanding commercial bank
debt for bonds issued at 100% of face value of such debt, bonds issued at a
discount of face value of such debt, bonds bearing an interest rate which
increases over time and bonds issued in exchange for the advancement of new
money by existing lenders. Certain Brady Bonds have been collateralized as to
principal due at maturity by U.S. Treasury zero coupon bonds with a maturity
equal to the final maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds. Collateral
purchases are financed by the IF, the World Bank and the debtor nations'
reserves. In addition, the first two or three interest payments on certain types
of Brady Bonds may be collateralized by cash or securities agreed upon by
creditors. Although Brady Bonds may be collateralized by U.S. Government
securities, repayment of principal and interest is not guaranteed by the U.S.
Government.
Short Term Trading and Portfolio Turnover. The Fund may attempt to
maximize current income through short-term portfolio trading. This will involve
selling portfolio instruments and purchasing different instruments to take
advantage of yield disparities in different segments of the market for
Government Obligations. Short-term trading may have the effect of increasing
portfolio turnover rate. A high rate of portfolio turnover (100% or greater)
involves corresponding higher transaction expenses and may make it more
difficult for the Fund to qualify as a regulated investment company for federal
income tax purposes.
Defensive Investments. When the Adviser believes unfavorable investment
conditions exist requiring the Fund to assume a temporary defensive investment
posture, the Fund may hold cash or invest all or a portion of its assets in
short-term instruments, including: short-term U.S. Government securities and
repurchase agreements in respect thereof; bank certificates of deposit, bankers'
acceptances, time deposits and letters of credit; and commercial paper
(including so called Section 4(2) paper) rated at least A-2 by S&P or P-2 by
Moody's or if unrated, considered by the Adviser to be of comparable quality.
The Fund's temporary defensive investments may also include: debt obligations of
U.S. companies rated at least A by S&P or Moody's or, if unrated, of comparable
quality in the opinion of the Adviser; commercial paper and corporate debt
obligations not satisfying the above credit standards if they are (a) subject to
demand features or puts or (b) guaranteed as to principal and interest by a
domestic or foreign bank having total assets in excess of $1 billion, by a
company whose commercial paper may be purchased by the Fund, or by a foreign
17
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government having an existing debt security rated at least A by S&P or Moody's;
and other short-term investments which the Adviser determines present minimal
credit risks and which are of "high quality" as determined by any major rating
service or, in the case of an instrument that is not rated, of comparable
quality as determined by the Adviser.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment
restrictions will not be changed without approval of a majority of the Fund's
outstanding voting securities which, as used in the Prospectus and this
Statement of Additional Information, means approval by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at a meeting if at least
50% of the Fund's outstanding shares are present in person or by proxy at that
meeting or (2) more than 50% of the Fund's outstanding shares.
The Fund observes the fundamental restrictions listed in items (1)
through (9) below.
The Fund may not:
(1) Issue senior securities, except as permitted by paragraph (2)
below. For purposes of this restriction, the issuance of
shares in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts,
forward foreign currency exchange contracts, forward
commitments and repurchase agreements entered into in
accordance with the Fund's investment policies, and the
pledge, mortgage or hypothecation of the Fund's assets within
the meaning of paragraph (3) below, are not deemed to be
senior securities.
(2) Borrow money in amounts exceeding 33% of the Fund's total
assets (including the amount borrowed) taken at market value.
Interest paid on borrowings will reduce income available to
shareholders.
(3) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if
the assets subject to such pledging, mortgaging or
hypothecation do not exceed 33% of the Fund's total assets
taken at market value.
(4) 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.
(5) Purchase or sell real estate or any interest therein,
including real estate limited partnerships, except that the
Fund may invest in securities of corporate or governmental
entities secured by real estate or marketable interests
therein or securities issued by companies that invest in real
estate or interests therein.
(6) Make loans, except for collateralized loans of portfolio
securities in accordance with the Fund's investment policies.
The Fund does not, for this purpose, consider the purchase of
all or a portion of an issue of bonds, bank certificates of
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deposit, bankers' acceptances, debentures or other securities,
whether or not the purchase is made upon the original issuance
of the securities, to be the making of a loan.
(7) Buy or sell commodities, commodity contracts, puts, calls or
combinations thereof, except futures contracts and options on
securities, securities indices, currency and other financial
instruments, options on such futures contracts, forward
foreign currency exchange contracts, forward commitments,
interest rate or currency swaps, securities index put or call
warrants and repurchase agreements entered into in accordance
with the Fund's investment policies.
(8) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after
such purchase, the value of its investments in such industry
would exceed 25% of its total assets taken at market value at
the time of each investment. This limitation does not apply to
investments in obligations of the U.S. Government or any of
its agencies or instrumentalities.
(9) Purchase securities of an issuer (other than the U.S.
Government, its agencies or instrumentalities), if, with
respect to 75% of the Fund's total assets,
(i) more than 5% of the Fund's total assets taken at
market value would be invested in the securities of
such issuer, or,
(ii) such purchase would at the time result in more than
10% of the outstanding voting securities of such
issuer being held by the Fund.
In connection with the lending of portfolio securities under item (6)
above, such loans must at all times be fully collateralized and the Fund's
custodian must take possession of the collateral either physically or in book
entry form. Securities used as collateral must be marked to market daily.
Nonfundamental Investment Restrictions. The following investment
restrictions are designated as nonfundamental and may be changed by the Trustees
without shareholders' approval.
The Fund may not:
(a) 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 to save commissions or to average prices
among them is not deemed to result in a joint securities trading
account.
(b) Purchase securities on margin (except that it may obtain such
short-term credits as may be necessary for the clearance of
transactions in securities and forward foreign currency exchange
contracts and may make margin payments in connection with transactions
in futures contracts and options on futures) or make short sales of
securities unless by virtue of its ownership of other securities, the
Fund has the right to obtain, without the payment of any additional
consideration, securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is made upon
the same conditions.
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(c) Purchase securities of an issuer if, to the Fund's knowledge, one or
more of the Trustees or officers of the Trust or the directors or
officers of the Adviser individually owns beneficially more than 0.5%
and together own beneficially more than 5% of the securities of such
issuer.
(d) Purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii)
more than 5% of the Fund's total assets would be invested in the
securities of any one 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. Subject to the above percentage
limitations, the Fund may, in connection with the John Hancock Group of
Funds Deferred Compensation Plan for Independent Trustees/Trustees,
purchase securities of other investment companies within the John
Hancock Group of Funds. The 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.
(e) Purchase securities of any issuer which, together with any predecessor,
has a record of less than three years' continuous operations if such
purchase would cause investments of the Fund in all such issuers to
exceed 5% of the value of the total assets of the Fund.
(f) Invest for the purpose of exercising control over or management of any
company.
(g) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Fund's total assets would be invested
in warrants which are not listed on the New York Stock Exchange or the
American Stock 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.
(h) Purchase any security, including any repurchase agreement maturing in
more than 7 days, which is not readily marketable, if more than 15% of
the net assets of the Fund, taken at market value, would be invested in
such securities. (The staff of the Securities and Exchange Commission
may consider over-the-counter options to be illiquid securities subject
to the 15% limit.)
(i) Purchase interests in oil, gas or other mineral leases or exploration
programs or leases; however, this policy will not prohibit the
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acquisition of securities of companies engaged in the production or
transmission of oil, gas or other minerals.
(j) Purchase a security if, as a result, more than 15% of the Fund's assets
would be invested in securities which are restricted as to disposition;
however, this policy will not restrict the acquisition of restricted
securities offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act of 1933 or to foreign securities
purchased in accordance with Regulation S under the Securities Act of
1933.
In order to permit the sale of shares of the Fund in certain states,
the Trustees may, in its sole discretion, adopt restrictions or investment
policies more restrictive than those described above. Should the Trustees
determine that any such more restrictive policy is no longer in the best
interest of the Fund and its shareholders, the Fund may cease offering shares in
the state involved and the Board may revoke such restrictive policy. Moreover,
if the states involved shall no longer require any such restrictive policy, the
Trustees may, at its sole discretion, revoke such policy. The Fund has agreed
with state securities administrators that it will not purchase the following
securities:
The Fund agrees that, in accordance with the Ohio Securities Division
and until such regulations are no longer required, it will comply with rule
1301:6-3-09(E)(9) by not investing in the securities of other open-end and
closed-end investment companies except by purchase in the open market where no
commission or profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or except when the purchase is part of a plan
of merger, consolidation, reorganization or acquisition.
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 value of the Fund's assets will not
be considered a violation of the restriction.
RATINGS
As described in this Statement of Additional Information, at least 75%
of the Fund's investments in fixed income securities will be comprised of
securities in the four highest applicable ratings of S&P and Moody's or their
equivalent or unrated securities deemed of comparable quality by the Adviser.
See the Appendix attached to this Statement of Additional Information, which
describes the characteristics of the securities in the various categories.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers
who are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Trust are also officers or directors of the Adviser or officers or directors of
John Hancock Funds, Inc. ("John Hancock Funds") the Fund's principal
distributor.
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), John
Hancock Investor Services
Corporation ("Investor Services"),
First Signature Bank and Trust
Company and Sovereign Asset
Management Corporation
("SAMCorp."); Director, John
Hancock Freedom Securities
Corporation, John Hancock Insurance
Agency, Inc. ("Insurance Agency,
Inc."), John Hancock Capital
Corporation 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).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
22
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Thomas W.L. Cameron * Trustee (1) Chairman and Director, Sovereign
Interstate/Johnson Lane Advisers, Inc.; Senior Vice
1892 Andell Bluff Blvd. President, Interstate/Johnson Lane
Johns Island, SC 29455 Corp. (securities dealer).
February 1927
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea (until
August 1992).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
23
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
24
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Anne C. Hodsdon * President and Director (1, 2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds, Investor Services (since
October 1996); Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
25
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
26
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, Investor Services, John
August 1937 Hancock Distributors, Inc.,
Insurnace Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp. and NM
Capital; Trustee, The Berkeley
Group; Director, JH Networking
Insurance Agency, Inc.; Director,
John Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993),
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
27
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, Investor
Services, SAMCorp., Insurance
Agency, Inc., Southeastern Thrift &
Bank Fund and NM Capital; Senior
Vice President, The Berkeley Group;
President, the Adviser (until
December 1994);
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
28
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Investor Services.
February 1935
Susan S. Newton Vice President and Secretary Vice President and Assistant
101 Huntington Avenue Secretary, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds,
March 1950 Investor Services; Secretary,
SAMCorp; Vice President, The
Berkeley Group, John Hancock
Distributors, Inc. (until 1994).
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Investor Services and John Hancock
July 1950 Funds; Counsel, John Hancock Mutual
Life Insurance Company.
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
29
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.
As of October 31, 1996, the officers and Trustees of the Fund as a
group beneficially owned less than 1% of the outstanding shares of the Fund and
to the knowledge of the registrant, no persons owned of record or beneficially
5% or more of any class of the registrant's outstanding securities.
The following table provides information regarding the compensation
paid by the Fund and the other investment companies in the John Hancock Fund
Complex to the Independent Trustees for their services for the Fund's most
recently completed fiscal year. The four non-independent Trustees, Messrs.
Boudreau, Cameron, Scipione and Ms. Hodsdon and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and
received no compensation from the Fund for their services.
Total Compensation
Aggregate From the Fund and
Independent Compensation John Hancock Fund
Trustees From the Fund Complex to Trustees(1)
-------- ------------- ----------------------
James F. Carlin $ 1,777 $ 60,700
Charles F. Fretz 2,568 56,200
Harold R. Hiser, Jr.* ---- 60,200
Charles L. Ladner 1,510 60,700
Patricia P. McCarter 1,510 60,700
Steven R. Pruchansky 1,560 62,700
Norman H. Smith 1,560 62,700
John P. Toolan* ---- 60,700
$10,485 $627,500
(1) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31,
1995. As of this date there were sixty-one funds in the John Hancock
Fund Complex, of which each of the Independent Trustees served as
Directors or Trustees of thirty-three funds.
* As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock Fund Complex for Mr.
Hiser was $31,324 and for Mr. Toolan was $71,437 under the John Hancock
Deferred Compensation Plan for Independent Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and presently has more than $19 billion in
assets under management in its capacity as investment adviser to the Fund and
other mutual funds and publicly traded investment companies in the John Hancock
group of funds having a combined total of over 1,080,000 shareholders. The
30
<PAGE>
Adviser is an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
management of more than $80 billion, the Life Company is one of the ten largest
life insurance companies in the United States, and carries high ratings from S&P
and A.M. Best's. Founded in 1862, the Life Company has been serving clients for
over 130 years.
The Fund has entered into an investment management contract with the
Adviser, under which the Adviser provides the Fund with a continuous investment
program, consistent with the Fund's stated investment objective and policies.
The Adviser is responsible for the day to day management of the Fund's portfolio
assets.
No person other than the Adviser and its directors and employees
regularly furnish advice to the Fund with respect to the desirability of the
Fund's 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.
All expenses which are not specifically paid by the Adviser and which
are incurred in the operation of the Fund, including fees of Trustees of the
Trust who are not "interested persons," as such term is defined in the
Investment Company Act (the "Independent Trustees") and the continuous public
offering of the shares of the Fund are borne by the Fund but excluding certain
distribution-related activities required to be paid by the Adviser or John
Hancock Funds.
As discussed in the Prospectus and as provided by the investment
management contract, the Fund pays the Adviser monthly an investment management
fee, which is accrued daily, based on an annual rate of 0.60% of the average of
the daily net assets of the Fund. From time to time, the Adviser may reduce its
fee or make other arrangements to limit the Fund's expenses to a specified
percentage of average net assets. The Adviser retains the right to re-impose a
fee and recover other payments to the extent that, at the end of any fiscal
year, the Fund's actual expenses at year end fall below any such limit.
Investment Advisory fees to the Adviser during the fiscal year ended
December 31, 1995, 1994 and 1993 amounted to $891,221, $864,666 and $474,915,
respectively.
The Fund compensates the Adviser for performing necessary tax and
financial management services. The compensation for 1996 is estimated to be an
annual rate of 0.01875% of the average net assets of the Fund.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or any affiliate 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 for the Fund or for other funds or clients for which
the 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 affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
31
<PAGE>
Pursuant to the investment management contract, the Adviser is not
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the investment management
contract relates, except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its duties or
from reckless disregard of its obligations and duties under the investment
management contract.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a 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 nonexclusive right to use the name "John Hancock"
or any similar name to any 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.
The Adviser has entered into a service agreement with Sovereign Asset
Management Corporation ("SAMCORP") which is an indirect wholly-owned subsidiary
of the Life Company. The service agreement provides that SAMCORP will provide to
the Adviser certain portfolio management services with respect to the equity
securities held in the portfolio of the Fund. The service agreement further
provides that the Adviser will remain ultimately responsible for all of its
obligations under the investment management contract between the Adviser and the
Fund. Subject to the supervision of the Adviser, SAMCORP furnishes the Fund with
recommendations with respect to the purchase, holding and disposition of equity
securities in the Fund's portfolio; furnishes the Fund with research, economic
and statistical data in connection with the Fund's equity investments; and
places orders for transactions in equity securities.
The Adviser pays to SAMCORP 40% of the monthly investment management
fee received by the Adviser with respect to the equity securities held in the
portfolio of the Fund during such month. The fees paid by the Fund to the
Adviser under the investment management contract are not affected by this
arrangement.
During the fiscal years ended December 31, 1995, 1994 and 1993, the
Adviser paid SAMCORP the sum of $118,896, $105,821, and $73,242, respectively,
in connection with the service agreement with SAMCORP.
The investment management contract and the distribution contract
discussed below continue in effect from year to year if approved annually by
vote of a majority of the Independent Trustees 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 approval, and by either the Trustees or the holders of a
majority of the 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 a majority of the outstanding voting
securities of the Fund.
32
<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment 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.
Securities in the aforementioned category 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 investments 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 the 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. 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 their value.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank 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.
The Fund will not price its 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 close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
DISTRIBUTION CONTRACTS
The Fund has entered into a Distribution Agreement with John Hancock
Funds. Under the agreement, John Hancock Funds is obligated to use its best
efforts to sell shares of each class of the Fund. Shares of the Fund are also
sold by selected broker-dealers (the "Selling Brokers") which have entered into
selling agency agreements with John Hancock Funds. John Hancock Funds accepts
orders for the purchase of the shares of the Fund which are continually offered
at net asset value next determined, plus any applicable sales charge. In
connection with the sale of Class A or Class B shares, John Hancock Funds and
Selling Brokers receive compensation in the form of a sales charge imposed, in
33
<PAGE>
the case of Class A shares, at the time of sale or, in the case of Class B
shares, on a deferred basis. Upon notice to all Selling Brokers, John Hancock
Funds may allow them up to the full applicable sales charge during periods
specified in such notice. During these periods, Selling Brokers may be deemed to
be underwriters as that term is defined in the 1933 Act. The sales charges are
discussed further in the Prospectus.
The Fund's Trustees adopted Distribution Plans with respect to Class A
and Class B shares ("the Plans"), pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Under the Plans, the Fund will pay distribution and service
fees at an aggregate annual rate of up to 0.30% and 1.00% respectively, of the
Fund's daily net assets attributable to shares of that class. However, the
service fee will not exceed 0.25% of the Fund's average daily net assets
attributable to each class of shares. The distribution fees are used to
reimburse John Hancock Funds for its distribution expenses, including but not
limited to: (i) initial and ongoing sales compensation to Selling Brokers and
others (including affiliates of John Hancock Funds) engaged in the sale of Fund
shares; (ii) marketing, promotional and overhead expenses incurred in connection
with the distribution of Fund shares; and (iii) with respect to Class B shares
only, interest expenses on unreimbursed distribution expenses. The service fees
will be used to compensate Selling Brokers for providing personal and account
maintenance services to shareholders. In the event that John Hancock Funds is
not fully reimbursed for payments it makes or expenses it incurs under the Class
A Plan, these expenses will not be carried beyond one year from the date they
were incurred. In the event that John Hancock Funds is not fully reimbursed for
expenses incurred by it under the Class B Plan in any fiscal year, John Hancock
Funds may carry these expenses forward together with interest on the balance of
these unreimbursed expenses, provided, however, that the Trustees may terminate
the Class B Plan and thus the Fund's obligation to make further payments at any
time. Accordingly, the Fund does not treat unreimbursed expenses relating to the
Class B shares as a liability of the Fund. The Plans were approved by a majority
of the voting securities of the Fund. The Plans and all amendments were approved
by the Trustees, including a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plans (the "Independent Trustees"), by votes cast in person at
meetings called for the purpose of voting on such Plans.
For the year ended December 31, 1995, an aggregate of $3,097,061 of
distribution expenses or 3.7% of the average net assets of Class B shares were
not reimbursed or recovered by John Hancock Funds through the receipt of
deferred sales charges or 12b-1 fees.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides
the Fund with a written report of the amounts expended under the Plans and the
purpose for which the expenditures were made. The Trustees review these reports
on a quarterly basis to determine their continued appropriateness.
34
<PAGE>
During the fiscal year ended December 31, 1995 the Funds paid John
Hancock Funds the following amounts of expenses with respect to the Class A and
Class B shares of the Funds.
<TABLE>
<CAPTION>
Expense Items
Printing and Expenses of Interest
Mailing of Compensation John Carrying or
Prospectus to to Hancock Other Finance
Advertising New Shareholders Selling Brokers Funds Charges
----------- ---------------- --------------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A Shares $33,515 $3,846 $98,915 $59,699 None
Class B Shares $53,861 $4,475 $328,674 $83,603 $351,388
</TABLE>
Each of the Plans provides that it will continue in effect only so long
as their continuance is approved at least annually by the Trustees and by the
Independent Trustees. Each of the Plans provides that it may be terminated
without penalty (a) by a vote of a majority of the Independent Trustees (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class
having voting rights with respect to the Plan upon 60 days' written notice to
John Hancock Funds, and (c) automatically in the event of assignment. Each of
the Plans further provides that it may not be amended to increase the maximum
amount of the fees for the services described therein without the approval of a
majority of the outstanding shares of the class of the Fund which has voting
rights with respect to the Plan. Each of the Plans also provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a vote of the Trustees and the Independent Trustees of the Fund. The
holders of Class A shares and Class B shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that each Plan will benefit the holders of the applicable class of
shares of the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset
value plus a sales charge which, at the option of the purchaser, may be imposed
either at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then they will only be issued for full shares. The Trustees reserve the
right to change or waive the Fund's minimum investment requirements and to
reject any order to purchase shares (including purchases by exchange) when in
the judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund
are described in the Prospectus. Methods of obtaining reduced sales charges
referred to generally in the Prospectus are described in detail below. In
calculating the sales charge applicable to current purchases of Class A shares,
the investor is entitled to cumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund owned by the
investor, or if John Hancock Investor Services Corporation ("Investor Services")
35
<PAGE>
is notified by the investor's dealer or the investor at the time of the
purchase, the cost of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to
purchases of Class A shares made at one time, the purchases will be combined if
made by (a) an individual, his or her spouse and their children under the age of
21, purchasing securities for his or their own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account, and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment
laws from paying a sales charge or commission when it purchases shares
of any registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if
it is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, mother, father, sister, brother, mother-in-law,
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into an agreement with John Hancock
Funds providing specifically for the use of Fund shares in fee-based
investment products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any
or all of his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed defined contribution plans with at least 100 eligible
employees at the inception of the Fund account, may purchase Class A
shares with no initial sales charge. However, if the shares are
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
<PAGE>
Amount Invested CDSC Rate
--------------- ---------
$1 to$4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
36
<PAGE>
Accumulation Privilege. Investors (including investors combining
purchases) who are already Class A shareholders may also obtain the benefit of a
reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or current value of the Class A shares
already held by such person.
Combination Privilege. Reduced sales charges (according to the schedule
set forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. Reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may opt to make the necessary
investments called for by the LOI over a forty-eight (48) month period. These
qualified retirement plans include group IRA's, SEP, TSA, 401(k) plans, 403(b)
plans, and Section 457 plans. Such an investment (including accumulations and
combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Investor Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period
within 13 or 48 months, the sales charge applicable will not be higher than that
which would have been applied (including accumulations and combinations) had the
LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class
A shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the 13-month period, at which time the
escrowed Class A shares will be released. If the total investment specified in
the LOI is not completed, the Class A shares held in escrow may be redeemed and
the proceeds used as required to pay such sales charge as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant directed
defined contribution plans with at least 100 eligible employees at the inception
of the Fund account may purchase Class A shares with no initial sales charge.
However, if the shares are redeemed within 12 months after the end of the
calendar year in which the purchase was made, a CDSC will be imposed at the
above rate.
Class A shares may also be purchased without an initial sales charge in
37
<PAGE>
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within six years of purchase will be subject to a contingent deferred sales
charge ("CDSC") at the rates set forth in the Prospectus as a percentage of the
dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the current market value or the original purchase cost of
the shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase price, including shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution
plans administered by Investor Services or the Life Company that had more than
100 eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six-year CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount, please
indicate if you require the proceeds to equal the dollar amount requested. If
not indicated, only the specified dollar amount will be redeemed from your
account and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
38
<PAGE>
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
-----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to Investor Services and are used in
whole or in part by Investor Services to defray its expenses related to
providing distribution- related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees facilitates the ability of the Fund to sell the
Class B shares without a sales charge being deducted at the time of the
purchase. See the Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Investor
Services. (Please note, this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plan and
Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
39
<PAGE>
Please see matrix for reference.
<TABLE>
<CAPTION>
CDSC Waiver Matrix for Class B Funds
- ---------------------------------------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-Retirement
Distribution (401(k), MPP, Rollover
PSP)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ---------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account value
distributions annually in
or 12% of periodic
account value payments
annually in
periodic
payments.
- ---------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of
and 70 1/2 Expectancy or account value
12% of account annually in
value annually periodic
in periodic payments
payments.
- ---------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account value
payments (72t) payments (72t) payments (72t) annually in
or 12% of or 12% of or 12% of periodic
account value account value account value payments
annually in annually in annually in
periodic periodic periodic
payments. payments. payments.
- ---------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- ---------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you
must notify Investor Services at the time you make your redemption. The waiver
will be granted once Investor Services has confirmed that you are entitled to
the waiver.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectus, the Fund
permits exchanges of shares of the Fund for shares of the same class in any
other John Hancock fund offering that class.
40
<PAGE>
Systematic Withdrawal Plan. The Fund permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent proceeds arising
from the redemption of Fund's shares. Since the redemption price of the Fund's
shares may be more or less than the shareholder's cost, depending upon the
market value of the securities owned by the Fund at the time of redemption, the
distribution of cash pursuant to this plan may result in realization of gain or
loss for purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
Class B shares of the Fund could be disadvantageous to a shareholder because of
the initial sales charge payable on purchases of Class A shares and the CDSC
imposed on redemptions of Class B shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase Class A or Class B shares
at the same time as a Systematic Withdrawal Plan is in effect. The Fund reserves
the right to modify or discontinue the Systematic Withdrawal Plan of any
shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Investor Services.
Monthly Automatic Accumulation Program (MAAP). This program in the
Prospectus. The program, as it relates to automatic investment drafts, is
subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly
Automatic Accumulation Program may be revoked by Investor
Services without prior notice if any investment is not honored
by your bank. The bank shall be under no obligation to notify
the shareholder as to the non-payment of any checks.
The Program may be discontinued by the shareholder either by
calling Investor Services or upon written notice to Investor
Services which is received at least five (5) business days
prior to the processing date of any investment.
Reinvestment Privilege. A shareholder who has redeemed shares of the
Fund may, within 120 days after the date of redemption, reinvest without payment
of a sales charge any part of the redemption proceeds in shares of the same
class of the Fund or another John Hancock funds, subject to the minimum
investment limit in any fund. The proceeds from the redemption of Class A shares
may be reinvested at net asset value without paying a sales charge in Class A
shares of any John Hancock funds. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from such redemption at net asset value in
additional shares of the class from which the redemption was made. Such
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and such new shares will continue to be subject to the
CDSC. For purposes of determining the amount of any CDSC imposed upon a
subsequent redemption, the holding period of the shares acquired through
reinvestment will include the holding period of the redeemed shares. The Fund
may modify or terminate the reinvestment privilege at any time.
A redemption or exchange of shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
shares will be treated for tax purposes as described below.
41
<PAGE>
DESCRIPTION OF FUND SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund, 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 Statement
of Additional Information, the Trustees have authorized shares of the Fund and
two other series. The Declaration of Trust also authorizes the Trustees to
classify and reclassify the shares of the Fund, or any new series of the Trust,
into one or more classes. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund, designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective distribution plans. The different
classes of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences resulting from the
facts that (i) the distribution and service fees relating to Class A and Class B
shares will be borne exclusively by that class; (ii) Class B shares will pay
higher distribution and service fees than Class A shares; and (iii) each of
Class A shares and Class B shares will bear any class expenses properly
allocable to such class of shares, subject to the requirements imposed by the
Internal Revenue Service on funds having a multiple-class structure.
Accordingly, the net asset value per share may vary depending whether Class A
shares or Class B shares are purchased.
In the event of liquidation, shareholders of each class are entitled to
share pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund 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
42
<PAGE>
obligations of the trust. However, the Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations and affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund'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 for the liabilities of
any other series. Furthermore, no fund included in the Fund's prospectus shall
be liable for any other John Hancock Fund. Liability is therefore limited to
circumstances in which the Fund itself would be unable to meet its obligations,
and the possibility of this occurrence is remote.
In order to avoid conflicts with portfolio trades for the Fund, the
Adviser and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. 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. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
A shareholders account is goverend by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and has elected
to be treated as a "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, the 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.
The Fund will be subject to a four percent nondeductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to seek to avoid or
minimize liability for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P") will be taxable under the Code for investors who are subject to
tax. If these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's federal tax basis
43
<PAGE>
in Fund shares and then, to the extent such basis is exceeded, will generally
give rise to capital gains. Shareholders who have chosen automatic reinvestment
of their distributions will have a federal tax basis in each share received
pursuant to such a reinvestment equal to the amount of cash they would have
received had they elected to receive the distribution in cash, divided by the
number of shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, foreign currency forward contracts, certain foreign currency futures
and options, 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 the Fund's investment in stock or
securities, possibly including certain currency positions or derivatives not
used for hedging purposes, may increase the amount of gain it is deemed to
recognize from the sale of certain investments or derivatives held for less than
three months, which gain is limited under the Code to less than 30% of its gross
income for each taxable year and may under future Treasury regulations produce
income not among the types of "qualifying income" from which the Fund must
derive at least 90% of its gross income for each taxable year. If the net
foreign exchange loss for a year treated as ordinary loss under Section 988 were
to exceed the Fund's investment company taxable income computed without regard
to such loss the resulting overall ordinary loss for such year would not be
deductible by the Fund or its shareholders in future years.
The 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. Because more than 50% of the Fund's assets at the close of any taxable
year will not consist of stocks or securities of foreign corporations, the Fund
will be unable to pass such taxes through to shareholders, who consequently will
not take such taxes into account on their own tax returns. However, the Fund
will deduct such taxes in determining the amount it has available for
distribution to shareholders.
If the Fund acquires stock in certain foreign 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"), the 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 there
adverse tax consequences, but any such election would require the Fund to
recognize taxable income or gain without the concurrent receipt of cash. The
Fund may limit and/or manage its holdings in passive foreign investment
companies to minimize its tax liability or maximize its return from these
investments.
The amount of net realized capital gains, if any, in any given year
will result from sales of securities or transactions in options or futures made
with a view to the maintenance of a portfolio believed by the Fund's management
to be most likely to attain the Fund's objective. Such sales, and any resulting
gains or losses, may therefore vary considerably from year to year. At the time
44
<PAGE>
of an investor's purchase of shares of the Fund, a portion of the purchase price
is often attributable to realized or unrealized appreciation in the Fund's
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions on these shares from such appreciation or income may be taxable to
such investor even if the net asset value of the investor's shares is, as a
result of the distributions, reduced below the investor's cost for such shares
and the distributions in reality represent a return of a portion of the purchase
price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
90 days after their purchase to the extent Class A shares of the Fund or another
John Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. Such disregarded charge will
result in an increase in the shareholder's tax basis in the Class A shares
subsequently acquired. Also, any loss realized on a redemption or exchange may
be disallowed to the extent the shares disposed of are replaced with other
shares of the Fund within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of, such as pursuant to automatic
dividend reinvestments. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long- term capital gain with respect to such shares.
Although the Fund's present intention is to distribute, at least
annually, all net capital gain, if any, the Fund reserves the right to retain
and reinvest all or any portion of the excess, as computed for Federal income
tax purposes, of net long-term capital gain over net short-term capital loss in
any year. The Fund will not in any event distribute net capital gain realized in
any year to the extent that a capital loss is carried forward from prior years
against such gain. To the extent such excess was retained and not exhausted by
the carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares by the
difference between his pro rata share of such excess and his pro rata share of
such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset 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 Fund and as noted above would not be distributed as such to
shareholders. The Fund has $259,999 of a capital loss carryforward available, to
45
<PAGE>
the extent provided by regulations, to offset future net realized capital gains.
The carryforward expires December 31, 2002.
For purposes of the dividends received deduction available to
corporations, dividends received by the Fund, if any, from U.S. domestic
corporations in respect of the stock of such corporations held by the Fund, for
U.S. Federal income tax purposes, for at least 46 days (91 days in the case of
certain preferred stock) and distributed and properly designated by the Fund may
be treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
shares of the Fund in order to qualify for the deduction and, if they have any
debt that is deemed under the Code directly attributable to such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability, if any. Additionally, any corporate
shareholder should consult its tax adviser regarding the possibility that its
basis in its shares may be reduced, for Federal income tax purposes, by reason
of "extraordinary dividends" received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of the
shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The Fund is required to accrue income on any debt securities that have
more than a de minimis amount of original issue discount (or debt securities
acquired at a market discount, if the Fund elects to include market discount in
income currently) prior to the receipt of the corresponding cash payments. The
mark to market rules applicable to certain options, futures contracts, and
forward contracts may also require the Fund to recognize income or gain without
a concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the 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 these distribution requirements.
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. The Fund will not
seek to satisfy any threshold or reporting requirements that may apply in
particular taxing jurisdictions, although the Fund may in its sole discretion
provide relevant information to shareholders.
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all taxable distributions to shareholders, as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt recipients, i.e., corporations and certain other investors distributions
to which are exempt from the information reporting provisions of the Code. Under
46
<PAGE>
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
Investments in debt obligations that are at risk of or in default
present special tax issues for the Fund. Tax rules are not entirely clear about
issues such as when the Fund 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 the Fund, in the event it invests in such securities, 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 or excise tax.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into futures, options, foreign
currency positions and foreign currency forward contracts. Certain of these
transactions undertaken by the Fund may cause the Fund to recognize gains or
losses from marking to market even though its positions have not been sold or
terminated and affect their character as long-term or short-term (or, in the
case of certain currency forwards, options, or futures, as ordinary income or
loss) and timing of some gains and losses realized by the Fund. Also, some of
the Fund's losses on its transactions involving options, futures and forward
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 gain. Certain of these transactions may also cause the Fund to dispose
of investments sooner than would otherwise have occurred. Some 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. These transactions may
therefore affect the amount, timing and character of the Fund's distributions to
shareholders. The Fund will take into account the special tax rules applicable
to options, futures and forward contracts (including consideration of any
available elections) in order to minimize any potential adverse tax
consequences.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax exempt entities, insurance companies
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of shares of the
Fund may also be subject to state and local taxes. Shareholders should consult
their own tax advisers as to the Federal, state or local tax consequences of
47
<PAGE>
ownership of shares of, and receipt of distributions from, the Fund in their
particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their Fund investment is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund. The Fund is not subject to Massachusetts corporate excise or
franchise taxes. Provided that the Fund qualifies as a regulated investment
company under the Code, it will not be required to pay any Massachusetts income
tax.
CALCULATION OF PERFORMANCE
The average annual total return is determined separately for each class
of shares at June 30, 1996 with all distributions reinvested in shares. The
average annualized total returns for Class A shares for the 1-year period and
since the Fund's inception on October 5, 1992, were 9.99% and 8.72%,
respectively, and reflect payment of the maximum sales charge of 5.00%. The
average annualized total returns for Class B shares for the 1-year period and
since the Fund's inception on October 5, 1992, were 9.95% and 9.07%,
respectively, and reflects applicable contingent deferred sales charge (maximum
contingent deferred sales charge of 5% declines to 0% over six years).
The 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
Where:
P = a hypothetical initial investment 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.
Because each share has its own sales charge and fee structure, the
classes have different performance results. In the case of Class A or Class B
48
<PAGE>
shares, this calculation assumes the maximum sales charge is included in the
initial investment or the CDSC is applied at the end of the period,
respectively. 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 the Fund during the period stated by the maximum offering
price or net asset value at the end of the period. Excluding the Fund's sales
charge from the distribution rate produces a higher rate.
In addition to average annual total returns, the 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.
Total returns may be quoted with or without taking the Fund's sales charge on
Class A shares or the CDSC on Class B shares into account. Excluding the Fund's
sales charge on Class A and the CDSC on Class B shares from a total return
calculation produces a higher total return figure.
The Fund's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price 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 = expenses accrued during the period (net of fee reductions and expense
limitation payments, if any).
c = the average daily number of shares outstanding during the period
that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The Class A and Class B shares' yield at June 30, 1996 was 2.87% and
2.32%, respectively. Both total return and yield calculations for Class A shares
include the effect of paying the maximum sales charge of 5.00%. Investments at
lower sales charges would result in higher performance figures. Both total
return and yield for the Class B shares reflect deduction of the applicable CDSC
imposed on a redemption of shares held for the applicable period. All
calculations assume that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the periods. The total return and
yield of Class A and Class B shares will differ; the Fund will include the total
return and yield of both classes in any advertisement or promotional material
including Fund performance data. The value of Fund shares, when redeemed, may be
more or less than their original cost. Both total return and yield are
historical calculations and are not an indication of future performance.
49
<PAGE>
From time to time, in reports and promotional literature, the 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-Fund
Performance Analysis," a publication which tracks mutual fund net assets, total
return, and yield. Comparisons may also be made to bank certificates of deposit
("CDs"), which differ from mutual funds, such as the Fund, in several ways. The
interest rate established by the sponsoring bank is fixed for the term of a CD,
there are penalties for early withdrawal from CDs, and the principal on a CD is
insured.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, the WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, BARRON'S and IBBOTION ASSOCIATES
will also be utilized as well as the RUSSELL and WILSHIRE indices. The Fund may
also cite Morningstar Mutual Values, an independent mutual fund information
service which ranks mutual funds. The Fund's promotional and sales literature
may make reference to the Fund's "beta." Beta is a reflection of the
market-related risk of the Fund by showing how responsive the Fund is to the
market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the 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; and changes in operating expenses
are all examples of items that can increase or decrease the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of
the Fund are made by the Adviser pursuant to recommendations made by its
investment committee of the Adviser, which consists of directors of the Adviser
and officers and Trustees who are interested persons of the Trust. Orders for
purchases and sales of securities are placed in a manner, which, in the opinion
of the 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 maker reflect a "spread." 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 these
transactions.
In the U.S. and in some other countries, debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. In other countries, both debt and
equity securities are traded on exchanges at fixed commission rates. Commissions
on foreign transactions are generally higher than the negotiated commission
rates available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
50
<PAGE>
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 National Association of Securities
Dealers, Inc. and other policies as the Board of Trustees may determine, the
Adviser may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the 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 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. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser, and,
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no commitment to allocate portfolio
transactions upon any prescribed basis. While the Adviser will be primarily
responsible for the allocation of the Fund's brokerage business, the policies
and practices of the Adviser in this regard must be consistent with the
foregoing and will at all times be subject to review by the Trustees. For the
fiscal years ended December 31, 1995, 1994 and 1993, the Fund paid brokerage
commissions in the amount of $187,534, $106,785 and $163,746, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the 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 these policies as the Board
may adopt from time to time.
For the fiscal year ended December 31, 1995, the Fund paid commissions
in the amount of $40,621 to compensate brokers for research services evaluations
of securities.
The Adviser's indirect parent, the Life Company, is an indirect
shareholder of Tucker Anthony Incorporated and Sutro & Company, Inc. and the
indirect sole shareholder of John Hancock Distributors, which are all
broker-dealers ("Affiliated Brokers"). Pursuant to procedures determined by the
Board of Trustees and consistent with the above policy of obtaining best net
results, the Fund may execute portfolio transactions with or through Affiliated
Brokers. During the fiscal years ending December 31, 1995, 1994 and 1993, the
Fund did not execute any portfolio transactions with Affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Fund on
securities or commodities exchange transactions, subject, however, to the
general policy of the Fund set forth above and the procedures adopted by the
Board of Trustees pursuant to the Investment Company Act. Commissions paid to an
Affiliated Broker must be at least as favorable as those which the Board
believes to be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or sold. A
51
<PAGE>
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 clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Trust, the Adviser or the Affiliated Broker. Any such transactions
would be subject to a good faith determination by the Trustees that the
compensation paid to Affiliated Brokers is fair and reasonable. 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 Broker as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria. The Fund will not engage in principal transactions with
Affiliated Brokers.
Other investment advisory clients advised by the Adviser may also
invest in the same securities as the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transactions as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable for
it. On the other hand, to the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Investors Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
an annual fee for Class A shares of $19.00 per shareholder account and for Class
B shares of $22.50 per shareholder account, plus certain out-of-pocket expenses.
These expenses are aggregated and charged to the Fund and allocated to each
class on the basis of the related net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Trust and Investors Bank & Company, 89 South Street,
Boston, Massachusetts 02111. Under the custodian agreement, Investors Bank &
Company performs custody, portfolio and fund accounting services. These expenses
are aggregated and charged to the Fund and allocated to each class on the basis
of their relative net asset values.
52
<PAGE>
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116. The independent auditors audit
and render an opinion on the Fund's annual financial statements and prepare the
Fund's income tax returns.
53
<PAGE>
APPENDIX
Moody's describes its ratings for fixed income securities as follows:
Fixed income securities 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.
Fixed income securities which are rated "Aa" are judged to be of high quality by
all standards. Together with the Aaa group they are generally referred to as
"high grade" obligations. They are rated lower than the best fixed income
securities because margins of protection may not be as large as in Aaa
securities or fluctuation 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.
Fixed income securities 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 some time in the
future.
Fixed income securities 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 fixed income securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Fixed income securities 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 fixed income securities in this class.
Fixed income securities 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.
Fixed income securities 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.
Fixed income securities which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
Fixed income securities which are rated "C" are the lowest rated class of fixed
income securities and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
S&P describes its ratings for fixed income securities as follows:
A-1
<PAGE>
Fixed income securities rated "AAA" have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
Fixed income securities rated "AA" have a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.
Fixed income securities rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than fixed income
securities in higher rated categories.
Fixed income securities rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas such securities normally exhibit
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 fixed income securities in this category than in higher
rated categories.
Fixed income securities rated "BB," "B," "CCC," "CC" and "C" are 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 "C" the highest
degree of speculation. While such fixed income securities will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Moody's describes its three highest ratings for commercial paper as follows:
Issuers rated "P-1" (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. "P-1" repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well- established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protections; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated "P-2" (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Issuers rated "P-3" (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
A-2
<PAGE>
S&P describes its three highest ratings for commercial paper as follows:
"A-1." This designation indicates that the degree of safety regarding timely
payment is very strong.
"A-2." Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1."
"A-3." Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
Quality Distribution
The average quality distribution of the portfolio for the fiscal year ended
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Y-T-D Rating Rating Assigned
Security Average % of Assigned by % of Assigned by % of
Rating Value Portfolio Adviser Portfolio Service Portfolio
<S> <C> <C> <C> <C> <C> <C>
AAA $23,631,725 16.0% 0 0.05 $23,631,725 16.0%
AA 3,340,775 2.2% 0 0.0% 3,340,775 2.2%
A 9.990.026 6.8% 0 0.0% 9,990,026 6.8%
BAA 8,349,007 5.6% 0 0.0% 8,349,007 5.6%
BA 5,156,810 3.5% 0 0.0% 5,156,810 3.5%
B 7,779,377 5.3% 0 0.0% 7,779,377 5.3%
CAA 0 0.0% 0 0.0% 0 0.0%
CA 0 0.0% 0 0.0% 0 0.0%
C 0 0.0% 0 0.0% 0 .00%
D 0 0.0% 0 0.0% 0 0.0%
================================================================================================
0
Debt 58,247,720 39.4% 0 0.0% 58,247,720 39.4%
Securities
0
Equity 84,752,103 57.5%
Securities
0
Short-Term 4,512,692 3.1%
Securities
0
Total 147,512,515 100.0%
Portfolio
0
Other 997,940
Assets-Net
0
Net Assets 148,510,455
===========
</TABLE>
A-4
<PAGE>
JOHN HANCOCK
SOVEREIGN INVESTORS FUND
CLASS A, CLASS B and CLASS C SHARES
Statement of
Additional Information
December 2, 1996
This Statement of Additional Information provides information about
John Hancock Sovereign Investors Fund (the "Fund") a diversified series of John
Hancock Investment Trust (the "Trust"), in addition to the information that is
contained in the combined Growth and Income Fund's Prospectus for Class A and
Class B shares, dated December 2, 1996, and in the Fund's Prospectus for Class C
shares, dated December 2, 1996 (the "Prospectuses").
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Fund's Prospectuses, a copy of which can be
obtained free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-(800)-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund .............................................. 2
Investment Objective and Policies ..................................... 2
Investment Restrictions ............................................... 8
Those Responsible for Management ...................................... 11
Investment Advisory and Other Services ................................ 20
Distribution Contracts ................................................ 22
Net Asset Value ....................................................... 24
Initial Sales Charge on Class A Shares ................................ 25
Deferred Sales Charge on Class B Shares ............................... 28
Special Redemptions ................................................... 32
Additional Services and Programs for Class A and Class B Shares........ 32
Description of the Fund's Shares ...................................... 33
Tax Status ............................................................ 35
Calculation of Performance ............................................ 40
Brokerage Allocation .................................................. 42
Transfer Agent Services ............................................... 44
Custody of Portfolio .................................................. 44
Independent Auditors .................................................. 45
Appendix............................................................... A-1
Financial Statements .................................................. F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a series of the Trust, an open-end investment management
company organized as a Massachusetts business trust on December 12, 1984. Prior
to December 2, 1996, the Fund was a diversified series of John Hancock Sovereign
Investors Fund, Inc.
John Hancock Advisers, Inc. (the "Adviser") is the investment adviser.
The Adviser is an indirect wholly-owned subsidiary of the John Hancock Mutual
Life Insurance Company (the "Life Company"), a Massachusetts life insurance
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide long-term growth of
capital and of income without assuming undue market risks. There is no assurance
that the Fund's objective will be attained. At times, however, because of market
conditions, the Fund may invest primarily for current income. The Fund will make
investments in different types and classes of securities in accordance with the
Board of Trustees' and the Adviser's appraisal of economic and market
conditions. The Fund's portfolio securities are selected 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 or mix of
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 and 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 management's judgment of what might best achieve
the Fund's investment objectives. The securities held by the Fund are under
continuous study by the Adviser. They are selected because they are considered
by the management to contribute to the possible achievement of the Fund's
objective. They are held or disposed of in accordance with the results of a
continuing examination of their merit.
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.
The Fund has adhered to this philosophy since 1979. By investing
primarily in these companies, the portfolio management team focuses on
investments with characteristics such as: a strong management team that has
demonstrated leadership through changing market cycles; financial soundness as
evidenced by consistently rising dividends and profits, strong cash flows, high
return on equity and a balance sheet showing little debt; and strong brand
recognition and market acceptance, backed by proven products and a
well-established, often global, distribution network.
2
<PAGE>
The Fund may hold all common stocks or for more defensive purposes it
may hold high grade liquid preferred stocks and debt securities or cash. In
addition, temporary investments in short term debt securities may be made so as
to receive a return on excess cash.
The investment policy of the Fund is to purchase and hold securities
for capital appreciation and investment income, although there may be a limited
number of short- term transactions incidental to the pursuit of its investment
objective. The Fund may make portfolio purchases and sales to the extent that in
its Board's opinion, relying on the Adviser or independently, such transactions
are in the interest of shareholders.
Portfolio turnover rates for the past three fiscal years were: 1993,
46%, 1994, 45% and 1995, 46%.
The Fund endeavors to achieve its objective by utilizing experienced
management and generally investing in securities of seasoned companies in sound
financial condition. While there is considerable flexibility in the investment
grade and type of security in which the Fund may invest, a company or its
predecessors must have been in continuous business for at least five years and
must have total assets of at least $10,000,000 before its securities can be
purchased by the Fund. The Fund has not purchased securities of real estate
investment trusts and has no present intention of doing so in the future.
Restricted Securities. Although the Fund has authority to purchase to a limited
extent "restricted securities" (i.e., securities that would be required to be
registered prior to distribution to the public), the Fund did not do so in its
past fiscal year and has no current intention of doing so, except that the Fund
may in the future invest in restricted securities eligible for resale to certain
institutional investors pursuant to Rule 144A under the Securities Act of 1933.
The Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, securities that are not readily marketable and restricted securities.
However, if the Trustees determines, based upon a continuing review of the
trading markets for specific Rule 144A securities that they are liquid then such
securities may be purchased without regard to the 15% limit. The Trustees may
adopt guidelines and delegate to the Adviser the daily function of determining
and monitoring the liquidity of restricted securities. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor the Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. The Fund does not intend to invest more
that 5% of its net assets in Rule 144A securities in the coming year.
Diversification. The Fund's investments are diversified in a broad list of
issues, representing many different industries. Although diversification does
not eliminate market risk, it may tend to reduce it. At the same time, holdings
of a large number of shares in any one company are avoided. Thus, during periods
when general economic and political conditions are subject to rapid changes, it
3
<PAGE>
may be appropriate to effect rapid changes in the Fund's investments. This can
be more readily accomplished by limiting the amount of any one investment.
As is common to all securities investments, the stock of this managed
diversified Fund is subject to fluctuation in value; its portfolio will not
necessarily prove a defense in periods of declining prices or lead the advance
in rising markets. The Fund's management will endeavor to reduce the risks
encountered in the use of any single investment by investing the assets of the
Fund in a widely diversified group of securities. Diversification, however, will
not necessarily reduce inherent market risks. Securities are selected mainly for
their investment character, based upon generally accepted elements of intrinsic
value including industry position, management, financial strength, earning
power, ready marketability and prospects for future growth.
Concentration. The Fund's policy is not to concentrate its investments in any
one industry, but investments of up to 25% of its total assets at market value
may be made in a single industry. This limitation may not be changed without the
affirmative vote of a majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act").
Lower Rated High-Yield "High Risk" Debt Obligations. The Fund may invest less
than 5% of its net assets in debt securities rated as low as C by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P")
and unrated securities deemed of equivalent quality by the Adviser. These
securities are speculative to a high degree and often have very poor prospects
of attaining real investment standing. Lower rated securities are generally
referred to as junk bonds. See the Appendix attached to this Statement of
Additional Information which describes the characteristics of the securities in
the various ratings categories.
Securities rated lower than Baa by Moody's or BBB by Standard & Poor's
are sometimes referred to as junk bonds. See the Appendix attached to this
Statement of Additional Information which describes the characteristics of the
securities in the various ratings categories. The Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the above-stated ratings. The credit ratings of Moody's and
Standard & Poor's in a timely fashion to reflect subsequent economic events. The
credit ratings of securities do not reflect an evaluation of market risk. 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 possiblity of an adverse change in
financial condition affecting the issuer's ability to make payments of interest
and principal. The market price and liquidity of lower rated fixed income
securities generally respond more to short-term corporate and market
developments than do those 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. The
Adviser seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions.
4
<PAGE>
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 the Fund's assets. The reduced
availability of reliable, objective data may increase the Fund's reliance on
management's judgment in valuing high yield high risk bonds. In addition, the
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. The Fund's investment, and consequently its net asset
value, will be subject to the market fluctuations and risk inherent in all
securities. Increasing rate note securities are typically refinanced by the
issuers within a short period of time.
The market value of debt securities which carry no equity participation
usually reflects yields generally available on securities of similar quality and
type. When such yields decline, the market value of a portfolio already invested
at higher yields can be expected to rise if such securities are protected
against early call. In general, in selecting securities for its portfolio, the
Fund intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Options and Futures. The Fund may not invest in futures contracts or sell call
or put options. The Fund has authority to purchase put and call options,
although the Fund has no present intention of doing so in the coming fiscal
year.
Government Securities. The Fund may also invest in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. 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 obligations supported by the credit
of the instrumentality, such as Federal National Mortgage Association Bonds
("Fannie Maes") and the Student Loan Marketing Association Bonds ("Sallie
Maes"). Ginnie Maes, Freddie Macs, Fannie Maes and Sallie Maes are
mortgage-backed securities which provide monthly payments which are, in effect,
a "pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans.
Collateralized Mortgage Obligations ("CMOs") in which the Fund may invest are
securities issued by a U.S. Government instrumentality that are collateralized
by a portfolio of mortgages or mortgage-backed securities. Mortgage-backed
securities may be less effective than traditional debt obligations of similar
maturity at maintaining yields during periods of declining interest rates.
5
<PAGE>
Mortgage-backed securities 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 the Fund's portfolio at the time such payments are received
by the Fund 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
the 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.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's
Fundamental Investment Restrictions. Generally, warrants and stock purchase
rights do not carry with them the right to receive dividends or exercise voting
rights with respect to the underlying securities, and they do not represent any
rights in the assets of the issuer. As a result, an investment in warrants and
rights may be considered to entail greater investment risk than certain other
types of investments. In addition, the value of warrants and rights does not
necessarily change with the value of the underlying securities, and they cease
to have value if they are not exercised on or prior to their expiration date.
Investment in warrants and rights increases the potential profit or loss to be
realized from the investment of a given amount of the Fund's assets as compared
with investing the same amount in the underlying stock.
Repurchase Agreements. In a repurchase agreement the Fund buys a security for a
relatively short period (usually not more than 7 days) subject to the obligation
to sell it back to the issuer at a fixed time and price plus accrued interest.
The Fund will enter into repurchase agreements only with member banks of the
Federal Reserve System and with "primary dealers" in U.S. Government securities.
The Adviser will continuously monitor the creditworthiness of the parties with
whom the Fund enters into repurchase agreements.
The 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
6
<PAGE>
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income decline in
value of the underlining securities or lack of access to income during this
period, as well as, the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank 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 the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. The 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. The 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. The Fund will enter into reverse repurchase
agreements only 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. The 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. The 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, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the 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 the 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 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, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
7
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of a majority of the Fund's outstanding voting
securities which, as used in the Prospectuses and this Statement of Additional
Information, means approval by the lesser of (1). The holders of 67% or more of
the Fund's shares represented at a meeting if at least 50% of Fund's outstanding
shares are present in person or by proxy at that meeting or (2) more than 50% of
the Fund's outstanding shares.
The Fund observes the following fundamental investment restriction. The
Fund may not:
(1) The Fund may not, with respect to 75% of its total assets,
purchase any security (other than securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements collateralized by
such securities) if, as a result: (a) more than 5% of its
total assets would be invested in the securities of any one
issuer, or (b) the Fund would own more than 10% of the voting
securities of any one issuer.
(2) The Fund may not issue senior securities, except as permitted
by paragraphs (3) and (7) below. For purposes of this
restriction, the issuance of shares of common stock in
multiple classes, the purchase or sale of options, futures
contracts and options on futures contracts, forward
commitments, and repurchase agreements entered into in
accordance with the Fund's investment policies, and the
pledge, mortgage or hypothecation of the Fund's assets are not
deemed to be senior securities.
(3) The Fund may not borrow money except in connection with the
sale or resale of its capital stock.
(4) The Fund may not act as an underwriter, except to the extent
that, in connection with the disposition of portfolio
investments, the Fund may be deemed to be an underwriter for
purposes of the Securities Act of 1933.
(5) The Fund may not purchase or sell real estate, or any interest
therein, including real estate mortgage loans, except that the
Fund may: (i) hold and sell real estate acquired as the result
of its ownership of securities, or (ii) invest in securities
of corporate or governmental entities secured by real estate
or marketable interests therein or securities issued by
companies (other that real estate limited partnerships) that
invest in real estate or interests therein.
(6) The Fund may not make loans, except that the Fund (1) may lend
portfolio securities in accordance with the Fund's investment
policies in an amount up to 331/3% 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
8
<PAGE>
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) The Fund may not purchase or sell commodities or commodity
contracts; except that the Fund may purchase and sell options
on securities, securities indices, currency and other
financial instruments, futures contracts on securities,
securities indices, currency and other financial instruments
and options on such futures contracts, forward commitments,
interest rate swaps, caps and floors, securities index put or
call warrants and repurchase agreements entered into in
accordance with the Fund's investment policies.
(8) The Fund may not purchase securities of an issuer conducting
its principal activity in any particular industry if
immediately after such purchase the value of the Fund's
investments in all issuers in this industry would exceed 25%
of its total assets taken at market value.
Non Fundamental Investment Restrictions. The following restrictions may be
changed by the Trustees without shareholder approval.
The Fund may not:
(a) Participate on a 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 any investment adviser to the
Fund in order to save commissions or to average prices among
the accounts, and the participation of the Fund as a part of a
group bidding for the purchase of tax exempt bonds shall not
be deemed to result in participation in a securities trading
account.
(b) 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 short and, if the right is conditional,
the sale is made upon the same conditions, except that the
Fund may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities.
(c) Purchase a security if, as a result, (i) more than 10% of the
Fund's total assets would be invested in the securities of
other investment companies, (ii) the Fund would hold more than
3% of the total outstanding voting securities of any one
investment company, or (iii) more than 5% of the Fund's total
assets would be invested in the securities of any one
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
9
<PAGE>
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.
Subject to the above percentage limitations, the Fund may, in
connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase
securities of other investment companies within the John
Hancock Group of Funds. The 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.
(d) Purchase a security of a company unless it or its predecessors
have been in continuous business for at least five years, and
unless its most recent balance sheet shows at least
$10,000,000 total assets.
(e) Invest for the purpose of exercising control over or
management of any company.
(f) Purchase warrants of any issuer, if as a result, more than 2%
of the value of the Fund's total assets would be invested in
warrants which are not listed on the New York Stock Exchange
or the American Stock Exchange or more than 5% of the value of
the Fund's total assets would be invested in warrants, whether
or not so listed, such warrants in each case to be valued at
the lesser of cost or market, but assigning no value to
warrants acquired by the Fund in units with or attached to
debt securities.
(g) Knowingly purchase or retain securities of an issuer if one or
more of the Trustees or officers of the Fund or directors or
officers of the Adviser or any investment management
subsidiary of the Adviser individually owns beneficially more
than 1/2 of 1% and together own beneficially more than 5% of
the securities of such issuer.
(h) Purchase interests in oil, gas or other mineral lease
exploration programs; however, this policy will not prohibit
the acquisition of securities of companies engaged in the
production or transmission of oil, gas or other minerals.
(i) Purchase any security, including any repurchase agreement
maturing in more than seven days, which is illiquid, if more
than 15% of the net assets of the Fund, taken at market value,
would be invested in such securities. (The staff of the
Securities and Exchange Commission currently considers
over-the-counter options to be illiquid securities subject to
the 15% limit.)
(j) Write put or call options.
(k) Purchase put and call options (other than protective put
options) if, as a result, the value of the Fund's aggregate
investment in such options would exceed 5% of its total
assets.
10
<PAGE>
(l) Purchase interests in real estate limited partnerships.
(m) No officer or Trustee of the Fund may take a short position in
the shares of the Fund, withhold orders or buy shares in
anticipation of orders.
(n) No security of a bank or trust company may be purchased unless
it is a domestic corporation, and has combined capital,
surplus and undivided profits of at least $20,000,000.
In order to permit the sale of shares of the Fund in certain states,
the Trustees may, in their sole discretion, adopt restrictions on investment
policy more restrictive than those described above. Should the Trustees
determine that any such more restrictive policy is no longer in the best
interest of the Fund and its shareholders, the Fund may cease offering shares in
the state involved and the Trustees may revoke such restrictive policy.
Moreover, if the states involved shall no longer require any such restrictive
policy, the Trustees may, at their sole discretion, revoke such policy. The Fund
has agreed with state securities administrators that it will not purchase the
following securities:
The Fund agrees that, in accordance with the Ohio Securities Division
and until such regulations are no longer required, it will comply with Rule
1301:6-3-09(E)(9) by not investing in the securities of other open-end and
closed-end investment companies except by purchase in the open market where no
commission or profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or except when the purchase is part of a plan
of merger, consolidation, reorganization or acquisition.
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 value of the Fund's assets will not
be considered a violation of the restriction.
Because investments in securities of other investment companies may
result in duplication of certain fees and expenses, the Fund will invest in such
securities only when, in the Adviser's opinion, the anticipated return on such
securities justifies any such additional expense.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers
who are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers or directors of the Adviser or officers or directors of
the Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock
Funds,").
11
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), John
Hancock Investor Services
Corporation ("Investor Services"),
First Signature Bank and Trust
Company and Sovereign Asset
Management Corporation
("SAMCorp."); Director, John
Hancock Freedom Securities
Corporation, John Hancock Capital
Corporation 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).
- -------------------
* Trustee may be deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
(1) Member of the Executive Committee. Under the Corporation's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
12
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Thomas W. L. Cameron* Trustee (1) Chairman and Director, Sovereign
Interstate/Johnson Lane Advisers, Inc.; Senior Vice
1982 Andell Bluff Blud. President Interstate/Johnson Line
Johns Island, SC 29455 Corp. (securities dealer).
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea (until
August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
- -------------------
* Trustee may be deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
(1) Member of the Executive Committee. Under the Corporation's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
13
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * President and Director (1, 2) President and Chief Operating
101 Huntington Avenue Officer, the Adviser; Director, The
Boston, MA 02199 Berkeley Group, John Hancock Funds,
April 1953 Investor Services (since October
1996); Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
- -------------------
* Trustee may be deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
(1) Member of the Executive Committee. Under the Corporation's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
14
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
(1) Member of the Executive Committee. Under the Corporation's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
15
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, Investor Services, John
August 1937 Hancock Distributors, Inc., John
Hancock Subsidiaries, Inc., John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993), SAMCorp. and NM
Capital; Trustee, The Berkeley
Group; Director JH Networking
Insurance Agency, Inc.
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
(1) Member of the Executive Committee. Under the Corporation's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
16
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1050 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman * Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, Investor
Services, SAMCorp., and NM Capital;
Senior Vice President, The Berkeley
Group; President, the Adviser (until
December 1994);
James B. Little * Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Investor Services.
February 1935
- -------------------
* Trustee may be deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
(1) Member of the Executive Committee. Under the Corporation's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
17
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Susan S. Newton * Vice President and Secretary Vice President and Assistant
101 Huntington Avenue Secretary, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds,
March 1950 Investor Services; Secretary,
SAMCorp; Vice President, The
Berkeley Group, John Hancock
Distributors, Inc. (until 1994).
John A. Morin * Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Investor Services and John Hancock
July 1950 Funds; Counsel, John Hancock Mutual
Life Insurance Company.
James J. Stokowski * Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Corporation as
defined in the Investment Company Act of 1940.
(1) Member of the Executive Committee. Under the Corporation's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
18
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.
As of October 31, 1996, the officers and Trustees of the Fund as a
group owned less than 1% of the outstanding shares of each class of the Fund and
as of the same date the following shareholders beneficially owned 5% of or more
of the outstanding shares of the Fund:
<TABLE>
<CAPTION>
Percentage of
Number of Shares of Total Outstanding
Name and Address of Class of Beneficial Shares of the Class
Shareholder Shares Interest Owned of the Fund
- ----------- ------ -------------- -----------
<S> <C> <C> <C>
Mellon Bank Trustee Class C shares 1,032,711 77.29%
California Savings Plus Program
457 Plan A/C CSPF0135002
Attn: Bob Stein
1 Cabot Rd.
Medford, MA 02155-5158
Mellon Bank Trustee Class C shares 303,150 22.69%
California Savings Plus Program
401(K) Thrift Plan A/C CSPF0035002
Attn: Bob Stein
1 Cabot Rd.
Medford, MA 02155-5158
</TABLE>
The following table provides information regarding the compensation
paid by the Fund during its most recently completed fiscal year and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees for their services. Messrs Boudreau, Cameron, Scipione and Ms. Hodsdon
and each of the officers of the Fund are interested persons of the Adviser, are
compensated by the Adviser and received no compensation from the Fund for their
services. Mr. Cameron resigned effective December 31, 1996. Messrs. Cunningham
and Linbeck were not Trustees of the Fund during its most recently completed
fiscal year and are therefore not included in the following table.
19
<PAGE>
Total Compensation
Aggregate From the Fund and John
Compensation From Hancock Fund Complex
Independent Trustees the Fund(2) to Trustees(1)(2)
- -------------------- -------- -----------------
James F. Carlin $ 15,878 $ 60,700
Charles F. Fretz 22,758 56,200
Harold R. Hiser, Jr.+ 25,266 60,200
Charles L. Ladner 13,422 60,700
Patricia P. McCarter 13,422 60,700
Steven R. Pruchansky 13,865 62,700
Norman H. Smith 13,865 62,700
John P. Toolan+ 13,422 60,700
-------- --------
$131,898 $484,600
(1) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1995.
(2) Compensation is for the fiscal year ended December 31, 1995.
+ As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all funds in the John Hancock fund complex for Mr. Hiser
was $31,324 and for Mr. Toolan was $71,437 under the John Hancock Deferred
Compensation Plan for Independent Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199- 7603, was organized in 1968 and presently has more than $19 billion in
assets under management in its capacity as investment adviser to the Fund and
other mutual funds and publicly traded investment companies in the John Hancock
group of funds having a combined total of over 1,080,000 shareholders. The
Adviser is an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
management of more than $80 billion, the Life Company is one of the ten largest
life insurance companies in the United States, and carries highest ratings from
Standard & Poor's and A.M. Best. Founded in 1862, the Life Company has been
serving clients for over 130 years.
The Fund has entered into an investment management contract with the
Adviser. Under the investment management contract, the Adviser provides the Fund
(i) with a continuous investment program, consistent with the Fund's stated
investment objective and policies; and (ii) supervision of all aspects of the
Fund's operations except those delegated to a custodian, transfer agent or other
20
<PAGE>
agent. The Adviser is responsible for the day to day management of the Fund's
portfolio assets.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or affiliates provide
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 for the Fund or for other funds or clients for which
the 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 affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
All expenses which are not specifically paid by the Adviser and which
are incurred in the operation of the Fund (including fees of Trustees of the
Fund who are not "interested persons," as such term is defined in the Investment
Company Act but excluding certain distribution-related activities required to be
paid by the Adviser or John Hancock Funds) and the continuous public offering of
the shares of the Fund are borne by the Fund.
As discussed in the Class A and Class B Prospectus and as provided by
the investment management contract, the Fund pays the Adviser quarterly an
investment management fee, which is accrued daily, based on a stated percentage
of the average of the daily net assets of the Fund.
Investment advisory fees paid to the Adviser in 1995, 1994 and 1993
amounted to $8,017,834, $7,452,980 and 6,750,790, respectively. The Adviser paid
SAMCorp the sum of $2,672,150 in 1993, $2,997,156 in 1994 and $3,232,490 in
1995.
From time to time, the Adviser may reduce its fee or make other
arrangements to limit the Fund's expenses to a specified percentage of average
daily net assets. The Adviser retains the right to re-impose a fee and recover
any other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
In the event normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any state limit where
the Fund is registered to sell shares of common stock, the fee payable to the
Adviser will be reduced to the extent of such excess and the Adviser will make
any additional arrangements necessary to eliminate any remaining excess expenses
to the extent required by law. Currently, the most restrictive limit applicable
to the Fund is 2.5% of the first $30,000,000 of the Fund's average daily net
assets, 2% of the next $70,000,000 of such assets and 1.5% of the remaining
average daily net assets.
Pursuant to the investment management contract, the Adviser is not
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the investment management
contract relates, except a loss resulting from willful misfeasance, bad faith or
21
<PAGE>
gross negligence on the part of the Adviser in the performance of its duties or
from reckless disregard of the obligations and duties under the investment
management contract.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a 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 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.
The Adviser has entered into a service agreement with Sovereign Asset
Management Corporation ("SAMCorp"), which is an indirect wholly-owned subsidiary
of the Life Company. The service agreement provides that SAMCorp will provide to
the Adviser certain portfolio management services with respect to the securities
held in the portfolio of the Fund. The service agreement further provides that
the Adviser will remain ultimately responsible for all of its obligations under
the investment management contract between the Adviser and the Fund. Subject to
the supervision of the Adviser, SAMCorp furnishes the Fund with recommendations
with respect to the purchase, holding and disposition of equity securities in
the Fund's portfolio; furnishes the Fund with research, economic and statistical
data in connection with the Fund's equity investments; and places orders for
transactions in equity securities.
The Adviser pays to SAMCorp 40% of the quarterly investment management
fee received by the Adviser with respect to the Fund during such quarter. The
fees paid by the Fund to the Adviser under the investment management contract
are not affected by this arrangement.
The investment management contract and the distribution contract
continue in effect from year to year thereafter if approved annually by vote of
a majority of the Trustees 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
approval, and by either the Trustees or the holders of a majority of the Fund's
outstanding voting securities. The contract automatically terminates upon
assignment and may be terminated without penalty on 60 days' notice at the
option of either party to the respective contract or by vote of a majority of
the outstanding voting securities of the Fund.
DISTRIBUTION CONTRACTS
The Fund has entered into a Distribution Agreement with John Hancock
Funds. Under the agreement, John Hancock Funds is obligated to use its best
efforts to sell shares of each class of the Fund. Shares of the Fund are also
sold by selected broker-dealers (the "Selling Brokers") which have entered into
selling agency agreements with John Hancock Funds. John Hancock Funds accepts
22
<PAGE>
orders for the purchase of the shares of the Fund which are continually offered
at net asset value next determined, plus any applicable sales charge. In
connection with the sale of Class A or Class B shares, John Hancock Funds and
Selling Brokers receive compensation in the form of a sales charge imposed, in
the case of Class A shares, at the time of sale or, in the case of Class B
shares, on a deferred basis. Upon notice to all selling Brokers, John Hancock
Funds may allow them up to the full applicable sales charge during periods
specified in such notice. During these periods, Selling Brokers my be deemed to
be underwriters as that term is defined in the 1933 Act. The sales charges are
discussed further in the Prospectus.
The Fund's Trustees adopted Distribution Plans with respect to Class A
and Class B shares ("the Plans"), pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Under the Plans, the Fund will pay distribution and service
fees at an aggregate annual rate of up to 0.30% and 1.00% for Class A and Class
B, respectively, of the Fund's daily net assets attributable to shares of that
class. However, the service fee will not exceed 0.25% of the Fund's average
daily net assets attributable to each class of shares. The distribution fees
will be used to reimburse the John Hancock Funds for its distribution expenses,
including but not limited to: (i) initial and ongoing sales compensation to
Selling Brokers and others (including affiliates of the Distributor) engaged in
the sale of Fund shares; (ii) marketing, promotional and overhead expenses
incurred in connection with the distribution of Fund shares; and (iii) with
respect to Class B shares only, interest expenses on unreimbursed distribution
expenses. The service fees will be used to compensate Selling Brokers for
providing personal and account maintenance services to shareholders. In the
event that John Hancock Funds is not fully reimbursed for expenses incurred by
it under the Class B Plan in any fiscal year, John Hancock Funds may carry these
expenses forward, provided, however, that the Trustees may terminate the Class B
Plan and thus the Fund's obligation to make further payments at any time.
Accordingly, the Fund does not treat unreimbursed expenses relating to the Class
B shares as a liability of the Fund. The Plans were approved by a majority of
the voting securities of the Fund. The Plans and all amendments were approved by
the Trustees, including a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plans (the "Independent Trustees"), by votes cast in person at
meetings called for the purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides
the Fund with a written report of the amounts expended under the Plans and the
purpose for which the expenditures were made. The Trustees review these reports
on a quarterly basis to determine their continued appropriateness.
During the fiscal year ended December 31, 1995, the Fund paid John
Hancock Funds the following amounts of expenses with respect to the Class A and
Class B shares of the Fund:
23
<PAGE>
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of Interest
Prospectus Compensation Expenses of Carrying or
to New to Selling John Hancock Other Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Sovereign
Investors Fund
- --------------
Class A Shares $459,536 $28,722 $1,921,699 $1,135,643 None
Class B Shares $179,770 $13,303 $ 531,451 $ 438,931 $744,118
</TABLE>
Each of the Plans provides that it will continue in effect only so long
as its continuance is approved at least annually by the Board of Trustees and by
the Independent Trustees. Each of the Plans provides that it may be terminated
without penalty (a) by a vote of a majority of the Independent Trustees (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class
having voting rights with respect to the Plan upon 60 days' written notice to
John Hancock Funds, and (c) automatically in the event of assignment. Each of
the Plans further provides that it may not be amended to increase the maximum
amount of the fees for the services described therein without the approval of a
majority of the outstanding shares of the class of the Fund which has voting
rights with respect to the Plan. Each of the Plans also provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a vote of the Trustees and the Independent Trustees of the Fund. The
holders of Class A shares and Class B shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that each Plan will benefit the holders of the applicable class of
shares of the Fund.
Class C shares of the Fund are not subject to any distribution plan.
Expenses associated with the obligation of John Hancock Funds to use its best
efforts to sell Class C shares will be paid by the Adviser or by John Hancock
Funds and will not be paid from the fees paid under Class A or Class B Plans.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment 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.
24
<PAGE>
Equity securities traded on a principal exchange or NASDAQ National
Market Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category 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 investments 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 the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank 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 the Fund's NAV.
The (NAV) for each fund and class is determined each business day at
the close of regular trading on the New York Stock Exchange (typically 4
P.M.Eastern Time) by dividing a class's net assets by the number of its shares
outstanding.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset
value plus a sales charge which, at the option of the purchaser, may be imposed
either at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then they will only be issued for full shares. The Trustees reserve the
right to change or waive the Fund's minimum investment requirements and to
reject any order to purchase shares (including purchases by exchange) when in
the judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund
are described in the Fund's Class A and Class B Prospectus. Methods of obtaining
reduced sales charges referred to generally in the Prospectus are described in
detail below. In calculating the sales charge applicable to current purchases of
Class A shares of the Fund, the investor is entitled to cumulate current
purchases with the greater of the current value (at offering price) of the Class
A shares of the Fund owned by the investor, or if John Hancock Investor Services
Corporation ("Investor Services") is notified by the investor's dealer or the
investor at the time of the purchase, the cost of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases of
Class A shares made at one time, the purchases will be combined if made by (a)
an individual, his or her spouse and their children under the age of 21,
purchasing securities for his or their own account, (b) a Trustee or other
fiduciary purchasing for a single Fund, estate or fiduciary account, and (c)
25
<PAGE>
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee or officer of the Trust; a Director or officer of the Adviser and
its affiliates or Selling Brokers; employees or sales representatives of
any of the foregoing; retired officers, employees or Trustees of any of the
foregoing; a member of the immediate family (spouse, children, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharings or other benefit plan for
the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant-directed defined
contribution plans with at least 100 eligible employees at the inception of
the Fund account, may purchase Class A shares with no initial sales charge.
However, if the shares are redeemed within 12 months after the end of the
calendar year in which the purchase was made, a CDSC will be imposed at the
following rate:
26
<PAGE>
Amount Invested CDSC Date
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of a reduced sales
charge by taking into account not only the amount then being invested but also
the purchase price or current value of the Class A shares already held by such
person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Class A and Class B Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in Class A
shares of the Fund and shares of all other John Hancock funds which carry a
sales charge.
Letter of Intention. Reduced sales loads are also applicable to investments made
over a specified period pursuant to a Letter of Intention (LOI), which should be
read carefully prior to its execution by an investor. The Fund offers two
options regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a period of thirteen
(13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty-eight (48) month period. These qualified
retirement plans include IRA, SEP, 401(k), 403(b) (including TSAs) and Section
457 plans. Such an investment (including accumulations and combinations) must
aggregate $50,000 or more invested during the specified period from the date of
the LOI or from a date within ninety (90) days prior thereto, upon written
request to Investor Services. The sales charge applicable to all amounts
invested under the LOI is computed as if the aggregate amount intended to be
invested had been invested immediately. If such aggregate amount is not actually
invested, the difference in the sales charge actually paid and the sales charge
payable had the LOI not been in effect is due from the investor. However, for
the purchases actually made with the specified period within 13 or 48 months,
the sales charge applicable will not be higher than that which would have been
applied (including accumulations and combinations) had the LOI been for the
amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class
A shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
27
<PAGE>
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
Because Class C shares are sold at net asset value without the
imposition of any sales charge, none of the privileges described under these
captions are available to Class C investors, with the following exception:
Combination Privilege. As explained in the Prospectus for Class C Shares, a
Class C investor may qualify for the minimum $1,000,000 investment (or such
other amount as may be determined by the Fund's officers) if the aggregate
amount of his current and prior investments in Class C shares of the Fund and
Class C shares of any other John Hancock Fund exceeds $1,000,000.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Class A and Class B Prospectus as a percentage of
the dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the current market value or the original purchase cost of
the Class B shares being redeemed. Accordingly, no CDSC will be imposed on
increases in account value above the initial purchase prices, including Class B
shares derived from reinvestment of dividends or capital gains distributions. No
CDSC will be imposed on shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service defined contribution
plans administered by Investor Services or the Life Company that had more than
100 eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six- year CDSC redemption period or those you acquired
28
<PAGE>
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount, please
indicate if you require the proceeds to equal the dollar amount requested. If
not indicated, only the specified dollar amount will be redeemed from your
account and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after
your purchase, your investment's net asset value per share has increased by $2
to $12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by Investor Services to defray its expenses related to
providing distribution related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees enables the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the Class
A and Class B Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
29
<PAGE>
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Investor services.
(Please note that this waiver does not apply to periodic withdrawal plan
redemptions of Class A shares that are subject to a CDSC).
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Internal Revenue Code of 1986, as amended (the
"Code")) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions under
the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under Section 401(a) of the Code
(401(k), Money Purchase Pension Plan, Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
30
<PAGE>
Please see matrix for reference.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-retirement
Distribution (401(k), MPP, Rollover
PSP)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually in
distributions or periodic payments
12% of acct.
value annually
in periodic
payments
- -------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or value annually in
12% of acct. periodic payments
value annually
in periodic
payments
- -------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of account
annuity annuity annuity payments value annually in
payments 72(+) payments 72(+) 72(+) or 12% of periodic payments
or 12% of acct. or 12% of acct. value
value annually acct. value annually in
in periodic annually in periodic payments
payments periodic
payments
- -------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you
must notify Investor Services at the time you make your redemption. The waiver
will be granted once Investor Services has confirmed that you are entitled to
the waiver.
31
<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the 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, he would incur a brokerage charge. Any such
securities would be valued for the purposes of making such payment at the same
value as used in determining net asset value. The Fund has, however, elected to
be governed by Rule 18f-1 under the Investment Company Act. Under that rule, the
Fund must redeem its shares for cash except to the extent that the redemption
payments to any shareholder during any 90-day period would exceed the lesser of
$250,000 or 1% of the Fund's net asset value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS FOR CLASS A AND CLASS B SHARES
Exchange Privilege. As described more fully in the Prospectuses, the Fund
permits exchanges of shares of any class of the Fund for shares of the same
class in any other John Hancock fund offering that class.
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund's shares. Since the redemption price of the Fund shares may
be more or less than the shareholder's cost, depending upon the market value of
the securities owned by the Fund at the time of redemption, the distribution of
cash pursuant to this plan may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The recognition of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
Class B shares of the Fund could be disadvantageous to a shareholder because of
the initial sales charge payable on such purchases of Class A shares and the
CDSC imposed on redemptions of Class B shares and because redemptions are
taxable events. Therefore, a shareholder should not purchase Class A and Class B
shares at the same time as a Systematic Withdrawal Plan is in effect. The Fund
reserves the right to modify or discontinue the Systematic Withdrawal Plan of
any shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Investor Services.
Monthly Automatic Accumulation Program (MAAP). This program is explained fully
in the Class A and Class B Prospectus. The program, as it relates to automatic
investment drafts, is subject to the following conditions:
The investment drafts will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
32
<PAGE>
any investment is not honored by the Shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the processing date of any investment.
Reinvestment Privilege. A shareholder who has redeemed shares of the Fund may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or any John Hancock fund, subject to the minimum investment limit in
any fund. The proceeds from the redemption of Class A shares may be reinvested
at net asset value without paying a sales charge in Class A shares of the Fund
or in Class A shares of any John Hancock fund. If a CDSC was paid upon a
redemption, a shareholder may reinvest the proceeds from such redemption at net
asset value in additional shares of the class from which the redemption was
made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
shares will be treated for tax purposes as described below.
DESCRIPTION OF FUND'S SHARES
The Trustees of the Trust are responsible for the management and
supervision of the fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund, 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 Statement
of Additional Information, the Trustees have authorized shares of the Fund and
three other series. The Declaration of Trust also authorizes the Trustees to
classify and reclassify the shares of the Fund, or any new series of the Trust,
into one or more classes. As of the date of this Statement of Additional
Information, the Trustees have authorizes the issuance of three classes of
shares of the Fund, designated as Class A, Class B and Class C.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective distribution plans. The different
33
<PAGE>
classes of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences resulting from the
facts that (I) the distribution and service fees relating to Class A and Class B
shares will be borne exclusively by that shares; and (iii) each of Class A
shares and Class B shares will bear any class expenses properly allocable to
that class of shares, subject to the requirements imposed by the Internal
Revenue Service on funds having a multiple-class structure. Accordingly, the net
asset value per share may vary depending whether Class A shares or Class B
shares are purchased.
In the event of liquidation, shareholders of each class are entitled to
share pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund 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 a request for 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 and affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund'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 for the liabilities of
any other series. Furthermore, no fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock Funds. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
In order to avoid conflicts with portfolio trades for the Fund, the
Adviser and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. 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. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
34
<PAGE>
A shareholder's account is governed by the laws of the Commonwealth of
Massachusetts.
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and has elected
to be treated as a "regulated investment company" under Subchapter M of the
Code, and intends to continue to so qualify in the future. 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, the Fund will not be subject to Federal income tax on taxable income
(including net realized capital gains) distributed to shareholders in accordance
with the timing requirements of the Code.
The Fund will be subject to a four percent nondeductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to seek to avoid or
minimize liability for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P") will be taxable under the Code for investors who are subject to
tax. If these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's federal tax basis
in Fund shares and then, to the extent such basis is exceeded, will generally
give rise to capital gains. Shareholders who have chosen automatic reinvestment
of their distributions will have a federal tax basis in each share received
pursuant to such a reinvestment equal to the amount of cash they would have
received had they elected to receive the distribution in cash, divided by the
number of shares received in the reinvestment.
The amount of net realized capital gains, if any, in any given year
will result from sales of securities made with a view to the maintenance of a
portfolio believed by the Fund's management to be most likely to attain the
Fund's objective. Such sales, and any resulting gains or losses, may therefore
vary considerably from year to year. At the time of an investor's purchase of
35
<PAGE>
shares of the Fund, a portion of the purchase price is often attributable to
realized or unrealized appreciation in the Fund's portfolio. Consequently,
subsequent distributions on these shares from such appreciation or income may be
taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares and the distributions in reality represent a return of a portion of the
purchase price.
If the Fund acquires stock of certain foreign 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"), the 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 Fund to
recognize taxable income or gain without the concurrent receipt of cash. The
Fund may limit and/or manage its holdings in passive foreign investment
companies to minimize its tax liability or maximize its return from these
investments.
The Fund may be subject to foreign taxes on its income from investments
in certain foreign securities, if any. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in some cases. Because more than
50% of the Fund's assets at the close of any taxable year will generally not
consist of stocks or securities of foreign corporations, the Fund will generally
be unable to pass such taxes through to shareholders, who will therefore
generally not be entitled to any foreign tax credit or deduction with respect to
their investment in the Fund. The Fund will deduct the foreign taxes it pays in
determining the amount it has available for distribution to shareholders.
Foreign exchange gains and losses realized by the Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, foreign currencies, or payable or receivables denominated in 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.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into options transactions.
Certain of these transactions may cause the Fund to recognize gains or losses
from marking to market even though its positions have not been sold or
terminated and may affect the character as long-term or short-term and timing of
some capital gains and losses realized by the Fund. Additionally, certain of the
Fund's losses on transactions involving options and any offsetting or successor
positions in its portfolio may be deferred rather than being taking into account
currently in calculating the Fund's taxable income or gain. Certain of such
transactions may also cause the Fund to dispose of investments sooner than would
otherwise have occurred. These transactions may therefore affect the amount,
timing and character of the Fund's distributions to shareholders. Some of the
36
<PAGE>
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 Fund will take
into account the special tax rules applicable to options including consideration
of available elections, in order to seek to minimize any potential adverse tax
consequences.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
90 days after their purchase to the extent Class A shares of the Fund or another
John Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. Such disregarded charge will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired. Also, any loss realized on a redemption or exchange may be disallowed
to the extent the shares disposed of are replaced with other shares of the Fund
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of, such as pursuant to automatic dividend reinvestment. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long- term capital gain
with respect to such shares.
Although the Fund's present intention is to distribute, at least
annually, all net capital gain, if any, the Fund reserves the right to retain
and reinvest all or any portion of the excess, as computed for Federal income
tax purposes, of net gain over net short- term capital loss in any year. The
Fund will not in any event distribute net capital gain realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares in the Fund by
the difference between his pro rata share of such excess and his pro rata share
of these taxes.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset 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
37
<PAGE>
liability to the Fund and as noted above would not be distributed as such to
shareholders. Presently, there are no realized capital loss carryforwards to
offset against future net realized capital gains.
For purposes of the dividends received deduction available to
corporations, dividends received by the Fund, if any, from U.S. domestic
corporations in respect of the stock of such corporations held by the Fund, for
U.S. Federal income tax purposes, for at least 46 days (91 days in the case of
certain preferred stock) and distributed and properly designated by the Fund may
be treated a qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
shares of the Fund in order to qualify for the deduction and, if they have any
debt that is deemed under the Code directly attributable to such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability, if any. Additionally, any corporate
shareholder should consult its tax adviser regarding the possibility that its
tax basis in its shares may be reduced, for Federal income tax purposes, by
reason of "extraordinary dividends" received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of the
shares.
The Fund is required to accrue income on any debt securities that have
more than a de minimus amount of original issue discount (or debt securities
acquired at a market discount, if the Fund elects to include market discount in
income currently) prior to the receipt of the corresponding cash payments. The
mark to market rules applicable to certain options and futures contracts may
also require the Fund to recognize gain within a concurrent receipt of cash.
However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or liability for any federal income or excise tax. Therefore, the 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
these distribution requirements.
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangible taxes,
the value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all taxable distributions to shareholders, as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt recipients, i.e., corporations and certain other investors distributions
to which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of the Code, Section 3406, and applicable
38
<PAGE>
Treasury regulations, all such reportable distributions and proceeds may be
subject to backup withholding of federal income tax at the rate of 31% in the
case of non-exempt shareholders who fail to furnish the Fund with their correct
taxpayer identification number and certain certifications required by the IRS or
if the IRS or a broker notifies the Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding as a result of failure to report interest or dividend income. The
Fund may refuse to accept an application that does not contain any required
taxpayer identification number or certification that the number provided is
correct. If the backup withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in shares, will
be reduced by the amounts required to be withheld. Any amounts withheld may be
credited against a shareholder's U.S. federal income tax liability. Investors
should consult their tax advisers about the applicability of the backup
withholding provisions.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Investments in debt obligations that are at risk of or in default may
present special tax issues for the Fund. Tax rules are not entirely clear about
issues such as when the Fund 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 the Fund, in the event it invests in such securities, 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 or excise tax.
The foregoing discussion relates solely to U.S. Federal income tax laws
applicable to the U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of shares of the
Fund may also be subject to state and local taxes. The foregoing discussion
related to U.S. investors that are not exempt from U.S. Federal income tax.
Different tax consequences will apply to plan participants, tax-exempt investors
and investors that are subject to tax deferral. You should consult your tax
adviser for specific advice. Under the Code, a tax-exempt investor in the Fund
will not generally recognize unrelated business taxable income from its
investment in the Fund unless the tax-exempt investor incurred indebtedness to
acquire or continue to hold Fund shares and such indebtedness remains unpaid.
Shareholders should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership of shares of, and receipt of distributions
from, the Fund in their particular circumstances.
39
<PAGE>
Non-U.S. investors not engaged in a U.S. trade or business with which
their Fund investment is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund. Provided that the Fund qualifies as a regulated investment company
under the Code, it will not be required to pay Massachusetts corporate excise,
franchise or income taxes.
CALCULATION OF PERFORMANCE
For the 30-day period ended June 30, 1996, the annualized yield on
Class A, Class B and Class C shares of the Fund was 1.76%, 1.06%, and 2.22%,
respectively. The average annual total return of the Class A shares of the Fund
for the 1, 5, 10 year periods ended June 30, 1996 was 16.18%, 11.58% and 10.40%,
respectively. The average annual total return of the Class B shares of the Fund
for the 1 year period ended June 30, 1996 and for the period from the
commencement of operations, January 3, 1994 to June 30, 1996 was 16.29% and
12.22%, respectively. The average annual total return of the Class C shares of
the Fund for the 1 year period ended June 30, 1996 and for the period from
commencement of operation, May 7, 1993 to June 30, 1996 was 22.69% and 12.87%,
respectively.
The 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
Where:
P = a hypothetical initial investment 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, 5 and 10 year periods.
40
<PAGE>
This calculation assumes the maximum sales charge of 5.0% is included
in the initial investment or the CDSC is applied at the end of the period, and
also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period. Performance calculations for
Class C shares do not include any sales charge or distribution plan fees. The
"distribution rate" is determined by annualizing the result of dividing the
declared dividends of the Fund during the period stated by the maximum offering
price or net asset value at the end of the period. Excluding the Fund's sales
charge from the distribution rate produces a higher rate.
In addition to average annual total returns, the 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.
Total returns may be quoted with or without taking the Fund's 5.0% sales charge
on Class A shares or the CDSC on Class B shares into account. Excluding the
Fund's sales charge on Class A shares and the CDSC on Class B shares from a
total return calculation produces a higher total return figure.
The Fund's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price per share
(which includes the full sales charge) 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 = expenses accrued during the period (net of fee reductions and
expense limitation payments, if any).
c = the average daily number of shares outstanding during the
period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
From time to time, in reports and promotional literature, the 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 -- Growth
41
<PAGE>
and Income Fund Performance Analysis," a monthly publication which tracks mutual
fund net assets, total return, and yield. Comparisons may also be made to bank
certificates of deposit ("CDs"), which differ from mutual funds, such as the
Fund, in several ways. The interest rate established by the sponsoring bank is
fixed for the term of a CD, there are penalties for early withdrawal from CDs,
and the principal on a CD is insured.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, the WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, BARRON'S and IBBOTSON ASSOCIATES
will also be utilized as well as the Russell and Wilshire indices. The Fund may
also cite Morningstar Mutual Values, an independent mutual fund information
service which ranks mutual funds. The Fund's promotional and sales literature
may make reference to the Fund's "beta." Beta is a reflection of the
market-related risk of the Fund by showing how responsive the Fund is to the
market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the 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; and changes in operating expenses
are all examples of items that can increase or decrease the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of
the Fund and the allocation of broker commissions are made by the Advisers
pursuant to recommendations made by its investment committee of the Adviser,
which consists of officers and Trustees of the Adviser and officers and Trustees
who are interested persons of the Fund, and by SAMCorp. Orders for purchases and
sales of securities are placed in a manner, which, in the opinion of the
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 maker reflect a "spread." 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 these transactions.
The 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 National Association of Securities
Dealers, Inc. and other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
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<PAGE>
To the extent consistent with the foregoing, the Fund will be governed
in the selection of broker 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 and
SAMCorp, 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 and SAMCorp. The receipt of research information
is not expected to reduce significantly the expenses of the Adviser. The
research information and statistical assistance furnished by brokers and dealers
may benefit the Life Company or other advisory clients of the Adviser and
SAMCorp, and, conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser or SAMCorp may result in research information
and statistical assistance beneficial to the Fund. The Fund will make no
commitment to allocate portfolio transactions upon any prescribed basis. While
the Adviser and SAMCorp will be primarily responsible for the allocation of the
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. For the years ended on December 31, 1995, 1994 and 1993, the Fund paid
negotiated brokerage commissions in the amount of $1,652,520, $1,197,837 and
$1,517,163, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the 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 such price is
reasonable in light of the services provided and to these policies as the
Trustees may adopt from time to time. During the fiscal year ended December 31,
1995, the Fund directed commissions in the amount of $216,694 to compensate
brokers for research services such as industry, economic and company reviews and
evaluation of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors Inc. and an indirect shareholder of
John Hancock Freedom Securities Corporation and its subsidiaries, Tucker Anthony
Incorporated and Sutro & Company, Inc., all of which 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 Affiliated Brokers. During the
year ended December 31, 1995, 1994 and 1993, the Fund did not execute any
portfolio transactions with Affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Fund on
securities or commodities exchange transactions, subject, however, to the
general policy of the Fund set forth above and the procedures adopted by the
Trustees pursuant to the Investment Company 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,
43
<PAGE>
but unaffiliated, customers except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Fund, the Adviser, SAMCorp or the Affiliated Broker. Any such
transactions would be subject to a good faith determination by the Trustees that
the compensation paid to Affiliated Brokers is fair and reasonable. Because the
Adviser and SAMCorp, which are affiliated with the Affiliated Brokers, have, as
investment advisers 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 Broker as a
basis for negotiating commissions at a rate higher than that determined in
accordance with the above criteria. The Fund will not engage in principal
transactions with Affiliated Brokers. The Fund 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.
Other investment advisory clients advised by the Adviser may also
invest in the same securities as the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transactions as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable for
it. On the other hand, to the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, 101
Huntington Avenue, Boston, MA 02205-9116, a wholly-owned indirect subsidiary of
the Life Company, is the transfer and dividend paying agent for the Fund. The
Fund pays an annual fee of $19.00 for each Class A shareholder and $21.50 for
each Class B shareholder account and 0.10% of the average daily net assets
attributable to the Class C shares, plus certain out-of-pocket expenses.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and Investors Bank & Trust Company, 89 South Street,
Boston, Massachusetts 02111. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
44
<PAGE>
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116. The independent auditors audit
and render an opinion on the Fund's annual financial statements and prepare the
Fund's annual income tax returns.
45
<PAGE>
APPENDIX
Moody's describes its lower ratings for corporate bonds as follows:
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.
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 characterized
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 represented obligations which are speculative in a high
degree. Such issues are often in default or have other marked 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.
Standard & Poor's 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.
Moody's describes its three highest ratings for commercial paper as follows:
A-1
<PAGE>
Issuers rated P-1 (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics: (1) leading market
positions in well- established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate reliance on
debt and ample asset protections; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Standard & Poor's describes its lower ratings for corporate bonds as follows:
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, CCC, CC, C Debt rated 'BB', 'B', 'CCC', 'CC" and 'C' 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 'C' 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.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
A-2
<PAGE>
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Standard & Poor's describes its three highest ratings for commercial paper as
follows:
A-1. This designation indicated that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
A-3
<PAGE>
FINANCIAL STATEMENTS
F-1
