JOHN HANCOCK
GROWTH AND
INCOME FUNDS
[John Hancock's Graphic Logo. A Circle
Dianond, Triangle and a Cube]
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PROSPECTUS GROWTH AND INCOME FUND
AUGUST 30, 1996
INDEPENDENCE EQUITY FUND
This prospectus gives vital
information about these funds. SOVEREIGN BALANCED FUND
For your own benefit and
protection, please read it before SOVEREIGN INVESTORS FUND
you invest, and keep it on hand
for future reference. SPECIAL VALUE FUND
Please note that these funds: UTILITIES FUND
* are not bank deposits
* are not federally insured
* are not endorsed by any bank
or government agency
* are not guaranteed to achieve
their goal(s)
Like all mutual fund shares, 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 [LOGO]JOHN HANCOCK FUNDS
prospectus. Any representation to the A GLOBAL INVESTMENT MANAGEMENT
contrary is a criminal offense. FIRM
101 Huntington Avenue, Boston,
Massachusetts 02199-7603
<PAGE>
CONTENTS
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A fund-by-fund look at goals, GROWTH AND INCOME FUND 4
strategies, risks, expenses and
financial history. INDEPENDENCE EQUITY FUND 6
SOVEREIGN BALANCED FUND 8
SOVEREIGN INVESTORS FUND 10
SPECIAL VALUE FUND 12
UTILITIES FUND 14
Policies and instructions for YOUR ACCOUNT
opening, maintaining and closing Choosing a share class 16
an account in any growth and How sales charges are calculated 16
income fund. Sales charge reductions and waivers 17
Opening an account 17
Buying shares 18
Selling shares 19
Transaction policies 21
Dividends and account policies 21
Additional investor services 22
Details that apply to the growth FUND DETAILS
and income funds as a group. Business structure 23
Sales compensation 24
More about risk 26
FOR MORE INFORMATION BACK COVER
<PAGE>
OVERVIEW
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GOAL OF THE GROWTH AND INCOME FUNDS
John Hancock growth and income funds invest for
varying combinations of income and capital
appreciation. Each fund has its own emphasis with
regard to income, growth and total return, and has
its own strategy and risk/reward profile. Because
you could lose money by investing in these funds,
be sure to read all risk disclosure carefully
before investing.
WHO MAY WANT TO INVEST
FUND INFORMATION KEY These funds may be appropriate for investors who:
Concise fund-by-fund * are looking for a more conservative alternative
descriptions begin on the to exclusively growth-oriented funds
next page. Each description * need an investment to form the core of a
provides the following portfolio
information: * seek above-average total return over the long
term
[GOAL GRAPHIC]GOAL AND * are retired or nearing retirement
STRATEGY The fund's
particular investment goals Growth and income funds may NOT be appropriate if
and the strategies it you:
intends to use in pursuing * are investing for maximum return over a long
those goals. time horizon
* require a high degree of stability of your
[PORTFOLIO principal
GRAPHIC]PORTFOLIO
SECURITIES The primary THE MANAGEMENT FIRM
types of securities in
which the fund invests. All John Hancock growth and income funds are
Secondary investments are managed by John Hancock Advisers, Inc. Founded in
described in "More about 1968, John Hancock Advisers is a wholly owned
risk" at the end of the subsidiary of John Hancock Mutual Life Insurance
prospectus. Company and manages more than $19 billion in
assets.
[RISK GRAPHIC]RISK FACTORS
The major risk factors
associated with the fund.
[TORSO GRAPHIC]PORTFOLIO
MANAGEMENT The individual
or group (including
subadvisers, if any)
designated by the
investment adviser to
handle the fund's
day-to-day management.
[% GRAPHIC]EXPENSES The
overall costs borne by an
investor in the fund,
including sales charges and
annual expenses.
[$ GRAPHIC]FINANCIAL
HIGHLIGHTS A table showing
the fund's financial
performance for up to ten
years, by share class. A
bar chart showing total
return allows you to
compare the fund's
historical risk level to
those of other funds.
<PAGE>
GROWTH AND INCOME FUND
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST TICKER SYMBOL CLASS A: TAGRX
CLASS B: TSGWX
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GOAL AND STRATEGY
[GOAL GRAPHIC]The fund seeks the highest total return (capital appreciation plus
current income) that is consistent with reasonable safety of capital. To pursue
this goal, the fund invests in a diversified portfolio of stocks, bonds and
money market instruments. Although the fund may concentrate in any of these
securities, under normal circumstances it invests primarily in stocks. The fund
may not invest more than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[PORTFOLIO GRAPHIC]The fund may invest in most types of securities, including:
* common and preferred stocks, warrants and convertible securities
* U.S. Government and agency debt securities, including mortgage-backed
securities
* corporate bonds, notes and other debt securities of any maturity
The fund favors stocks that have paid dividends in the past 12 months and show
potential for a dividend increase. The fund invests no more than 5% of assets in
junk bonds (bonds rated lower than BBB/Baa and their unrated equivalents), but
does not invest in bonds rated lower than B.
The fund may invest up to 25% of assets in foreign securities (35% during
adverse U.S. market conditions); however, foreign securities typically have not
exceeded 5% of assets. To a limited extent the fund also may invest in certain
higher-risk securities, and may engage in other investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[RISK GRAPHIC]As with any growth and income fund, the value of your investment
will fluctuate in response to stock and bond market movements.
To the extent that it invests in certain securities, the fund may be affected by
additional risks:
* foreign securities: currency, information, natural event and political risks
* mortgage-backed securities: extension and prepayment risks
These risks are defined in "More about risk" starting on page 26. This section
also details other higher-risk securities and practices that the fund may
utilize. Before you invest, please read "More about risk" carefully.
PORTFOLIO MANAGEMENT
[TORSO GRAPHIC]Timothy E. Keefe, leader of the fund's portfolio management team
since joining John Hancock Funds in July 1996, is a senior vice president of the
adviser and has been in the investment business since 1987.
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INVESTOR EXPENSES
<TABLE>
[% GRAPHIC]Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<CAPTION>
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SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
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<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
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ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
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<S> <C> <C>
Management fee 0.625% 0.625%
12b-1 fee(3) 0.250% 1.00%
Other expenses 0.445% 0.445%
Total fund operating expenses 1.320% 2.070%
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- --------------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $63 $90 $119 $201
Class B shares
Assuming redemption
at end of period $71 $95 $131 $221
Assuming no redemption $21 $65 $111 $221
This example is for comparison purposes only and is not a representation of
the fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
4 GROWTH AND INCOME FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
<TABLE>
[$ GRAPHIC]The figures below have
been audited by the fund's
independent auditors, Ernst & Young
LLP.
VOLATILITY, AS INDICATED BY CLASS A [BAR GRAPH]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) 19.90 22.58 (9.86) 23.47 0.18 23.80 10.47 13.64
<CAPTION>
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CLASS A - YEAR ENDED AUGUST 31, 1986 1987 1988 1989 1990 1991 1992 1993
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.42 $ 11.11 $ 12.04 $ 8.83 $ 10.19 $ 9.87 $ 11.77 $ 12.43
Net investment income (loss) 0.35 0.42 0.50 0.55 0.20 0.20 0.32(2) 0.40(2)
Net realized and unrealized gain (loss)
on investments 1.48 1.77 (1.73) 1.42 (0.18) 2.07 0.89 1.12
Total from investment operations 1.83 2.19 (1.23) 1.97 0.02 2.27 1.21 1.52
Less distributions:
Dividends from net investment income (0.36) (0.38) (0.49) (0.61) (0.27) (0.19) (0.25) (0.42)
Distributions from net realized gain on
investments sold (0.78) (0.88) (1.49) -- (0.07) (0.18) (0.30) (1.45)
Total distributions (1.14) (1.26) (1.98) (0.61) (0.34) (0.37) (0.55) (1.87)
Net asset value, end of period $ 11.11 $ 12.04 $ 8.83 $ 10.19 $ 9.87 $ 11.77 $ 12.43 $ 12.08
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(3) (%) 19.90 22.58 (9.86) 23.47 0.18 23.80 10.47 13.64
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 69,516 90,974 69,555 70,513 63,150 77,461 89,682 115,780
Ratio of expenses to average
net assets (%) 1.12 1.21 1.29 1.12 1.29 1.38 1.34 1.29
Ratio of net investment income (loss) to
average net assets (%) 3.53 3.86 5.45 6.07 1.96 1.90 2.75 3.43
Portfolio turnover rate (%) 150 138 120 214 69 70 119 107
Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A N/A N/A N/A
VOLATILITY, AS INDICATED BY CLASS A [BAR GRAPH]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) (2.39) 19.22 12.58(4)
<CAPTION>
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CLASS A - YEAR ENDED AUGUST 31, 1994 1995 1996(1)
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<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.08 $ 11.42 $ 13.38
Net investment income (loss) 0.32(2) 0.21(2) 0.11
Net realized and unrealized gain (loss)
on investments (0.61) 1.95 1.56
Total from investment operations (0.29) 2.16 1.67
Less distributions:
Dividends from net investment income (0.37) (0.20) (0.11)
Distributions from net realized gain on
investments sold -- -- (0.15)
Total distributions (0.37) (0.20) (0.26)
Net asset value, end of period $ 11.42 $ 13.38 $ 14.79
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(3) (%) (2.39) 19.22 12.58(4)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 121,160 130,183 135,820
Ratio of expenses to average
net assets (%) 1.31 1.30 1.16(5)
Ratio of net investment income (loss) to
average net assets (%) 2.82 1.82 1.60(5)
Portfolio turnover rate (%) 195 99 36
Average brokerage commission rate(6) ($) N/A N/A 0.0658
<CAPTION>
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CLASS B - YEAR ENDED AUGUST 31, 1991(7) 1992 1993 1994 1995 1996(1)
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<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $11.52 $ 11.77 $ 12.44 $ 12.10 $ 11.44 $ 13.41
Net investment income (loss) -- 0.23(2) 0.30(2) 0.24(2) 0.13(2) 0.07
Net realized and unrealized gain (loss)
on investments 0.25 0.89 1.12 (0.61) 1.96 1.56
Total from investment operations 0.25 1.12 1.42 (0.37) 2.09 1.63
Less distributions:
Dividends from net investment income -- (0.15) (0.31) (0.29) (0.12) (0.07)
Distributions from net realized gain on
investments sold -- (0.30) (1.45) -- -- (0.15)
Total distributions -- (0.45) (1.76) (0.29) (0.12) (0.22)
Net asset value, end of period $11.77 $ 12.44 $ 12.10 $ 11.44 $ 13.41 $ 14.82
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 2.17(4) 9.67 12.64 (3.11) 18.41 12.18(4)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 7,690 29,826 65,010 114,025 114,723 125,071
Ratio of expenses to average net assets (%) 2.19(5) 2.07 2.19 2.06 2.03 1.87(5)
Ratio of net investment income (loss) to average
net assets (%) 1.46(5) 2.02 2.53 2.07 1.09 0.89(5)
Portfolio turnover rate (%) 70 119 107 195 99 36
Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A 0.0658
(1) Six months ended February 29, 1996. (Unaudited.)
(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) Annualized.
(6) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(7) Class B shares commenced operations on August 22, 1991.
</TABLE>
GROWTH AND INCOME FUND 5
<PAGE>
INDEPENDENCE EQUITY FUND
REGISTRANT NAME: JOHN HANCOCK CAPITAL SERIES
TICKER SYMBOL CLASS A: JHDCX
CLASS B: JHIDX
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GOAL AND STRATEGY
[LOGO]The fund seeks above-average total return (capital appreciation plus
current income). To pursue this goal, the fund invests primarily in a
diversified stock portfolio whose risk profile is similar to that of the S&P 500
index. The fund does not invest exclusively in S&P 500 stocks.
In choosing stocks, the fund uses a proprietary computer model (NIXDEX) to
identify stocks that appear to be undervalued. The fund favors those undervalued
stocks that are selected by its model and that are believed to have improving
fundamentals. The fund may not invest more than 25% of assets in any one
industry.
PORTFOLIO SECURITIES
[LOGO]Under normal circumstances, the fund invests at least 65% of assets in
common stocks. It may also invest in warrants, preferred stocks and investment-
grade convertible debt securities.
The fund may invest in foreign securities in the form of American Depository
Receipts (ADRs) and U.S. dollar-denominated securities of foreign issuers
traded on U.S. exchanges. To a limited extent the fund also may invest in
certain higher-risk securities, and may engage in other investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[LOGO]As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements. Because the fund
follows an index-tracking strategy, it is likely to remain fully invested even
if the fund's managers anticipate a market downturn.
To the extent that it invests in foreign securities, the fund may be affected by
additional risks, such as information, natural event and political risks. These
risks are defined in "More about risk" starting on page 26. This section also
details other higher-risk securities and practices that the fund may utilize.
Please read "More about risk" carefully before you invest.
MANAGEMENT/SUBADVISER
[LOGO]The fund's investment decisions are made by a portfolio management team,
and no individual is primarily responsible for making them. Team members are
employees of Independence Investment Associates, Inc., the fund's subadviser and
a subsidiary of John Hancock Mutual Life Insurance Company.
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INVESTOR EXPENSES
[LOGO]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<TABLE>
<CAPTION>
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SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
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ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.30% 1.00%
Other expenses 1.00% 1.00%
Total fund operating expenses (after limitation)(3) 1.30% 2.00%
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
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SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -------------------------------------------------------------------------------
Class A shares $63 $89 $118 $199
Class B shares
Assuming redemption
at end of period $70 $93 $128 $215
Assuming no redemption $20 $63 $108 $215
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fee would be 0.75% for each class and total fund
operating expenses would be 2.05% for Class A and 2.75% for Class B.
Management fee includes a subadviser fee equal to 55% of the management
fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
6 INDEPENDENCE EQUITY FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
<TABLE>
[LOGO]The figures below have been audited by the fund's independent auditors,
Price Waterhouse LLP.
<CAPTION>
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART 10.95(4) 13.58 6.60 16.98 29.12]
- --------------------------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED MAY 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 $ 10.98 $ 12.16 $ 12.68 $14.41
Net investment income (loss) 0.15 0.22 0.28(2) 0.32(2) 0.20(2)
Net realized and unrealized gain (loss) on investments 0.94 1.25 0.52 1.77 3.88
Total from investment operations 1.09 1.47 0.80 2.09 4.08
Less distributions:
Dividends from net investment income (0.11) (0.23) (0.23) (0.28) (0.22)
Distributions from net realized gain on
investments sold -- (0.06) (0.05) (0.08) (0.29)
Total distributions (0.11) (0.29) (0.28) (0.36) (0.51)
Net asset value, end of period $10.98 $ 12.16 $ 12.68 $ 14.41 $17.98
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 10.95(4) 13.58 6.60 16.98 29.12
Total adjusted investment return at net asset
value(3,5) (%) 9.23(4) 11.40 6.15 16.94 28.47
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 2,622 12,488 66,612 101,418 14,878
Ratio of expenses to average net assets (%) 1.66(6) 0.76 0.70 0.70 0.94
Ratio of adjusted expenses to average net assets(7) (%) 3.38(6) 2.94 1.15 0.74 1.59
Ratio of net investment income (loss) to average
net assets (%) 1.77(6) 2.36 2.20 2.43 1.55
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 0.05(6) 0.18 1.75 2.39 0.90
Portfolio turnover rate (%) 53 53 43 71 157
Fee reduction per share ($) 0.15 0.20 0.06(2) 0.005(2) 0.08(2)
Average brokerage commission rate(8) ($) N/A N/A N/A N/A N/A
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CLASS B - YEAR ENDED MAY 31, 1996(1)
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $15.25
Net investment income (loss) 0.09 (2)
Net realized and unrealized gain (loss) on investments 2.71
Total from investment operations 2.80
Less distributions:
Dividends from net investment income (0.09)
Net asset value, end of period $17.96
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 18.46 (4)
Total adjusted investment return at net asset value(3,5) (%) 17.59 (4)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 15,125
Ratio of expenses to average net assets (%) 2.00 (6)
Ratio of adjusted expenses to average net assets(7) (%) 3.21 (6)
Ratio of net investment income (loss) to average net assets (%) 0.78 (6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (0.43)(6)
Portfolio turnover rate (%) 157
Fee reduction per share ($) 0.13 (2)
Average brokerage commission rate(8) ($) N/A
- ----------
(1) Class A and Class B shares commenced operations on June 10, 1991 and
September 7, 1995, respectively.
(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.
</TABLE>
INDEPENDENCE EQUITY FUND 7
<PAGE>
SOVEREIGN BALANCED FUND
REGISTRANT NAME: JOHN HANCOCK SOVEREIGN INVESTORS FUND, INC.
TICKER SYMBOL CLASS A: SVBAX CLASS B: SVBBX
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GOAL AND STRATEGY
[LOGO]The fund seeks current income, long-term growth of capital and income, and
preservation of capital. To pursue these goals, the fund allocates its assets
among a diversified mix of debt and equity securities. While the relative
weightings of debt and equity securities will shift over time, at least 25% of
assets will be invested in senior debt securities. The fund may not invest more
than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[LOGO]The fund may invest in any type or class of security, including (but not
limited to) stocks, warrants, U.S. Government and agency securities, corporate
debt securities, investment-grade short-term securities, foreign currencies and
options and futures contracts.
The fund's stock investments are exclusively in companies that have increased
their dividend payout in each of the last ten years. Up to 25% of the fund's
bond investments may be rated from BB/Ba to C (junk bonds).
The fund may invest up to 35% of assets in foreign securities; however, these
typically have not exceeded 5% of assets. To a limited extent the fund also may
invest in certain higher-risk securities, and may engage in other investme nt
practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[LOGO]As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements. To the extent that it
invests in certain securities, the fund may be affected by additional risks:
* junk bonds: above-average credit, market and other risks
* foreign securities: currency, information, natural event and political risks
* mortgage-backed securities: extension and prepayment risks
These risks are listed and defined in "More about risk" starting on page 26.
This section also details other higher-risk securities and practices that the
fund may utilize. Please read "More about risk" carefully before you invest.
MANAGEMENT/SUBADVISER
[LOGO]John F. Snyder III and Barry H. Evans lead the fund's portfolio management
team. Mr. Snyder, an investment manager since 1971, is an executive vice
president of Sovereign Asset Management Corporation, the fund's subadviser and a
subsidiary of John Hancock Funds. Mr. Evans, a senior vice president of the
adviser, has been in the investment business since joining John Hancock Funds in
1986.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
[LOGO]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<CAPTION>
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------
Management fee(3) 0.60% 0.60%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.39% 0.39%
Total fund operating expenses 1.29% 1.99%
</TABLE>
<TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- -------------------------------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $62 $89 $117 $198
Class B shares
Assuming redemption
at end of period $70 $92 $127 $214
Assuming no redemption $20 $62 $107 $214
- ----------
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Management fee includes a subadviser fee equal to 40% of the stock portion
of the management fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
8 SOVEREIGN BALANCED FUND
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[LOGO]The figures below have been audited by the fund's independent auditors,
Ernst & Young LLP.
<CAPTION>
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART 2.37(4) 11.38 (3.51) 24.23]
- ---------------------------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED DECEMBER 31, 1992(1) 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 10.19 $ 10.74 $ 9.84
Net investment income (loss) 0.04 0.46 0.50 0.44(2)
Net realized and unrealized gain (loss) on investments 0.20 0.68 (0.88) 1.91
Total from investment operations 0.24 1.14 (0.38) 2.35
Less distributions:
Dividends from net investment income (0.05) (0.45) (0.50) (0.44)
Distributions from net realized gain on investments sold -- (0.14) (0.02) --
Total distributions (0.05) (0.59) (0.52) (0.44)
Net asset value, end of period $ 10.19 $ 10.74 $ 9.84 $ 11.75
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 2.37(4) 11.38 (3.51) 24.23
Total adjusted investment return at net asset value(3,5) (%) 2.22(4) -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 5,796 62,218 61,952 69,811
Ratio of expenses to average net assets (%) 2.79(6) 1.45 1.23 1.27
Ratio of adjusted expenses to average net assets(7) (%) 2.94(6) -- -- --
Ratio of net investment income (loss) to average net assets (%) 3.93(6) 4.44 4.89 3.99
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.78(6) -- -- --
Portfolio turnover rate (%) 0 85 78 45
Fee reduction per share ($) 0.0016 N/A N/A N/A
Average brokerage commission rate(8) ($) N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
CLASS B - YEAR ENDED DECEMBER 31, 1992(1) 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 10.20 $ 10.75 $ 9.84
Net investment income (loss) 0.03 0.37 0.43 0.36(2)
Net realized and unrealized gain (loss) on investments 0.20 0.70 (0.89) 1.90
Total from investment operations 0.23 1.07 (0.46) 2.26
Less distributions:
Dividends from net investment income (0.03) (0.38) (0.43) (0.36)
Distributions from net realized gain on investments sold -- (0.14) (0.02) --
Total distributions (0.03) (0.52) (0.45) (0.36)
Net asset value, end of period $ 10.20 $ 10.75 $9.84 $11.74
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 2.29(4) 10.63 (4.22) 23.30
Total adjusted investment return at net asset value(3,5) (%) 2.14(4) -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 14,311 78,775 79,176 87,827
Ratio of expenses to average net assets (%) 3.51(6) 2.10 1.87 1.96
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
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.06(6) -- -- --
Portfolio turnover rate (%) 0 85 78 45
Fee reduction per share ($) 0.0012 -- -- --
Average brokerage commission rate(8) ($) N/A N/A N/A N/A
(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.
</TABLE>
SOVEREIGN BALANCED FUND 9
<PAGE>
SOVEREIGN INVESTORS FUND
REGISTRANT NAME: JOHN HANCOCK SOVEREIGN INVESTORS FUND, INC.
TICKER SYMBOL CLASS A: SOVIX CLASS B:SOVBX
- -------------------------------------------------------------------------------
GOAL AND STRATEGY
[LOGO]The fund seeks long-term growth of capital and of income without assuming
undue market risks. Under normal circumstances, the fund invests most of its
assets in a diversified selection of stocks, although it may respond to market
conditions by investing in other types of securities such as bonds or short-term
securities. The fund may not invest more than 25% of assets in any one industry.
Currently, the fund utilizes a "dividend performers" strategy in selecting
portfolio stocks, investing exclusively in companies that have increased their
dividend payout in each of the last ten years.
PORTFOLIO SECURITIES
[LOGO]The fund may invest in most types of securities, including:
* common and preferred stocks, warrants and convertible securities
* U.S. Government and agency debt securities, including mortgage-backed
securities
* corporate bonds, notes and other debt securities of any maturity
The fund's bond investments are primarily investment-grade, although up to 5% of
assets may be invested in junk bonds rated as low as C and their unrated
equivalents. To a limited extent the fund may invest in certain higher-risk
securities, and may engage in other investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[LOGO]As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements.
To the extent that the fund invests in higher-risk securities, it takes on
additional risks that could adversely affect its performance. Before you invest,
please read "More about risk" starting on page 26.
MANAGEMENT/SUBADVISER
[LOGO]John F. Snyder III and Barry H. Evans lead the fund's portfolio management
team. Mr. Snyder, an investment manager since 1971, is an executive vice
president of Sovereign Asset Management Corporation, the fund's subadviser and a
subsidiary of John Hancock Funds. Mr. Evans, a senior vice president of the
adviser, has been in the investment business since joining John Hancock Funds in
1986.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<CAPTION>
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------
Management fee(3) 0.58% 0.58%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.28% 0.34%
Total fund operating expenses 1.16% 1.92%
</TABLE>
<TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- -------------------------------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $61 $85 $111 $184
Class B shares
Assuming redemption
at end of period $70 $90 $124 $205
Assuming no redemption $20 $60 $104 $205
- ----------
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Management fee includes a subadviser fee equal to 40% of the management
fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
10 SOVEREIGN INVESTORS FUND
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[LOGO]The figures below have been audited by the fund's independent auditors,
Ernst & Young LLP.
VOLATILITY, AS INDICATED BY CLASS A [BAR CHART
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) 21.70 0.28 11.23 23.76 4.38 30.48 7.23 5.71 (1.85) 29.15
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED DECEMBER 31, 1986(1,2) 1987(1) 1988(1) 1989(1) 1990(1) 1991(1,3) 1992(1) 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <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 $ 14.31 $ 14.78 $ 15.10 $ 14.24
Net investment income (loss) 0.58 0.53 0.57 0.59 0.58 0.54 0.47 0.44 0.46 0.40
Net realized and unrealized gain (loss)
on investments 1.89 (0.45) 0.65 2.01 (0.05) 3.03 0.54 0.39 (0.75) 3.71
Total from investment operations 2.47 0.08 1.22 2.60 0.53 3.57 1.01 0.83 (0.29) 4.11
Less distributions:
Dividends from net investment income (0.55) (0.58) (0.61) (0.61) (0.59) (0.53) (0.45) (0.42) (0.46) (0.40)
Distributions from net realized gain
on investments sold (0.87) (0.90) (0.38) (0.58) (0.60) (0.67) (0.09) (0.09) (0.11) (0.08)
Total distributions (1.42) (1.48) (0.99) (1.19) (1.19) (1.20) (0.54) (0.51) (0.57) (0.48)
Net asset value, end of period $12.36 $10.96 $11.19 $12.60 $11.94 $ 14.31 $ 14.78 $ 15.10 $ 14.24 $ 17.87
TOTAL INVESTMENT RETURN AT NET
ASSET VALUE(4) (%) 21.70 0.28 11.23 23.76 4.38 30.48 7.23 5.71 (1.85) 29.15
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(000s omitted) ($) 34,708 40,564 45,861 66,466 83,470 194,055 872,932 1,258,575 1,090,231 1,280,321
Ratio of expenses to average
net assets (%) 0.70 0.85 0.86 1.07 1.14 1.18 1.13 1.10 1.16 1.14
Ratio of net investment income
(loss) to average net assets (%) 4.28 3.96 4.97 4.80 4.77 4.01 3.32 2.94 3.13 2.45
Portfolio turnover rate (%) 34 59 35 40 55 67 30 46 45 46
Average brokerage commission rate(5) ($) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B - YEAR ENDED DECEMBER 31, 1994(6) 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.02 $ 14.24
Net investment income (loss) 0.38 (7) 0.27(7)
Net realized and unrealized gain (loss) on investment (0.69) 3.71
Total from investment operations (0.31) 3.98
Less distributions:
Dividends from net investment income (0.36) (0.28)
Distributions from net realized gain on investments sold (0.11) (0.08)
Total distributions (0.47) (0.36)
Net asset value, end of period $ 14.24 $ 17.86
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) (2.04)(8) 28.16
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 128,069 257,781
Ratio of expenses to average net assets (%) 1.86(9) 1.90
Ratio of net investment income (loss) to average net assets (%) 2.57(9) 1.65
Portfolio turnover rate (%) 45 46
Average brokerage commission rate(5) ($) N/A N/A
- ----------
(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 commenced 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.
</TABLE>
SOVEREIGN INVESTORS FUND 11
<PAGE>
SPECIAL VALUE FUND
REGISTRANT NAME: JOHN HANCOCK CAPITAL SERIES TICKER SYMBOL CLASS A: SPVAX
CLASS B: SPVBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[GOAL GRAPHIC]The fund seeks capital appreciation, with income as a secondary
consideration. To pursue this goal, the fund invests primarily in stocks that
appear comparatively undervalued and are out of favor. The fund looks for
companies of any size whose earnings power or asset value does not appear to be
reflected in the current stock price, and whose stocks thus have potential for
appreciation. The fund also takes a "margin of safety" approach, seeking those
stocks that are believed to have limited downside risk. The fund may not invest
more than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[PORTFOLIO GRAPHIC]The fund invests primarily in the common stocks of U.S.
companies. It may also invest in warrants, preferred stocks and convertible
securities.
The fund may invest up to 50% of assets in foreign securities (including
American Depository Receipts), and under normal circumstances may invest up to
10% of net assets in investment-grade debt securities. To a limited extent the
fund also may invest in certain higher-risk securities and may engage in other
investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[RISK GRAPHIC]As with any growth and income fund, the value of your investment
will fluctuate. Even comparatively undervalued stocks typically fall in price
during broad market declines. Small- and medium-sized company stocks, which may
comprise a portion of the fund's portfolio, tend to be more volatile than the
market as a whole.
To the extent that it invests in foreign securities, the fund may be affected by
additional risks, such as currency, information, natural event and political
risks. These risks are defined in "More about risk" starting on page 26. This
section also details other higher-risk securities and practices that the fund
may utilize. Please read "More about risk" carefully before you invest.
PORTFOLIO MANAGEMENT
[TORSO GRAPHIC]Timothy E. Keefe, leader of the fund's portfolio management team
since August 1996, is a senior vice president of the adviser. He joined John
Hancock Funds in July 1996 and has been in the investment business since 1987.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
[% GRAPHIC]Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<CAPTION>
- ---------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- ---------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
- ---------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- ---------------------------------------------------------------
<S> <C> <C>
Management fee (after expense
limitation)(3,4) 0.00% 0.00%
12b-1 fee(5) 0.30% 1.00%
Other expenses (after limitation)(3) 0.71% 0.71%
Total fund operating expenses
(after limitation)(3) 1.01% 1.71%
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- -----------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $60 $81 $103 $167
Class B shares
Assuming redemption
at end of period $67 $84 $113 $183
Assuming no redemption $17 $54 $ 93 $183
This example is for comparison purposes only and is not a representation of
the fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses (except for
12b-1 and transfer agent expenses). Without this limitation, management fees
would be 0.70% for each class, other expenses would be 0.90% for each class,
and total fund operating expenses would be 1.90% for Class A and 2.60% for
Class B.
(4) Includes a subadviser fee equal to 0.40% of the management fee.
(5) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
12 SPECIAL VALUE FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[$ GRAPHIC]The figures below have been audited
by the fund's independent auditors,
Ernst & Young LLP.
VOLATILITY, AS INDICATED BY CLASS A [BAR GRAPH]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) 7.81(4) 20.26
<CAPTION>
- --------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED DECEMBER 31, 1994(1) 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.50 $ 8.99
Net investment income (loss) 0.18(2) 0.21(2)
Net realized and unrealized gain (loss) on investments 0.48 1.60
Total from investment operations 0.66 1.81
Less distributions:
Dividends from net investment income (0.17) (0.20)
Distributions from net realized gain on investments sold -- (0.21)
Total distributions (0.17) (0.41)
Net asset value, end of period $ 8.99 $ 10.39
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 7.81(4) 20.26
Total adjusted investment return at net asset value(3,5) (%) 7.30(4) 19.39
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 4,420 12,845
Ratio of expenses to average net assets (%) 0.99(6) 0.98
Ratio of adjusted expenses to average net assets(7) (%) 4.98(6) 1.85
Ratio of net investment income (loss) to average net assets (%) 2.10(6) 2.04
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) (1.89)(6) 1.17
Portfolio turnover rate (%) 0.3 9
Fee reduction per share ($) 0.34(2) 0.09(2)
Average brokerage commission rate(8) ($) N/A N/A
<CAPTION>
- --------------------------------------------------------------------------------------------
CLASS B - YEAR ENDED DECEMBER 31, 1994(1) 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.50 $ 9.00
Net investment income (loss) 0.13(2) 0.12(2)
Net realized and unrealized gain (loss) on investments 0.48 1.59
Total from investment operations 0.61 1.71
Less distributions:
Dividends from net investment income (0.11) (0.12)
Distributions from net realized gain on investments sold -- (0.21)
Total distributions (0.11) (0.33)
Net asset value, end of period $ 9.00 $ 10.38
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 7.15(4) 19.11
Total adjusted investment return at net asset value(3,5) (%) 6.64(4) 18.24
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 3,296 16,994
Ratio of expenses to average net assets (%) 1.72(6) 1.73
Ratio of adjusted expenses to average net assets(7) (%) 5.71(6) 2.60
Ratio of net investment income (loss) to average net assets (%) 1.53(6) 1.21
Ratio of adjusted net investment income (loss) to average net
assets(7) (%) (2.46)(6) 0.34
Portfolio turnover rate (%) 0.3 9
Fee reduction per share ($) 0.34(2) 0.09(2)
Average brokerage commission rate(8) ($) N/A N/A
(1) Class A and Class B shares commenced operations on January 3, 1994.
(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.
</TABLE>
SPECIAL VALUE FUND 13
<PAGE>
UTILITIES FUND
REGISTRANT NAME: JOHN HANCOCK CAPITAL SERIES
TICKER SYMBOL CLASS A: JHUAX CLASS B: JHUBX
- -------------------------------------------------------------------------------
GOAL AND STRATEGY
[LOGO]The fund seeks current income and, to the extent consistent with this
goal, growth of income and long-term growth of capital. To pursue this goal, the
fund invests primarily in public utilities companies, such as those whose
principal business involves the generation, handling or sale of electricity,
natural gas, water, waste management services or non-broadcast
telecommunications services. Under normal circumstances, the fund will invest at
least 65% of assets in these companies. The fund may invest in other industries
if fund management believes it would help the fund meet its goal.
PORTFOLIO SECURITIES
[LOGO]The fund invests primarily in the common stocks of U.S. and foreign
companies. It may also invest in warrants, preferred stocks and convertible
securities.
Foreign securities (including American Depository Receipts) and investment-grade
debt securities may each comprise up to 25% of portfolio investments. To a
limited extent the fund also may invest in certain higher-risk securities, and
may engage in other investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[LOGO]As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements. Because the fund
concentrates on a narrow segment of the economy, its performance is largely
dependent on that segment's performance. Utilities stocks may be adversely
affected by numerous factors, including government regulation and deregulation,
environmental issues, competition and rising interest rates.
To the extent that it invests in foreign securities, the fund may be affected by
additional risks such as currency, information, natural event and political
risks. These risks are defined in "More about risk" starting on page 26. This
section also details other higher-risk securities and practices that the fund
may utilize. Please read "More about risk" carefully before you invest.
PORTFOLIO MANAGEMENT
[LOGO]Gregory K. Phelps, leader of the fund's portfolio management team since
April 1996, is a vice president of the adviser. He joined John Hancock Funds in
January 1995 and has been in the investment business since 1981.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
[LOGO]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<CAPTION>
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.26% 0.26%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.49% 0.49%
Total fund operating expenses (after limitation)(3) 1.05% 1.75%
</TABLE>
<TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- -------------------------------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $60 $82 $105 $172
Class B shares
Assuming redemption
at end of period $68 $85 $115 $188
Assuming no redemption $18 $55 $ 95 $188
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
- ----------
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses (except for
12b-1 and transfer agent expenses). Without this limitation, management
fees would be 0.70% for each class and total fund operating expenses would
be 1.49% for Class A and 2.19% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
14 UTILITIES FUND
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
[LOGO]The figures below have been audited by the fund's independent auditors,
Price Waterhouse LLP.
<CAPTION>
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART 2.82(4) 7.10 14.44]
- ------------------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED MAY 31, 1994(1) 1995 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.50 $ 8.26 $ 8.48
Net investment income (loss) 0.12 (2) 0.44(2) 0.41(2)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.36) 0.12 0.79
Total from investment operations (0.24) 0.56 1.20
Less distributions:
Dividends from net investment income -- (0.34) (0.41)
Distributions from net realized gains on investments sold -- -- (0.10)
Total distributions -- (0.34) (0.51)
Net asset value, end of period $ 8.26 $ 8.48 $ 9.17
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) (2.82)(4) 7.10 14.44
Total adjusted investment return at net asset value(3,5) (13.89)(4) 6.44 14.01
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 781 19,229 22,574
Ratio of expenses to average net assets (%) 1.00 (6) 1.04 1.04
Ratio of adjusted expenses to average net assets(7) (%) 12.07 (6) 1.70 1.47
Ratio of net investment income (loss) to average net assets (%) 4.53 (6) 5.39 4.49
Ratio of adjusted net investment income (loss) to average
net assets(7)(%) (6.54)(6) 4.73 4.06
Portfolio turnover rate (%) 6 98 124
Fee reduction per share ($) 0.27 (2) 0.05(2) 0.04(2)
Average brokerage commission rate(8) ($) N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
CLASS B - YEAR ENDED MAY 31, 1994(1) 1995 1996
- ------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 8.50 $ 8.25 $ 8.45
Net investment income (loss) 0.08 (2) 0.38(2) 0.34(2)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.33) 0.12 0.79
Total from investment operations (0.25) 0.50 1.13
Less distributions:
Dividends from net investment income -- (0.30) (0.34)
Distributions from net realized gains on investments sold -- -- (0.10)
Total distributions -- (0.30) (0.44)
Net asset value, end of period $ 8.25 $ 8.45 $ 9.14
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) (2.94)(4) 6.31 13.68
Total adjusted investment return at net asset value(3,5) (14.01)(4) 5.65 13.25
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 445 38,344 47,759
Ratio of expenses to average net assets (%) 1.72 (6) 1.71 1.77
Ratio of adjusted expenses to average net assets(7) (%) 12.79 (6) 2.37 2.20
Ratio of net investment income (loss) to average net assets (%) 4.20 (6) 4.64 3.77
Ratio of adjusted net investment income (loss) to average
net assets(7)(%) (6.87)(6) 3.98 3.34
Portfolio turnover rate (%) 6 98 124
Fee reduction per share ($) 0.27 (2) 0.05(2) 0.04(2)
Average brokerage commission rate(8) ($) N/A N/A N/A
- ----------
(1) Class A and Class B shares commenced operations on February 1, 1994.
(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.
</TABLE>
UTILITIES FUND 15
<PAGE>
YOUR ACCOUNT
- -------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock growth and income funds offer two classes of shares, Class A
and Class B. Each class has its own cost structure, allowing you to choose the
one that best meets your requirements. Your financial representative can help
you decide.
- -------------------------------------------------------------------------------
CLASS A CLASS B
- -------------------------------------------------------------------------------
* Front-end sales charges, as * No front-end sales charge;
described below. There are all your money goes to work
several ways to reduce these for you right away.
charges, also described below.
* Higher annual expenses than
* Lower annual expenses than Class A shares.
Class B shares.
* A deferred sales charge on
shares you sell within six years
of purchase, as described below.
* Automatic conversion to Class A
shares after eight years, thus
reducing future annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
Sovereign Investors Fund offers Class C shares, which have their own expense
structure and are available to financial institutions only. Call Investor
Services for more information (see the back cover of this prospectus).
- -------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
<TABLE>
CLASS A Sales charges are as follows:
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A SALES CHARGES
- -------------------------------------------------------------------------------
AS A % OF AS A % OF YOUR
YOUR INVESTMENT OFFERING PRICE INVESTMENT
<S> <C> <C>
Up to $49,999 5.00% 5.26%
$50,000 - $99,999 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
</TABLE>
<TABLE>
INVESTMENTS OF $1 MILLION OR MORE Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
<CAPTION>
- -------------------------------------------------------------------------------
CDSC ON $1 MILLION + INVESTMENTS
- -------------------------------------------------------------------------------
YOUR INVESTMENT CDSC ON SHARES BEING SOLD
<S> <C>
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the last day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
<TABLE>
CLASS B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within six years of buying them. There is no CDSC on
shares acquired through reinvestment of dividends. The CDSC is based on the
original purchase cost or the current market value of the shares being sold,
whichever is less. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
<CAPTION>
- -------------------------------------------------------------------------------
Class B deferred charges
- -------------------------------------------------------------------------------
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
<S> <C>
1st year 5.00%
2nd year 4.00%
3rd or 4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6 years None
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the first day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
16 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCING YOUR CLASS A SALES CHARGES There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
* Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge.
* Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
* Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Investor Services to add these options.
GROUP INVESTMENT PROGRAM Allows established groups of four or more investors to
invest as a group. Each investor has an individual account, but for sales charge
purposes the group's investments are lumped together, making the investors
potentially eligible for reduced sales charges. There is no charge, no
obligation to invest (although initial aggregate investments must be at least
$250) and you may terminate the program at any time.
To utilize: contact your financial representative or Investor Services to find
out how to qualify.
CDSC WAIVERS As long as Investor Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases:
* to make payments through certain systematic withdrawal plans
* to make certain distributions from a retirement plan
* because of shareholder death or disability
To utilize: If you think you may be eligible for a CDSC waiver, contact your
financial representative or Investor Services, or consult the SAI (see the back
cover of this prospectus).
REINSTATEMENT PRIVILEGE If you sell shares of a John Hancock fund, you may
invest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge. If you paid a CDSC when you sold
your shares, you will be credited with the amount of the CDSC. All accounts
involved must have the same registration.
To utilize: contact your financial representative or Investor Services.
WAIVERS FOR CERTAIN INVESTORS Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
* government entities that are prohibited from paying mutual fund sales charges
* financial institutions or common trust funds investing $1 million or more for
non-discretionary accounts
* selling brokers and their employees and sales representatives
* financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
* fund trustees and other individuals who are affiliated with these or other
John Hancock funds
* individuals transferring assets to a John Hancock growth fund from an
employee benefit plan that has John Hancock funds
* members of an approved affinity group financial services program
* certain insurance company contract holders (one-year CDSC usually applies)
* participants in certain retirement plans with at least 100 members (one-year
CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Investor Services or consult the SAI.
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
* non-retirement account: $1,000
* retirement account: $250
* group investments: $250
* Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest
at least $25 a month
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Investor Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges section of the
application. By applying for privileges now, you can avoid the delay and
inconvenience of having to file an additional application if you want to add
privileges later.
5 Make your initial investment using the table on the next page. You can
initiate any purchase, exchange or sale of shares through your financial
representative.
YOUR ACCOUNT 17
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
BUYING SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
BY CHECK
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[GRAPHIC: a check]
* Make out a check for the investment amount, payable * Make out a check for the investment amount payable
to "John Hancock Investor Services Corporation." to "John Hancock Investor Services Corporation."
* Deliver the check and your completed application to * Fill out the detachable investment slip from an account
your financial representative, or mail them to Investor statement. If no slip is available, include a note specifying
Services (address on next page). the fund name, your share class, your account number
and the name(s) in which the account is registered.
* Deliver the check and your investment slip or note to
your financial representative, or mail them to Investor
Services (address on next page).
- ---------------------------------------------------------------------------------------------------------------------------------
BY EXCHANGE
- ---------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC: two arrows]
* Call your financial representative or Investor Services * Call Investor Services to request an exchange.
to request an exchange.
- ---------------------------------------------------------------------------------------------------------------------------------
BY WIRE
- ---------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC: an arrow]
* Deliver your completed application to your financial * Instruct your bank to wire the amount of your
representative, or mail it to Investor Services. investment to:
First Signature Bank & Trust
* Obtain your account number by calling your financial Account # 900000260
representative or Investor Services. Routing # 211475000
Specify the fund name, your share class, your account
* Instruct your bank to wire the amount of your number and the name(s) in which the account is
investment to: registered. Your bank may charge a fee to wire funds.
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your choice of share class, the
new account number and the name(s) in which the account
is registered. Your bank may charge a fee to wire funds.
- ---------------------------------------------------------------------------------------------------------------------------------
BY PHONE
- ---------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC: a telephone]
See "By wire" and "By exchange." * Verify that your bank or credit union is a member of
the Automated Clearing House (ACH) system.
* Complete the "Invest-By-Phone" and "Bank Information"
sections on your account application.
* Call Investor Services to verify that these features
are in place on your account.
* Tell the Investor Services representative the fund name,
your share class, your account number, the name(s) in
which the account is registered and the amount of your
investment.
</TABLE>
To open or add to an account using the Monthly Automatic Accumulation
Program, see "Additional investor services."
18 YOUR ACCOUNT
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------
SELLING SHARES
- ------------------------------------------------------------------------------------------------------
<CAPTION>
DESIGNED FOR TO SELL SOME OR ALL OF YOUR SHARES
- ------------------------------------------------------------------------------------------------------
BY LETTER
- ------------------------------------------------------------------------------------------------------
<S> <C>
[GRAPHIC: a business envelope]
* Accounts of any type. * Write a letter of instruction or complete a stock power
indicating the fund name, your share class, your account
* Sales of any amount. number, the name(s) in which the account is registered
and the dollar value or number of shares you wish to sell.
* Include all signatures and any additional documents
that may be required (see next page).
* Mail the materials to Investor Services.
* A check will be mailed to the name(s) and address in
which the account is registered, or otherwise according
to your letter of instruction.
- ------------------------------------------------------------------------------------------------------
BY PHONE
- ------------------------------------------------------------------------------------------------------
[GRAPHIC: a telephone]
* Most accounts. * For automated service 24 hours a day using
your touch-tone phone, call the EASI-Line at
* Sales of up to $100,000. 1-800-338-8080.
* To place your order with a representative at John Hancock
Funds, call Investor Services between 8 a.m. and 4 p.m. on
most business days.
- ------------------------------------------------------------------------------------------------------
BY WIRE OR ELECTRONIC FUNDS TRANSFER (EFT)
- ------------------------------------------------------------------------------------------------------
[GRAPHIC: an arrow]
* Requests by letter to sell any * Fill out the "Telephone Redemption" section of your
amount (accounts of any type). new account application.
* Requests by phone to sell up to * To verify that the telephone redemption privilege is in
$100,000 (accounts with telephone place on an account, or to request the forms to add it
redemption privileges). to an existing account, call Investor Services.
* Amounts of $1,000 or more will be wired on the next
business day. A $4 fee will be deducted from your
account.
* Amounts of less than $1,000 may be sent by EFT or by
check. Funds from EFT transactions are generally
available by the second business day. Your bank may
charge a fee for this service.
- ------------------------------------------------------------------------------------------------------
BY EXCHANGE
- ------------------------------------------------------------------------------------------------------
[GRAPHIC: two arrows]
* Accounts of any type. * Obtain a current prospectus for the fund into which
you are exchanging by calling your financial
* Sales of any amount. representative or Investor Services.
* Call Investor Services to request an exchange.
</TABLE>
- -------------------------------------------
ADDRESS
John Hancock Investor Services Corporation
P.O. Box 9116 Boston, MA 02205-9116
PHONE
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- -------------------------------------------
To sell shares through a systematic withdrawal plan,
see "Additional investor services."
YOUR ACCOUNT 19
<PAGE>
SELLING SHARES IN WRITING In certain circumstances, you will need to make
your request to sell shares in writing. You may need to include additional
items with your request, as shown in the table below. You may also need to
include a signature guarantee, which protects you against fraudulent orders.
You will need a signature guarantee if:
* your address of record has changed within the past 30 days
* you are selling more than $100,000 worth of shares
* you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
* a broker or securities dealer
* a federal savings, cooperative or other type of bank
* a savings and loan or other thrift institution
* a credit union
* a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
SELLER REQUIREMENTS FOR WRITTEN REQUESTS [GRAPHIC: Envelope]
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Owners of individual, joint, sole proprietorship, UGMA/UTMA * Letter of instruction.
(custodial accounts for minors) or general partner accounts.
* On the letter, the signatures and titles of all persons
authorized to sign for the account, exactly as the account
is registered.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Owners of corporate or association accounts. * Letter of instruction.
* Corporate resolution, certified within the past 90 days
* On the letter and the resolution, the signature of the
person(s) authorized to sign for the account.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Owners or trustees of trust accounts. * Letter of instruction.
* On the letter, the signature(s) of the trustee(s).
* If the names of all trustees are not registered on the account,
please also provide a copy of the trust document certified
within the past 60 days.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Joint tenancy shareholders whose co-tenants are deceased. * Letter of instruction signed by surviving tenant.
* Copy of death certificate.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Executors of shareholder estates. * Letter of instruction signed by executor.
* Copy of order appointing executor.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Administrators, conservators, guardians and other sellers or * Call 1-800-225-5291 for instructions.
account types not listed above.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (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.
BUY AND SELL PRICES When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
EXECUTION OF REQUESTS Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Investor Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
TELEPHONE TRANSACTIONS For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Investor Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, Investor Services is
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
EXCHANGES You may exchange shares of your John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
Class B shares will continue to age from the original date and will retain the
same CDSC rate as they had before the exchange, except that the rate will change
to that of the new fund if the new fund's rate is higher. A CDSC rate that has
increased will drop again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may change or cancel its exchange
privilege at any time, upon 60 days' notice to its shareholders. A fund may also
refuse any exchange order.
CERTIFICATED SHARES Most shares are electronically recorded. If you wish to
have certificates for your shares, please write to Investor Services.
Certificated shares can only be sold by returning the certificates to Investor
Services, along with a letter of instruction or a stock power and a signature
guarantee.
SALES IN ADVANCE OF PURCHASE PAYMENTS When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten calendar days after
the purchase.
ELIGIBILITY BY STATE You may only invest in, or exchange into, fund shares
legally available in your state.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
ACCOUNT STATEMENTS In general, you will receive account statements as follows:
* after every transaction (except a dividend reinvestment) that affects your
account balance
* after any changes of name or address of the registered owner(s)
* in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS The funds generally distribute most or all of their net earnings in
the form of dividends.Income dividends are typically paid quarterly, and capital
gains dividends, if any, are typically paid annually.
YOUR ACCOUNT 21
<PAGE>
DIVIDEND REINVESTMENTS Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or
if you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
TAXABILITY OF DIVIDENDS As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past
and intends to in the future, it pays no federal income tax on the earnings
it distributes to shareholders.
Consequently, dividends you receive from a fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction for a portion of certain dividends they receive.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
TAXABILITY OF TRANSACTIONS Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the
sale price of the shares you sell or exchange, you may have a gain or a loss
on the transaction. You are responsible for any tax liabilities generated by
your transactions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Investor Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and
you can terminate your program at any time. To establish:
* Complete the appropriate parts of your account application.
* If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Investor Services
Corporation." Deliver your check and application to your financial
representative or Investor Services.
SYSTEMATIC WITHDRAWAL PLAN This plan may be used for routine bill payment or
periodic withdrawals from your account. To establish:
* Make sure you have at least $5,000 worth of shares in your account.
* Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
* Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they are
all on the same payment schedule.
* Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
* Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Investor Services.
RETIREMENT PLANS John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, SARSEPs, 401(k) plans, 403(b) plans (including
TSAs) and other pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund with a low minimum investment of $250 or, for
some group plans, no minimum investment at all. To find out more, call
Investor Services at 1-800-225-5291.
22 YOUR ACCOUNT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
HOW THE FUNDS ARE ORGANIZED Each John Hancock growth and income fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees or a board of directors, an
independent body that has ultimate responsibility for the fund's activities. The
board retains various companies to carry out the fund's operations, including
the investment adviser, custodian, transfer agent and others (see diagram). The
board has the right, and the obligation, to terminate the fund's relationship
with any of these companies and to retain a different company if the board
believes it is in the shareholders' best interests.
[A flow chart that contains 8 rectangular-shaped boxes and illustrates the
hierachy of how the funds are organized. Within the flowchart, there are 5
tiers. The tiers are connected by shaded lines.
Shareholders represent the first tier. There is a shaded vertical arrow on the
left-hand side of the page. The arrow has arrowheads on both ends and is
contained within two horizontal, shaded lines. This is meant to highlight tiers
two and three which focus on Distribution and Shareholder Services.
Financial Services Firms and their Representatives are shown on the second tier.
Principal Distributor and Transfer Agent are shown on the third tier.
A shaded vertical arrow on the right-hand side of the page denotes those
entities involved in the Asset Management. The arrow has arrowheads on both ends
and is contained within two horizontal, shaded lines. This fourth tier includes
the Subadvisor, Investment Advisor and the Custodian.
The fifth tier contains the Trustees/Directors.]
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock growth and income funds
may include individuals who are affiliated with the investment adviser. However,
the majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
FUND DETAILS 23
<PAGE>
ACCOUNTING COMPENSATION The funds compensate the adviser for performing tax
and financial management services. Annual compensation for 1996 will not
exceed 0.02% of each fund's average net assets.
PORTFOLIO TRADES In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock
Mutual Life Insurance Company, but only when the adviser believes no other
firm offers a better combination of quality execution (i.e., timeliness and
completeness) and favorable price.
INVESTMENT GOALS Except for Growth and Income Fund, Sovereign Balanced Fund
and Utilities Fund, each fund's investment goal is fundamental and may only
be changed with shareholder approval.
DIVERSIFICATION All of the growth and income funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock
Funds, pay compensation to financial services firms that sell the funds'
shares. These firms typically pass along a portion of this compensation to
your financial representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the fund in assets ("12b-1" refers to the
federal securities regulation authorizing annual fees of this type). The 12b-1
fee rates vary by fund and by share class, according to Rule 12b-1 plans adopted
by the funds' respective boards. The sales charges and 12b-1 fees paid by
investors are detailed in the fund-by-fund information. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
<TABLE>
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
- --------------------------------------------------------------------------------
CLASS B UNREIMBURSED DISTRIBUTION EXPENSES(1)
- --------------------------------------------------------------------------------
<CAPTION>
UNREIMBURSED AS A % OF
FUND EXPENSES NET ASSETS
<S> <C> <C>
Growth and Income $3,463,988 3.15%
- --------------------------------------------------------------------------------
Independence Equity $ 227,836 4.18%
- --------------------------------------------------------------------------------
Sovereign Balanced $3,097,061 3.72%
- --------------------------------------------------------------------------------
Sovereign Investors $1,907,573 1.00%
- --------------------------------------------------------------------------------
Special Value $ 807,110 7.50%
- --------------------------------------------------------------------------------
Utilities $1,584,645 3.41%
- --------------------------------------------------------------------------------
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
</TABLE>
INITIAL COMPENSATION Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
ANNUAL COMPENSATION Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears. Firms affiliated
with John Hancock, which include Tucker Anthony, Sutro & Company and John
Hancock Distributors, may receive an additional fee of up to 0.05% a year of
their total eligible net assets.
To compensate for continuing services, John Hancock Funds will pay Merrill
Lynch, Pierce, Fenner & Smith, Inc. an annual fee equal to 0.15% of the value of
Class A shares held by its customers for more than four years.
24 FUND DETAILS
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM
SALES CHARGE REALLOWANCE FIRST YEAR MAXIMUM
PAID BY INVESTORS OR COMMISSION SERVICE FEE TOTAL COMPENSATION(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Up to $49,999 5.00% 4.01% 0.25% 4.25%
- ---------------------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 4.50% 3.51% 0.25% 3.75%
- ---------------------------------------------------------------------------------------------------------------------------------
$100,000 - $249,999 3.50% 2.61% 0.25% 2.85%
- ---------------------------------------------------------------------------------------------------------------------------------
$250,000 - $499,999 2.50% 1.86% 0.25% 2.10%
- ---------------------------------------------------------------------------------------------------------------------------------
$500,000 - $999,999 2.00% 1.36% 0.25% 1.60%
- ---------------------------------------------------------------------------------------------------------------------------------
REGULAR INVESTMENTS OF
$1 MILLION OR MORE
- ---------------------------------------------------------------------------------------------------------------------------------
First $1M - $4,999,999 - 0.75% 0.25% 1.00%
- ---------------------------------------------------------------------------------------------------------------------------------
Next $1 - $5M above that - 0.25% 0.25% 0.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Next $1 and more above that - 0.00% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------------------------
WAIVER INVESTMENTS(2) - 0.00% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM
REALLOWANCE FIRST YEAR MAXIMUM
OR COMMISSION SERVICE FEE TOTAL COMPENSATION
(% of offering price) (% of net investment) (% of offering price)
- ---------------------------------------------------------------------------------------------------------------------------------
All amounts 3.75% 0.25% 4.00%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percenta ges if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
</TABLE>
CDSC revenues collected by John Hancock Funds may be used to fund commission
payments when there is no initial sales charge.
FUND DETAILS 25
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. On the following page are brief descriptions
of these securities and practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the performance of a John
Hancock growth and income fund will be positive over any period of time.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the asset being hedged (hedging is the use of one
investment to offset the effects of another investment).
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK The risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment.
EXTENSION RISK The risk that an unexpected rise in interest rates will
extend the life of a mortgage-backed security beyond the expected prepayment
time, typically reducing the security's value.
INFORMATION RISK The risk that key information about a security or market is
inaccurate or unavailable.
INTEREST RATE RISK The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates
typically causes a fall in values, while a fall in rates typically causes a
rise in values.
LEVERAGE RISK Associated with securities or practices (such as borrowing)
that multiply small index or market movements into large changes in value.
* HEDGED When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the
fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
* SPECULATIVE To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
LIQUIDITY RISK The risk that certain securities may be difficult or
impossible to sell at the time and the price that the seller would like.
MANAGEMENT RISK The risk that a strategy used by a fund's management may
fail to produce the intended result. Common to all mutual funds.
MARKET RISK The risk that the market value of a security may move up and
down, sometimes rapidly and unpredictably. Common to all stocks and bonds and
the mutual funds that invest in them.
NATURAL EVENT RISK The risk of losses attributable to natural disasters,
crop failures and similar events.
OPPORTUNITY RISK The risk of missing out on an investment opportunity
because the assets necessary to take advantage of it are tied up in less
advantageous investments.
POLITICAL RISK The risk of losses directly attributable to government or
political actions of any sort.
PREPAYMENT RISK The risk that unanticipated prepayments may occur, reducing
the value of mortgage-backed securities.
VALUATION RISK The risk that a fund has valued certain of its securities at
a higher price than it can sell them for.
<TABLE>
- --------------------------------------------------------------------------------
ANALYSIS OF FUNDS WITH 5% OR MORE IN JUNK BONDS(1)
- --------------------------------------------------------------------------------
<CAPTION>
QUALITY RATING
(S&P/MOODY'S)(2) SOVEREIGN BALANCED FUND
<S> <C> <C>
AAA/Aaa 16.0%
INVESTMENT- AA/Aa 2.2%
GRADE BONDS A/A 6.8%
BBB/Baa 5.7%
- --------------------------------------------------------------------------------
BB/Ba 3.5%
B/B 5.3%
JUNK BONDS CCC/Caa 0.0%
CC/Ca 0.0%
C/C 0.0%
% OF PORTFOLIO IN BONDS 39.5%
- -- Rated by S&P or Moody's.
(1) Data as of fund's last fiscal year end.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
</TABLE>
26 FUND DETAILS
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
HIGHER-RISK SECURITIES AND PRACTICES
- ------------------------------------------------------------------------------------------------------------------------------------
This table shows each fund's investment limitations as a percentage of portfolio assets.
In each case the principal types of risk are listed (see previous page for definitions).
Numbers in this table show allowable usage only; for actual usage, consult the fund's
annual/semi-annual reports.
<CAPTION>
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
* No policy limitation on usage; fund may be using currently
@ Permitted, but has not typically been used GROWTH INDEPENDENCE SOVEREIGN SOVEREIGN SPECIAL
- - Not permitted AND INCOME EQUITY BALANCED INVESTORS VALUE UTILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENTS The borrowing of money
from banks or through reverse repurchase agreements. Leverage,
credit risks. 33.3 33.3 33 - 33.3 33.3
REPURCHASE AGREEMENTS The purchase of a security that must later
be sold back to the issuer at the same price plus interest.
Credit risk. * * * * * *
SECURITIES LENDING The lending of securities to financial
institutions, which provide cash or government securities as
collateral. Credit risk. 33 33.3 33.3 33.3 33.3 33.3
SHORT SALES The selling of securities which have been borrowed
on the expectation that the market price will drop.
* Hedged. Hedged leverage, market, correlation, liquidity,
opportunity risks. - @ @ @ @ @
* Speculative. Speculative leverage, market, liquidity risks. - @ - - @ -
SHORT-TERM TRADING Selling a security soon after purchase. A
portfolio engaging in short-term trading will have higher
turnover and transaction expenses. Market risk. * * * * * *
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Market, opportunity,
leverage risks. * * * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities rated
below BBB/Baa are considered junk bonds. Credit, market,
interest rate, liquidity, valuation and information risks. 5 - 25 5 - -
FOREIGN SECURITIES Securities issued by foreign companies,
as well as American or European depository receipts, which
are dollar-denominated securities typically issued by American
or European banks and are based on ownership of securities issued
by foreign companies. Market, currency, information, natural
event, political risks. 35 * 35 - 50 25
RESTRICTED AND ILLIQUID SECURITIES Securities not traded on the
open market. May include illiquid Rule 144A securities. Liquidity,
valuation, market risks. 10 15 15 15 15 15
- ------------------------------------------------------------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX OPTIONS
Contracts involving the right or obligation to deliver or
receive assets or money depending on the performance of one
or more assets or an economic index.
* Futures and related options. Interest rate, currency, market,
hedged or speculative leverage, correlation, liquidity,
opportunity risks. * @ * - * @
* Options on securities and indices. Interest rate, currency,
market, hedged or speculative leverage, correlation, liquidity,
credit, opportunity risks. 10(1) @ 5(1) 5(1) 5(1) @
CURRENCY CONTRACTS Contracts involving the right or obligation to
buy or sell a given amount of foreign currency at a specified
price and future date.
* Hedged. Currency, hedged leverage, correlation, liquidity,
opportunity risks. * - * - * *
* Speculative. Currency, speculative leverage, liquidity risks. - - - - - -
(1)Applies to purchased options only.
</TABLE>
FUND DETAILS 27
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
growth and income funds:
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/semi-annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference (is legally a part of this prospectus).
To request a free copy of the current annual/semi-annual report or the SAI,
please write or call:
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, MA 02205-9116
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
[LOGO] JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 Huntington Avenue
Boston, Massachusetts 02199-7603
[Copyright] 1996 John Hancock Funds, Inc.
GINPN 8/96
[LOGO]
JOHN HANCOCK
FINANCIAL SERVICES
<PAGE>
JOHN HANCOCK GROWTH AND INCOME FUND
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
August 30, 1996
This Statement of Additional Information ("SAI") 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 Fund's Prospectus, dated August 30, 1996 (the "Prospectus").
This SAI 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 02205-5291
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Trust............................................ 2
Certain Investment Practices......................................... 2
Investment Restrictions.............................................. 15
Those Responsible for Management..................................... 17
Investment Advisory and Other Services............................... 28
Distribution Contract................................................ 31
Net Asset Value...................................................... 33
Initial Sales Charge on Class A Shares............................... 34
Deferred Sales Charge on Class B Shares.............................. 37
Special Redemptions.................................................. 40
Additional Services and Programs..................................... 41
Description of the Fund's Shares..................................... 42
Tax Status........................................................... 44
Calculation of Performance........................................... 50
Brokerage Allocation................................................. 52
Transfer Agent Services.............................................. 54
Custody of Portfolio................................................. 55
Independent Auditors................................................. 55
Appendix A........................................................... 56
Financial Statements................................................. F-1
<PAGE>
ORGANIZATION OF THE TRUST
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.
CERTAIN INVESTMENT PRACTICES
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.
Purchases of Warrants. The Fund's investment policies permit the
purchase of rights and warrants, which represent rights to purchase the common
stock of companies at designated prices. 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 a warrant or right which is
not listed on the New York or American Stock Exchanges if the purchase would
result in the Fund's owning unlisted warrants in an amount exceeding 2% of its
net assets.
Lending of Portfolio Securities. The Fund may lend portfolio securities
to 2 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 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.
American Depository Receipts (ADRS) and European Depository Receipts
(EDRs). The Fund may invest in securities of non-U.S. issuers directly or in the
2
<PAGE>
form of American Depository Receipts (ADRs), European Depository Receipts (EDRs)
or other similar securities representing interests in the common stocks of
foreign issuers. ADRs are receipts, typically issued by a U.S. 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. Generally, ADRs, in registered form, are designed for use
in the U.S. securities markets and EDRs, in bearer form, are designed for use in
the European securities markets. The underlying securities are not always quoted
or denominated in the same currency as the ADRs or the EDRs.
Foreign Securities. The Fund may, as a matter of nonfundamental policy,
invest up to 25% (and up to 35% during times of adverse U.S. market conditions)
of its total assets in securities of foreign issuers, including debt and equity
securities of corporate and governmental issuers in countries with emerging
economies or securities markets.
Investing in securities of non-U.S. issuers, particularly securities of
issuers located in emerging countries, may entail greater risks than investing
in similar securities of U.S. issuers. These risks include (i) less social,
political and economic stability; (ii) the small current size of the markets for
many such securities and the currently low or nonexistent volume of trading,
which result in a lack of liquidity and in greater price volatility; (iii)
certain national policies which may restrict the Fund's investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; and (v) the
absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
Investing in securities of non-U.S. companies may entail additional
risks due to the potential political and economic instability of certain
countries and the risks of expropriation, nationalization, confiscation or the
imposition of restrictions on foreign investment and on repatriation of capital
invested. In the event of such expropriation, nationalization or other
confiscation by any country, the Fund could lose its entire investment in any
such country.
In addition, even though opportunities for investment may exist in
foreign countries, and in particular emerging markets, any change in the
leadership or policies of the governments of those countries or in the
leadership or policies of the governments of those countries or in the
leadership or policies of any other government which exercises a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
3
<PAGE>
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of Latin American countries previously
expropriated large quantities of real and personal property similar to the
property which may be represented by the securities purchased by the Fund. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by foreign securities
purchased by the Fund will not also be expropriated, nationalized, or otherwise
confiscated. If such confiscation were to occur, the Fund could lose a
substantial portion of its investments in such countries. The Fund's investments
may similarly be adversely affected by exchange control regulation in any of
those countries.
Certain countries in which the Fund may invest may have vocal
minorities that advocate radical religious or revolutionary philosophies or
support ethnic independence. Any disturbance on the part of such individuals
could carry the potential for widespread destruction or confiscation of property
owned by individuals and entities foreign to such country and could cause the
loss of the Fund's investment in those countries.
Certain countries prohibit or impose substantial restrictions on
investments in their capital markets by foreign entities such as the Fund. As
illustrations, certain countries require governmental approval prior to
investments by foreign persons, or limit the amount of investment by foreign
persons in a particular company, or limit the investment by foreign persons to
only a specific class of securities of a company that may have less advantageous
terms than securities of the company available for purchase by nationals.
Moreover, the national policies of certain countries may restrict investment
opportunities in issuers or industries deemed sensitive to national interests.
In addition, some countries require governmental approval for the repatriation
of investment income, capital or the proceeds of securities sales by foreign
investors. The Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental approval for repatriation, as well as by the
application to it of other restrictions on investments.
Foreign companies are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from those
applicable to U.S. companies. In particular, the assets, liabilities and profits
appearing on the financial statements of such a company may not reflect its
financial position or results of operations in the way they would be reflected
had such financial statements been prepared in accordance with U.S. generally
accepted accounting principles. Most foreign securities held by the Fund will
not be registered with the Securities and Exchange Commission (the "SEC") and
the issuers thereof will not be subject to the SEC's reporting requirements.
Thus, there will be less available information concerning foreign issuers of
securities held by the Fund than is available concerning U.S. issuers. In
instances where the financial statements of an issuer are not deemed to reflect
accurately the financial situation of the issuer, the Adviser will take
4
<PAGE>
appropriate steps to evaluate the proposed investment, which may include on-site
inspection of the issuer, interviews with its management and consultations with
accountants, bankers and other specialists. There is substantially less publicly
available information about foreign companies than there are reports and ratings
published about U.S. companies and the U.S. Government. In addition, where
public information is available, it may be less reliable than such information
regarding U.S. issuers.
Because the Fund may invest up to 25% (35% during times of adverse U.S.
market conditions) of its total assets in securities which are denominated or
quoted in foreign currencies, the strength or weakness of the U.S. dollar
against such currencies may account for part of the Fund's investment
performance. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of the Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in the Fund's net asset value and any net investment income and capital
gains to be distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.
Although the Fund values its assets daily in terms of U.S. dollars, the
Fund does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. However, the Fund may do so from time to time, and
investors should be aware of the costs of currency conversion. Although currency
dealers do not charge a fee for conversion, they do realize a profit based on
the difference ("spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to sell that currency to the dealer.
Securities of foreign issuers, and in particular many emerging country
issuers, may be less liquid and their prices more volatile than securities of
comparable U.S. issuers. In addition, foreign securities exchanges and brokers
are generally subject to less governmental supervision and regulation than in
the U.S., and foreign securities exchange transactions are usually subject to
fixed commissions, which are generally higher than negotiated commissions on
U.S. transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
5
<PAGE>
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
The Fund's investment income or, in some cases, capital gains from
foreign issuers may be subject to foreign withholding or other foreign taxes,
thereby reducing the Fund's net investment income and/or net realized capital
gains. See "Tax Status."
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
6
<PAGE>
SEC or commodities exchanges regulated by the Commodity Futures Trading
Commission.
Foreign Currency Transactions. Generally, 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. As a matter of nonfundamental policy, the Fund may also enter into
forward foreign currency exchange contracts involving currencies of the
different countries in which it may invest as a hedge against possible
variations in the foreign exchange rate between these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
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 requiring it to purchase
foreign currency, its custodian bank will segregate cash or liquid securities in
a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. Those
assets will be valued at market daily, and, if the value of the securities in
the separate account declines, additional cash or liquid securities will be
placed in the account so that the value of the account will be equal to the
amount of the Fund's commitment with respect to such contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for 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 Debt Obligations. The Fund's policies with
respect to fixed income securities are nonfundamental. The Fund's investment
objective effectively places limits on the quality of its investments in
7
<PAGE>
corporate fixed income securities. In general, the Fund's investments in such
securities will be limited to investment grade securities; that is, securities
rated at least Baa by Moody's Investors Service, Inc. ("Moody's") and BBB by
Standard & Poor's Ratings Group ("Standard & Poor's"). The Fund may purchase
securities rated lower than BBB or Baa only if, in the opinion of the Adviser,
the assigned rating does not accurately reflect the true quality of the issuer's
credit and these securities are determined to be comparable in quality to
investment grade securities; provided, that no more than 5% of the Fund's total
assets are invested in these securities. The Fund will not invest in any
securities rated lower than B by either Moody's or Standard & Poor's. The Fund
is not obligated to dispose of securities which are subsequently downgraded
below the minimum ratings described above. Ratings are based largely on the
historical financial condition of the issuer. Consequently, the rating assigned
to any particular security is not necessarily a reflection of the issuer's
current financial condition, which may be better or worse than the rating would
indicate. See Appendix A for a description of ratings assigned by Moody's and
Standard & Poor's.
The Fund may invest in unrated corporate fixed income securities only
where, in the opinion of the Adviser, these securities are determined to be
comparable in quality to investment grade securities.
Debt securities that are rated BBB or Baa or lower and unrated
securities can pose more risks and involve greater volatility of price and risk
of loss of principal and income than higher quality securities. These debt
securities are considered, to varying degrees, speculative in that change in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
quality securities. The high yield fixed income market is relatively new and its
growth occurred during a period of economic expansion. The market has not yet
been fully tested by an economic recession.
The market price and liquidity of lower rated fixed income securities
generally respond to short-term corporate and market developments to a greater
extent than the price and liquidity of higher rated securities, because these
developments are perceived to have a more direct relationship to the ability of
an issuer of lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield bond market or the
reduced availability of market quotations will make it more difficult to dispose
of these bonds and to value them accurately. The reduced availability of
reliable objective data may increase the Fund's reliance on management's
judgment in valuing high yield bonds. In addition, the Fund's investments in
such bonds may be susceptible to adverse publicity and investor perceptions,
whether or not justified by fundamental factors.
8
<PAGE>
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
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.
9
<PAGE>
Repurchase Agreements. In order to enhance liquidity or preserve
capital, the Fund may invest temporarily in repurchase agreements. A repurchase
agreement is a contract under which the Fund acquires a security for a
relatively short period (usually not more than seven days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). 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 and lack of access to income during this period, and 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 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 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 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
10
<PAGE>
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, if the difference is maintained by the Fund in cash or 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 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
11
<PAGE>
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.
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
12
<PAGE>
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
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
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<PAGE>
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.
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 higher transaction
expenses and may make it more difficult for the Fund to qualify as a regulated
investment company for Federal income tax purposes.
Restricted Securities. As a matter of nonfundamental policy, 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
14
<PAGE>
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 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.
As a matter of nonfundamental policy, 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 1933 Act. 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.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon
its investments as set forth below which may 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: (a) more than 50% of the outstanding shares of the Fund
or (b) 67% or more of the shares represented at a meeting where more than 50% of
the outstanding shares of the Fund are represented, whichever is less. Under
these restrictions, 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.
15
<PAGE>
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 "Certain
Investment Practices" above. In addition, the 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.
16
<PAGE>
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.
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.
As a nonfundamental restriction, 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.
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").
The following table sets forth the principal occupation or employment
of the Trustees during the past five years:
17
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation(s)
Name and Address with the Trust During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Trustee, Chairman and Chairman and Chief Executive
101 Huntington Avenue Chief Executive Officer, the Adviser and The
Boston, MA 02199 Officer(3)(4) Berkeley Financial Group ("The
October 1944 Berkeley 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).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
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<PAGE>
Position Held Principal Occupation(s)
Name and Address with the Trust During Past Five Years
- ---------------- -------------- ----------------------
James F. Carlin Trustee(1)(2) 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) and Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea
(until August 1992).
William H. Cunningham Trustee(1)(2) 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 for 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.
Harold R. Hiser, Jr. Trustee(1)(2) Executive Vice President,
Schering-Plough Corporation Schering-Plough Corporation
One Giralda Farms (pharmaceuticals) (retired 1996);
Madison, NJ 07940-1000 Director, ReCapital Corporation
October 1931 (reinsurance) (until 1995).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
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<PAGE>
Position Held Principal Occupation(s)
Name and Address with the Trust During Past Five Years
- ---------------- -------------- ----------------------
Charles F. Fretz Trustee(1)(2) Retired; self-employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Forster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Anne C. Hodsdon* President and President and Chief Operating
101 Huntington Avenue Trustee(3)(4) Officer, the Adviser; Executive
Boston, MA 02199 Vice President, the Adviser (until
April 1953 December 1994); Senior Vice
President, the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Charles L. Ladner Trustee(1)(2) Director, Energy North, Inc.
UGI Corporation (public utility holding
460 North Gulph Road company)(until 1992); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
February 1938 (holding company, public utilities,
LPGAS).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
20
<PAGE>
Position Held Principal Occupation(s)
Name and Address with the Trust During Past Five Years
- ---------------- -------------- ----------------------
Leo E. Linbeck, Jr. Trustee(1)(2) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
August 1934 company 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
Eastern Corporation (a diversified
energy company), Daniel Industries,
Inc. (manufacturer of gas measuring
products and energy related
equipment), GeoQuest International,
Inc. (a geophysical consulting
firm) (1980-1993); Director,
Greater Houston Partnership.
Patricia P. McCarter Trustee(1)(2) Director and Secretary, The
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer).
Malvern, PA 19355
May 1928
Steven R. Pruchansky Trustee(1)(2) Director and President, Mast
360 Horse Creek Drive, #208 Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust
(1982-1994); President, Maxwell
Building Corp. (until 1991).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
21
<PAGE>
Position Held Principal Occupation(s)
Name and Address with the Trust During Past Five Years
- ---------------- -------------- ----------------------
Richard S. Scipione* Trustee(3) General Counsel, John Hancock
John Hancock Place Mutual Life Insurance Company;
P.O. Box 111 Director, the Adviser, Advisers
Boston, MA 02199 International, John Hancock Funds,
August 1937 Investor Services, John 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(1)(2) Lieutenant General, USMC, Deputy
Rt. 1, Box 249 E Chief of Staff for Manpower and
Linden, VA 22642 Reserve Affairs, Headquarters
March 1933 Marine Corps; Commanding General
III Marine Expeditionary Force/3rd
Marine Division (retired 1991).
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
22
<PAGE>
Position Held Principal Occupation(s)
Name and Address with the Trust During Past Five Years
- ---------------- -------------- ----------------------
John P. Toolan Trustee(1)(2) Director, The Smith Barney Muni
13 Chadwell Place Bond Funds, The Smith Barney
Morristown, NJ 07960 Tax-Free Money Fund, Inc., Vantage
September 1930 Money 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 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).
</TABLE>
The executive officers of the Trust and their principal occupations
during the past five years are set forth below. Unless otherwise indicated, the
business address of each is 101 Huntington Avenue, Boston, Massachusetts 02199.
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
23
<PAGE>
<TABLE>
<CAPTION>
Position(s) held Principal Occupation(s)
Name and Date of Birth with Trust During Past 5 Years
- ---------------------- ---------- -------------------
<S> <C> <C>
Robert G. Freedman* Vice Chairman and Chief Vice Chairman and Chief Investment
July 1938 Investment Officer(4) Officer, the Adviser; President,
the Adviser (until December 1994).
James B. Little* Senior Vice President and Senior Vice President, the Adviser.
February 1935 Chief Financial Officer
James J. Stokowski* Vice President and Vice President, the Adviser.
November 1946 Treasurer
Susan S. Newton* Vice President and Vice President and Assistant
March 1950 Secretary Secretary, the Adviser.
John A. Morin* Vice President Vice President, the Adviser.
July 1950
</TABLE>
* An "interested person" of the Fund, as such term is defined in the 1940
Act.
(1) Member of the Audit Committee of the Trust.
(2) Member of the Committee on Administration of the Trust.
(3) Member of the Executive Committee of the Trust. The Executive Committee may
generally exercise most powers of the Trustees between regularly scheduled
meetings of the Board of Trustees.
(4) Member of the Investment Committee of the Adviser.
24
<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 May 17, 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. On such date, the following shareholder was the only record holder or
beneficial owner of 5% or more of the shares of either class of the Fund's
shares:
Percentage of
Name and Address Class Shares Outstanding Shares of
of Shareholder of Shares Owned Class of Fund
-------------- --------- ----- -------------
Merrill Lynch Pierce Class B 423,931 5.03%
Fenner & Smith, Inc.
4800 Deerlake Dr. East
Jacksonville, FL
32246-6484
On such date, no other person(s) owned of record or was known by the Trust to
beneficially own as much as 5% of the outstanding shares of the Trust or of
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.
25
<PAGE>
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 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 Board of 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.
26
<PAGE>
Aggregate Total Compensation from
Compensation all Funds in John Hancock
Trustees from the Fund+ Fund Complex to 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.
Aggregate Total Compensation from all
Compensation Funds in John Hancock Fund
Advisory Board* from the Fund Complex 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
27
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice
from the Adviser. Investors should refer to the Prospectus for a description of
certain information concerning the investment management contract. Each of the
Trustees and principal officers of the Trust who is also an affiliated person of
the Adviser is named above, together with the capacity in which such person is
affiliated with the Trust and the Adviser or TFMC (the Fund's prior investment
adviser).
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199- 7603, was organized in 1968 and currently has more than $18 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 a wholly- owned subsidiary of The Berkeley Financial Group, which
is in turn a wholly-owned subsidiary of John Hancock Subsidiaries, Inc., which
is in turn a wholly-owned subsidiary of the Life Company, one of the most
recognized and respected financial institutions in the nation. With total assets
under management of 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.
No person other than the Adviser and its directors and employees regularly
furnishes advice to the Fund with respect to the desirability of the Fund
investing in, purchasing or selling securities. The Adviser may from time to
time receive statistical or other similar factual information, and information
regarding general economic factors and trends, from the Life Company and its
affiliates.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund including, but not limited to, (i) the
fees of the Trustees of the Fund who are not "interested persons," as such term
is defined in the 1940 Act (the "Independent Trustees"), (ii) the fees of the
members of the Trust's Advisory Board (described above) and (iii) the continuous
public offering of the shares of the Fund are borne by the Fund. Subject to the
requirements imposed by the Internal Revenue Service on funds having a
28
<PAGE>
multiple-class structure, class expenses properly allocable to any Class A or
Class B shares will be borne exclusively by such class of shares.
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 voluntarily and temporarily 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.
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 applicable
contract.
The initial term of the investment management contract expires on December
22, 1996, and the contract will continue in effect from year to year thereafter
if approved annually by a vote of a majority of the Independent Trustees of the
Fund, cast in person at a meeting called for the purpose of voting on such
approval, and by either a majority of the Trustees or the holders of a majority
of the Fund's outstanding voting securities. The management contract may, on 60
days' written notice, be terminated at any time without the payment of any
penalty by the Fund by vote of a majority of the outstanding voting securities
of the Fund, by the Trustees or by the Adviser. The management contract
terminates automatically in the event of its assignment.
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
29
<PAGE>
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.
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
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.
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
30
<PAGE>
by TFMC and $18,652, $21,055 and $11,255, respectively, was paid for certain
data processing and pricing information services.
DISTRIBUTION CONTRACT
Distribution Contract. As discussed in the Prospectus, the Fund's shares
are sold on a continuous basis at the public offering price. John Hancock Funds,
a wholly-owned subsidiary of the Adviser, has the exclusive right, pursuant to
the Distribution Contract dated December 22, 1994 (the "Distribution Contract"),
to purchase shares from the Fund at net asset value for resale to the public or
to broker- dealers at the public offering price. Upon notice to all
broker-dealers ("Selling Brokers") with whom it has sales agreements, John
Hancock Funds may allow such Selling Brokers up to the full applicable sales
charge during periods specified in such notice. During these periods, such
Selling Brokers may be deemed to be underwriters as that term is defined in the
1933 Act.
The Distribution Contract was initially adopted by the affirmative vote of
the Fund's Board of Trustees including the vote of a majority of the Independent
Trustees, cast in person at a meeting called for such purpose. The Distribution
Contract shall continue in effect until December 22, 1996 and from year to year
thereafter if approved by either the vote of the Fund's shareholders or the
Board of Trustees, including the vote of a majority of the Independent Trustees,
cast in person at a meeting called for such purpose. The Distribution Contract
may be terminated at any time, without penalty, by either party upon sixty (60)
days' written notice or by a vote of a majority of the outstanding voting
securities of the Fund and terminates automatically in the case of an assignment
by John Hancock Funds.
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.
Distribution Plans. The Board of Trustees, including the Independent
Trustees of the Fund, approved new distribution plans pursuant to Rule 12b-1
under the 1940 Act for Class A Shares ("Class A Plan") and Class B Shares
("Class B Plan"). Such Plans were approved by a majority of the outstanding
shares of each respective class on December 16, 1994 and became effective on
December 22, 1994.
Under the Class A Plan, the distribution or service fee will not exceed an
annual rate of 0.25% of the average daily net asset value of the Class A Shares
of the Fund. Any expenses under the Class A Plan not reimbursed within 12 months
of being presented to the Fund for repayment are forfeited and not carried over
to future years. Under the Class B Plan, the distribution or service fee to be
31
<PAGE>
paid by the Fund will not exceed an annual rate of 1.00% of the average daily
net assets of the Class B Shares of the Fund; provided that the portion of such
fee used to cover Service Expenses (described below) shall not exceed an annual
rate of 0.25% of the average daily net asset value of the Class B Shares of the
Fund. In accordance with generally accepted accounting principles, the Fund does
not treat unreimbursed distribution expenses attributable to Class B shares as a
liability of the Fund and does not reduce the current net assets of Class B by
such amount, although the amount may be payable under Class B Plan in the
future.
Under the Plans, expenditures shall be calculated and accrued daily and
paid monthly or at such other intervals as the Trustees shall determine. The fee
may be spent by John Hancock Funds on Distribution Expenses or Service Expenses.
"Distribution Expenses" include any activities or expenses primarily intended to
result in the sale of shares of the relevant class of the Fund, 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. "Service
Expenses" under the Plans include payments made to, or on account of, account
executives of selected broker-dealers (including affiliates of John Hancock
Funds) and others who furnish personal and shareholder account maintenance
services to shareholders of the relevant class of the Fund. For the fiscal year
ended August 31, 1995, an aggregate of $3,463,988 of distribution expenses or
3.15% of the average net assets of the Fund's Class B shares was not reimbursed
or recovered by John Hancock Funds through the receipt of deferred sales charges
or Rule 12b-1 fees in prior periods.
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:
<TABLE>
<CAPTION>
Printing and
Mailing of Interest,
Prospectuses Carrying or
to New Compensation to Other Finance
Advertising Shareholders Selling 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>
32
<PAGE>
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 securities 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, the Board of Trustees has determined
that, in its judgment, there is a reasonable likelihood that each Plan will
benefit the holders of the applicable class of shares of the Fund.
Information regarding the services rendered under the Plans and the
Distribution Contract and the amounts paid therefor by the respective class of
the Fund is provided to, and reviewed by, the Board of Trustees on a quarterly
basis. In this quarterly review, the Board of Trustees considers the continued
appropriateness of the Plans and the Distribution Contract and the level of
compensation provided therein.
When the Fund seeks an Independent Trustee to fill a vacancy or as a
nominee for election by shareholders, the selection or nomination of the
Independent Trustee is, under resolutions adopted by the Trustees
contemporaneously with their adoption of the Plans, committed to the discretion
of the Committee on Administration of the Trustees. The members of the Committee
on Administration are all Independent Trustees and identified in this Statement
of Additional Information under the heading "Those Responsible for Management."
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.
33
<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 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.
INITIAL SALES CHARGE ON CLASS A SHARES
Class A 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, or if
34
<PAGE>
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
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.
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<PAGE>
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:
Amount Invested CDSC Rate
--------------- ---------
$1 Million 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
the reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or 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. The 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
36
<PAGE>
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
(either 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 escrow 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 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. 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.
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
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<PAGE>
years from the time of any payment for the purchase 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 $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
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<PAGE>
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 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).
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<PAGE>
* 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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------------------------
<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
distributions or in periodic
12% of account payments
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or 12% value annually
of account value in periodic
annually in payments
periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for annuity Waived for annuity Waived for annuity 12% of account
payments (72t)or payments (72t)or payments (72t)or value annually
12% of account 12% of account 12% of account in periodic
value annually in value annually in value annually in payments
periodic payments periodic 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>
40
<PAGE>
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.
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 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. As described more fully in the Prospectus, 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 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 fully in the Prospectus and the Account Privileges Application. The
41
<PAGE>
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.
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 mutual 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
Ownership of the Fund is represented by transferable shares of
beneficial interest. The Declaration of Trust permits the Trustees to create an
unlimited number of series and classes of shares of the Fund and, with respect
to each series and class, to issue an unlimited number of full or fractional
shares and to divide or combine the shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests of the
Fund.
42
<PAGE>
Each share of each series or class of the Fund represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Fund is separate
and distinct. All consideration received for the sales of shares of a particular
series or class of the Fund, all assets in which such consideration is invested
and all income, earnings and profits derived from such investments will be
allocated to and belong to that series or class. As such, each such share is
entitled to dividends and distributions out of the net income belonging to that
series or class as declared by the Board of Trustees. Shares of the Fund have a
par value of $0.01 per share. The assets of each series are segregated on the
Fund's books and are charged with the liabilities of that series and with a
share of the Fund's general liabilities. The Board of Trustees determines those
assets and liabilities deemed to be general assets or liabilities of the Fund,
and these items are allocated among each series in proportion to the relative
total net assets of each series.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional classes within any
series (which would be used to distinguish among the rights of different
categories of shareholders, as might be required by future regulations or other
unforeseen circumstances). 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. Class A and Class B Shares of
the Fund represent an equal proportionate interest in the aggregate net asset
values attributable to that class of the Fund. Holders of Class A Shares and
Class B Shares each have certain exclusive voting rights on matters relating to
the Class A Plan and the Class B Plan, respectively. 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.
Voting Rights. Shareholders are entitled to a full vote for each full
share held, except that for Trust-wide shareholder votes the Trustees may
determine that it is appropriate for each dollar of net asset value to be
43
<PAGE>
entitled to one vote and fractional dollars to a proportional vote. The Trustees
themselves have the power to alter the number and the terms of office of
Trustees, and they may at any time lengthen their own terms or make their terms
of unlimited duration (subject to certain removal procedures) and appoint their
own successors, provided that at all times at least a majority of the Trustees
have been elected by shareholders. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can, if
they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees. Although the Fund need
not hold annual meetings of shareholders, the Trustees may call special meetings
of shareholders for action by shareholder vote as may be required by the 1940
Act or the Declaration of Trust. Also, a shareholder's meeting must be called if
so requested in writing by the holders of record of 10% or more of the
outstanding shares of the Trust. In addition, the Trustees may be removed by the
action of the holders of record of two-thirds or more of the outstanding shares.
Shareholder Liability. The Declaration of Trust provides that no
Trustee, officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or its own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. It also provides that all third persons shall
look solely to the Fund's property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
As a Massachusetts business trust, the Fund is not required to issue
share certificates. The Fund shall continue without limitation of time subject
to the provisions in the Declaration of Trust concerning termination by action
of the shareholders.
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. 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.
44
<PAGE>
Notwithstanding the fact that the Prospectus is a combined prospectus
for the Fund and other John Hancock mutual funds, the Fund shall not be liable
for the liabilities of any other John Hancock mutual fund.
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
45
<PAGE>
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.
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
46
<PAGE>
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
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
47
<PAGE>
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
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.
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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
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
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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
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 August 31, 1995, the annualized yields of
the Fund's Class A shares and Class B shares were (3.53%) and (3.49%),
respectively. As of August 31, 1995, the average annual total returns of the
Class A shares of the Fund for the one, five and ten year periods were (13.27%),
11.43% and 10.90%, respectively. As of August 31, 1995, the average annual
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returns for the Fund's Class B shares for the one year period and since
inception on August 22, 1991 were 13.41% and 9.24%, 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:
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 also assumes that all
dividends and distributions are reinvested at net asset value on the
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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.
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 approximately 1,700 fixed income mutual funds
in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers
are also used for comparison purposes, as well as the Russell and Wilshire
Indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
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.
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 and
the allocation of brokerage commissions are made by the Adviser and officers of
the Fund pursuant to recommendations made by its investment committee, which
consists of officers and Trustees of the Adviser and affiliates and officers and
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Trustees 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 such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer and transactions with dealers serving as market
makers reflect a "spread." Investments in debt securities are generally traded
on a net basis through dealers acting for their own account as principals and
not as brokers; no brokerage commissions are payable on such transactions.
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 NASD 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
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 Fund's officers 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 aggregate dollar amount of brokerage
commissions paid were $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
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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 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
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 will not effect principal transactions with
Affiliated Brokers. The Fund may, however, purchase securities from other
members of underwriting syndicates of which Tucker Anthony, Sutro and John
Hancock Distributors are members, but only in accordance with the policy set
forth above and procedures adopted and reviewed periodically by the Trustees.
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.
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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.
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
$16.00 for each Class A shareholder and $18.50 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. Under the custodian agreement, IBT performs
custody, portfolio and fund accounting services.
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.
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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
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during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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.
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