JOHN HANCOCK
SOVEREIGN BALANCED FUND
CLASS A AND CLASS B SHARES
Statement of
Additional Information
December 2, 1996 as revised March 12, 1997
This Statement of Additional Information provides information about
John Hancock Sovereign Balanced Fund (the "Fund") a diversified series of John
Hancock Investment Trust (the "Trust"), in addition to the information that is
contained in the combined Growth and Income Fund's Prospectus dated December 2,
1996 (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus, a copy of which can be obtained free
of charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way STE 1000
Boston, Massachusetts 02217-1000
1-(800)-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund ............................................. 2
Investment Objectives and Policies ................................... 2
Investment Restrictions .............................................. 17
Ratings............................................................... 21
Those Responsible for Management ..................................... 21
Investment Advisory and Other Services ............................... 29
Net Asset Value ...................................................... 31
Distribution Contracts ............................................... 32
Initial Sales Charge on Class A Shares ............................... 34
Deferred Sales Charge on Class B Shares .............................. 36
Additional Services and Programs ..................................... 39
Description of Fund Shares ........................................... 41
Tax Status ........................................................... 42
Calculation of Performance ........................................... 47
Brokerage Allocation ................................................. 49
Transfer Agent Services .............................................. 51
Custody of Portfolio ................................................. 51
Independent Auditors ................................................. 51
Appendix.............................................................. A-1
Financial Statements ................................................. F-1
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ORGANIZATION OF FUND
The Fund is a series of the Trust, an open-end investment management
company organized as a Massachusetts business trust on December 12, 1984. Prior
to December 2, 1996, the Fund was a diversified series of John Hancock Sovereign
Investors Fund, Inc.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment
adviser. The Adviser is an indirect wholly-owned subsidiary of the John Hancock
Mutual Life Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Fund are to provide current income,
long-term growth of capital and income and preservation of capital without
assuming what the Adviser believes to be undue market risks. At times, however,
because of market conditions, the Fund may invest primarily for current income.
There is no assurance that the Fund's objectives will be achieved. The Fund will
allocate its investments among different types and classes of securities in
accordance with the Adviser's appraisal of economic and market conditions.
Shareholder approval is not required to effect changes in the Fund's investment
objectives.
The Fund may invest in any type or class of security. At least 25% of
the value of the Fund's total assets will be invested in fixed income senior
securities. Fixed income securities may include both convertible and
non-convertible debt securities and preferred stock, and only that portion of
their value attributed to their fixed income characteristics, as determined by
the Adviser, can be used in applying the 25% test. The balance of the Fund's
total assets may consist of cash or (i) equity securities of established
companies, (ii) equity and fixed income securities of foreign corporations,
governments or other issuers meeting applicable quality standards as determined
by the Fund's investment adviser, (iii) foreign currencies, (iv) securities that
are issued or guaranteed as to interest and principal by the U.S. Government,
its agencies, authorities or instrumentalities, (v) obligations and equity
securities of banks or savings and loan associations (including certificates of
deposit and bankers' acceptances); and (vi) to the extent available and
permissible, options and futures contracts on securities, currencies and
indices. Each of these investments is more fully described below. The Fund's
portfolio securities are selected mainly for their investment character based
upon generally accepted elements of intrinsic value, including industry
position, management, financial strength, earning power, marketability and
prospects for future growth. The distribution or mix of various types of
investments is based on general market conditions, the level of interest rates,
business and economic conditions and the availability of investments in the
equity or fixed income markets.
Equity securities, for purposes of the Fund's investment policy, are
limited to common stocks, preferred stocks, investment grade convertible
securities and warrants. In addition, the Fund utilizes a strategy of investing
only in those common stocks which have a record of having increased their
shareholder dividend in each of the preceding ten or more years. This dividend
performers strategy may be changed at any time.
At least 75% of the Fund's total investments in fixed income securities
(other than commercial paper) will be rated within the four highest grades as
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determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or
Standard & Poor's Ratings Group ("S&P") (AAA, AA, A or BBB). Fixed income
securities rated Baa or BBB are considered medium grade obligations with
speculative characteristics; and adverse economic conditions or changing
circumstances may weaken their issuers' capacity to pay interest and repay
principal.
The Fund diversifies its investments among a number of industry groups
without concentrating more than 25% of its assets in any particular industry.
The Fund's investments are subject to market fluctuation and the risks inherent
in all securities. There is no assurance that the Fund will achieve its
investment objectives.
Assuming relatively stable economic conditions, it is anticipated that
the annual portfolio turnover rate will not usually exceed 100%. However, under
certain economic conditions, a higher turnover may be advisable to achieve the
Fund's objectives.
Investment in Foreign Securities. The Fund may invest up to 35% of its
total assets in securities of foreign companies. The actual percentage that will
be allocated to foreign securities will vary depending on the relative yields of
foreign and U.S. securities, the economies of foreign countries, the condition
of such countries' financial markets, the interest rate climate of such
countries and the relationship of such countries' currency to the U.S. dollar.
These factors are judged on the basis of fundamental economic criteria (e.g.,
relative inflation levels and trends, growth rate forecasts, balance of payments
status and economic policies) as well as technical and political data.
Investments in foreign securities may involve a greater degree of risk
than those in domestic securities. There is generally less publicly available
information about foreign companies in the form of reports and ratings similar
to those that are published about issuers in the United States. Also, foreign
issuers are generally not subject to uniform accounting, auditing and financial
reporting requirements comparable to those applicable to United States issuers.
Because foreign securities may be denominated in currencies other than
the U.S. dollar, changes in foreign currency exchange rates will affect the
Fund's net asset value, the value of dividends and interest earned, gains and
losses realized on the sale of securities, and any net investment income and
gains that the Fund distributes to shareholders. Securities transactions
undertaken in some foreign markets may not be settled promptly, so that the
Fund's investments on foreign exchanges may be less liquid and subject to the
risk of fluctuating currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market
whether through over-the-counter markets or exchanges located in the countries
where principal offices of the issuers are located. Foreign securities markets
are generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges. although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
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With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, exproporiation,
nationalization or confiscatory taxation, limitation on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States economy in terms of growth of gross national product, rate of
inflaction, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends, in some cases capital gains and interest payable on
certain of the Fund's foreign portfolio securities may be subject to foreign
withholding or other foreign taxes, thus reducing the net amount of income or
gains available for distribution to the Fund's shareholders.
These risks may be intensified in the case of investments in emerging
markets or countries with limited or developing capital markets. These countries
are located in the Asia-Pacific region, Eastern Europe, Latin and South America
and Africa. Security prices in these markets can be significantly more volatile
than in more developed countries, reflecting the greater uncertainties of
investing in less established markets and economies. Political, legal and
economic structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. The Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
Forward Commitment and When-Issued Securities. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued
transactions, it relies on the seller to consummate the transaction. The failure
of the issuer or seller to consummate the transaction may result in the Fund's
losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued or forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
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On the date the Fund enters into an agreement to purchase securities on
a when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Repurchase Agreements. In a repurchase agreement the Fund buys a
security for a relatively short period (usually not more than 7 days) subject to
the obligation to sell it back to the issuer at a fixed time and price plus
accrued interest. The Fund will enter into repurchase agreements only with
member banks of the Federal Reserve System and with "primary dealers" in U.S.
Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom it enters into repurchase agreements.
The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in or be
prevented from liquidating the underlying securities and could experience
losses, including the possible decline in the value of the underlying securities
during the period while the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and decline in value of the underlining securities or
of access to income during this period as well as expense of enforcing its
rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of U.S. Government securities held
in its portfolio to a bank with an agreement that the Fund will buy back the
securities at a fixed future date at a fixed price plus an agreed amount of
"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The Fund
will also continue to be subject to the risk of a decline in the market value of
the securities sold under the agreements because it will reacquire those
securities upon effecting their repurchase. In addition, the Fund will not enter
into reverse repurchase agreements and other borrowings exceeding in the
aggregate 33% of the market value of its total assets. To minimize various risks
associated with reverse repurchase agreements, the Fund will establish and
maintain with the Fund's custodian a separate account consisting of highly
liquid, marketable securities in an amount at least equal to the repurchase
prices of these securities (plus accrued interest thereon) under such
agreements. The Fund will enter into reverse repurchase agreements only with
federally insured banks or savings and loan associations which are approved in
advance as being creditworthy by the Board of Trustees. Under procedures
established by the Board of Trustees, the Adviser will monitor the
creditworthiness of the banks involved.
Financial Futures Contracts. The Fund may hedge its portfolio by
selling financial futures contracts as an offset against the effect of expected
increases in interest rates or declines in security or foreign currency values
and by purchasing such futures contracts as an offset against the effect of
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expected declines in interest rates or increases in security or foreign currency
values. Although other techniques could be used to reduce the Fund's exposure to
interest rate, securities market and currency fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
financial futures contracts. The Fund will enter into financial futures
contracts for hedging, speculative and other non-hedging purposes.
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the Commodity Futures Trading
Commission ("CFTC"). Futures contracts are traded on these markets in a manner
that is similar to the way a stock is traded on a stock exchange. The boards of
trade, through their clearing corporations, guarantee that the contracts will be
performed. It is expected that if new types of financial futures contracts are
developed and traded the Fund may engage in transactions in such contracts.
Although some financial futures contracts by their terms call for
actual delivery or acceptance of financial instruments, in most cases the
contracts are closed out prior to delivery by offsetting purchases or sales of
matching financial futures contracts (same exchange, underlying security or
currency and delivery month). Other financial futures contracts, such as futures
contracts on securities indices, by their terms call for cash settlements. If
the offsetting purchase price is less than the Fund's original sale price, the
Fund realizes a gain, or if it is more, the Fund realizes a loss. Conversely, if
the offsetting sale price is more than the Fund's original purchase price, the
Fund realizes a gain, or if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations. The Fund will pay
a commission in connection with each purchase or sale of financial futures
contracts, including a closing transaction. For a discussion of the Federal
income tax considerations of transactions in financial futures contracts, see
the information under the caption "Tax Status" below.
At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
Government securities, known as "initial margin." The margin required for a
financial futures contract is set by the board of trade or exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the financial futures contract which is returned to the Fund upon termination of
the contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. Each day, the
futures contract is valued at the official settlement price of the board of
trade or exchange on which it is traded. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. This process is known
as "mark to market." Variation margin does not represent a borrowing or lending
by the Fund but is instead a settlement between the Fund and the broker of the
amount one would owe the other if the financial futures contract expired. In
computing net asset value, the Fund will mark to the market its open financial
futures positions.
Successful hedging depends on the extent of correlation between the
market for the underlying securities and the futures contract market for those
securities or currency. There are several factors that will probably prevent
this correlation from being perfect, and even a correct forecast of general
interest rate, securities market or currency trends may not result in a
successful hedging transaction. There are significant differences between the
securities or currency markets and the futures markets which could create an
a given hedge. The degree of imperfection of correlation depends on
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circumstances such as: variations in speculative market demand for financial
futures and debt and equity securities, including technical influences in
futures trading and differences between the financial instruments being hedged
and the instruments underlying the standard financial futures contracts
available for trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower-rated, and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise
of skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of market behavior or unexpected interest rate, securities
market or currency trends. The Fund will bear the risk that the price of the
securities being hedged will not move in complete correlation with the price of
the futures contracts used as a hedging instrument. Although the Adviser
believes that the use of financial futures contracts will benefit the Fund, an
incorrect prediction could result in a loss on both the hedged securities or
currency in the Fund's portfolio and the futures position so that the Fund's
return might have been better had hedging not been attempted. However, in the
absence of the ability to hedge, the Adviser might have taken portfolio actions
in anticipation of the same market movements with similar investment results
but, presumably, at greater transaction costs. The low margin deposits required
for futures transactions permit an extremely high degree of leverage. A
relatively small movement in the price of instruments underlying a futures
contract may result in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount the price of a futures contract may vary either
up or down from the previous day's settlement price, at the end of the current
trading session. Once the daily limit has been reached in a futures contract
subject to the limit, no more trades may be made on that day at a price beyond
that limit. The daily limit governs only price movements during a particular
trading day and, therefore, does not limit potential losses because the limit
may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
Finally, although the Fund engages in financial futures transactions
only on boards of trade or exchanges where there appears to be an adequate
secondary market, there is no assurance that a liquid market will exist for a
particular futures contract at any given time. The liquidity of the market
depends on participants closing out contracts rather than making or taking
delivery. In the event participants decide to make or take delivery, liquidity
in the market could be reduced. In addition, the Fund could be prevented from
executing a buy or sell order at a specified price or closing out a position due
to limits on open positions or daily price fluctuation limits imposed by the
exchanges or boards of trade. If the Fund cannot close out a position, it will
be required to continue to meet margin requirements until the position is
closed.
The Fund will not engage in a transaction in futures or options on
futures for speculative purposes if, immediately thereafter, the sum of initial
margin deposits and premiums required to establish speculative positions in
futures contracts and options on futures would exceed 5% of the Fund's total
may exceed the amount invested or of the premium received.
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Options on Financial Futures Contracts. The Fund may purchase and write
call and put options on financial futures contracts. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time during the period of the option. Upon exercise, the writer of the option
delivers the futures contract to the holder at the exercise price. The Fund
would be required to deposit with its custodian initial and variation margin
with respect to put and call options on futures contracts written by it.
Options on futures contracts involve risks similar to the risks
relating to transactions in financial futures contracts. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
Restrictions on Use of Futures Transactions and Options. The Fund
intends to comply with CFTC Regulation 4.5 and thereby avoid the status of
"commodity pool operator."
When futures contracts or options thereon are purchased to protect
against a price increase in securities intended to be purchased later, it is
anticipated that at least 75% of such intended purchases will be completed. As
an alternative to this test of bona fine hedging intent, a CFTC regulation
permits the Fund to elect to comply with a different test, under which the Fund
will not enter into a futures contract or purchase an option thereon for
non-hedging purposes if immediately thereafter the initial margin deposits and
premiums required to establish non-hedging positions in futures contracts and
options on futures would exceed 5% of the Fund's total assets.
When the Fund purchases a futures contract, writes a put option thereon
or purchases a call option thereon, an amount of cash or liquid securities will
be deposited in a segregated account with the Fund's custodian which is equal to
the underlying value of the futures contract reduced by the amount of initial
and variation margin held in the account of its broker.
Options Transactions. The Fund may write listed and over-the-counter
covered call options and covered put options on securities and foreign currency
in order to earn additional income from the premiums received. In addition, the
Fund may purchase listed and over-the-counter call and put options. The extent
to which covered options will be used by the Fund will depend upon market
conditions and the availability of alternative strategies. The Fund may purchase
listed and over-the-counter call and put options on securities and currency with
an aggregate value not exceeding 5% of the Fund's total assets.
The Fund will write listed and over-the-counter call options only if
they are "covered," which means that the Fund owns or has the immediate right to
acquire the securities underlying the options without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio. A call option written by the Fund will also be "covered" if the Fund
holds on a share-for-share basis a covering call on the same securities where
(i) the exercise price of the covering call held is equal to or less than the
exercise price of the call written or, if the exercise price of the covering
call is greater than that of the call written, the difference is maintained by
the Fund in cash, U.S. Treasury bills or high grade liquid debt obligations in a
segregated account with the Fund's custodian, and (ii) the covering call expires
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
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exercise price, less the transaction costs, exceeds the cost of the underlying
security, the Fund would realize a gain in addition to the amount of the option
premium it received. If the exercise price, less transaction costs, is less than
the cost of the underlying security, the Fund's loss would be reduced by the
amount of the option premium.
As writer of a covered put option, the Fund will write a put option
only with respect to securities it intends to acquire for the Fund's portfolio
and will maintain in a segregated account with its custodian bank cash, U.S.
Government securities, or high-grade liquid debt securities with a value equal
to the price at which the underlying security may be sold to the Fund in the
event the put option is exercised by the purchaser. The Fund can also write a
"covered" put option by purchasing on a share-for-share basis a put on the same
security as the put written by the Fund if the exercise price of the covering
put held is equal to or greater than the exercise price of the put written and
the covering put expires at the same time or later than the put written.
In writing listed and over-the-counter covered put options on
securities, the Fund would earn income from the premiums received. If a covered
put option is not exercised, the Fund would keep the option premium and the
assets maintained to cover the option. If the option is exercised and the
exercise price, including transaction costs, exceeds the market price of the
underlying security, the Fund would realize a loss, but the amount of the loss
would be reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its
obligation prior to its exercise, it may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that the Fund's
position will be offset by the Options Clearing Corporation. The Fund may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. There is no guarantee that a closing purchase transaction can be
effected. Although the Fund will generally write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular option or at any particular time, and for some options no secondary
market on an exchange may exist.
In the case of a written call option, effecting a closing transaction
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. In the case of
a written put option, it will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option. The Fund will realize a loss from a closing transaction if the cost of
the closing transaction is more than the premium received for writing the
option. However, because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
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Over-the-Counter Options. The Fund may engage in options transactions
on exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e., performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the-counter ("OTC") transactions are two-party
contracts with price and terms negotiated by the buyer and seller. The Fund will
acquire only those OTC options for which management believes the Fund can
receive on each business day at least two separate bids or offers (one of which
will be from an entity other than a party to the option) or those OTC options
valued by an independent pricing service. The Fund will write and purchase OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or their affiliates which have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million. The SEC has taken the position that OTC options are
illiquid securities subject to the restriction that illiquid securities are
limited to not more than 15% of the Fund's assets. The SEC, however, has a
partial exemption from the above restrictions on transactions in OTC options.
The SEC allows the Fund to exclude from 15% limitation on illiquid securities a
portion of the value of the OTC options written by the Fund, provided that
certain conditions are met. First, the other party to the OTC options has to be
a primary U.S. Government securities dealer designated as such by the Federal
Reserve Bank. Second, the Fund would have an absolute contractual right to
repurchase the OTC options at a formula price. If the above conditions are met,
a Fund must treat as illiquid only that portion of the OTC option's value (and
the value of its underlying securities) which is equal to the formula price for
repurchasing the OTC option, less the OTC option's intrinsic value.
While transactions in options may reduce certain risks, they may entail
other risks. Certain risks arise due to the imperfect correlations between
movements in the price of options contracts and movements in the prices of the
securities or currency underlying the contracts.
The Fund's ability to use options to hedge or earn income successfully
will depend on the Adviser's ability to predict accurately the future direction
of interest rate changes, currency rate fluctuations and other market factors.
The success of hedging transactions will also depend on the degree of
correlation between the options markets and the securities markets. The risk of
loss on written options transactions is potentially unlimited and may exceed the
amount invested or of the premium received. In addition, the Fund could be
prevented from opening, or realizing the benefits of closing out, an options
position because of position limits or limits on daily price fluctuations
imposed by an exchange.
Lending of Securities. The Fund may lend portfolio securities to
brokers, dealers, and financial institutions if the loan is collateralized by
cash or U.S. Government securities according to applicable regulatory
requirements. The Fund may reinvest any cash collateral in short-term securities
and money market funds. When the Fund lends portfolio securities, there is a
risk that the borrower may fail to return the loaned securities. As a result,
the Fund may incur a loss or in the event of the borrower's bankruptcy may be
delayed in or prevented from liquidating the collateral. It is a fundamental
policy of the Fund not to lend portfolio securities having a total value in
excess of 33 1/3% of its total assets.
Restricted Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933 ("1933
Act"), including securities offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act. However, the Fund will not invest more than
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15% of its assets in illiquid investments, which include repurchase agreements
maturing in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Board of Trustees determines, based upon
a continuing review of the trading markets for specific Rule 144A securities,
that they are liquid, then such securities may be purchased without regard to
the 15% limit. The Trustees may adopt guidelines and delegate to the Adviser the
daily function of determining the monitoring and liquidity of restricted
securities. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Trustees will carefully
monitor the Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in the Fund if qualified institutional buyers become for a time
uninterested in purchasing these restricted securities.
The Fund may acquire other restricted securities including securities
for which market quotations are not readily available. These securities may be
sold only in privately negotiated transactions or in public offerings with
respect to which a registration statement is in effect under the Securities Act
of 1933. Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair market value as determined in good faith by the Fund's
Trustees. If through the appreciation of restricted securities or the
depreciation of unrestricted securities, the Fund should be in a position where
more than 15% of the value of its assets is invested in illiquid securities
(including repurchase agreements which mature in more than seven days and
options which are traded over-the-counter and their underlying securities), the
Fund will bring its holdings of illiquid securities below the 15% limitation.
Government Securities. Certain U.S. Government securities, including
U.S. Treasury bills, notes and bonds, and Government National Mortgage
Association certificates ("Ginnie Maes"), are supported by the full faith and
credit of the United States. Certain other U.S. Government securities, issued or
guaranteed by Federal agencies or government sponsored enterprises, are not
supported by the full faith and credit of the United States, but may be
supported by the right of the issuer to borrow from the U.S. Treasury. These
securities include obligations of the Federal Home Loan Mortgage Corporation
("Freddie Macs"), and obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association Bonds ("Fannie
Maes"). No assurance can be given that the U.S. Government will provide
financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Ginnie Maes, Freddie Macs and Fannie Maes are mortgage-backed
securities which provide monthly payments which are, in effect, a "pass-through"
of the monthly interest and principal payments (including any prepayments) made
by the individual borrowers on the pooled mortgage loans. Collateralized
mortgage obligations ("CMOs") in which the Fund may invest are securities issued
by a U.S. Government instrumentality that are collateralized by a portfolio of
mortgages or mortgage-backed securities. Mortgage-backed securities may be less
effective than traditional debt obligations of similar maturity at maintaining
yields during periods of declining interest rates. The Fund will not invest more
than 50% of its assets in mortgage-backed securities.
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Forward Foreign Currency Transactions. The foreign currency
transactions of the Fund may be conducted on a spot (i.e., cash) basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. The Fund may also enter into forward foreign currency contracts
involving currencies of the different countries in which it will invest as a
hedge against possible variations in the foreign exchange rate between these
currencies. This is accomplished through contractual agreements to purchase or
sell a specified currency at a specified future date and price set at the time
of the contract. The Fund's transactions in forward foreign currency contracts
will be limited to hedging either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency
contracts with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities denominated
in foreign currencies. Portfolio hedging is the use of forward foreign currency
contracts to offset portfolio security positions denominated or quoted in such
foreign currencies. The Fund will not attempt to hedge all of its foreign
portfolio positions and will enter into such transactions only to the extent, if
any, deemed appropriate by the Adviser.
If the Fund enters into a forward contract to purchase foreign
currency, its custodian bank will segregate cash or liquid securities in a
separate account of the Fund in an amount necessary to complete the contract.
Those assets will be market to market daily and if the value of the securities
in the separate account declines, additional cash or securities will be added so
that the value of the account will be equal to the amount of the Fund's
commitment in forward contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. These transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency transactions
varies with such factors as the currency involved, the length of the contract
period and the market conditions then prevailing. Since transactions in foreign
currency are usually conducted on a principal basis, no fees or commissions are
involved.
Lower Rated High Yield "High Risk" Securities. Up to 25% of the Fund's
total investments in fixed income securities may be in high yielding, fixed
income securities rated as low as C by Moody's or S&P. These lower rated
securities are speculative to a high degree and often have very poor prospects
of attaining real investment standing. Lower rated securities are generally
referred to as junk bonds. Ratings are based largely on the historical financial
condition of the issuer.
Securities rated lower than Baa by Moody's or BBB by Standard & Poor's
are sometimes referred to as junk bonds. See the Appendix attached to this
Statement of Additional Information which describes the characteristics of the
securities in the various ratings categories. The Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the above-stated ratings. The credit ratings of Moody's and
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Standard & Poor's such as those ratings described here, may not be changed by
Moody's and Standard & Poor's in a timely fashion to reflect subsequent economic
events. The credit ratings of securities do not reflect an evaluation of market
risk. Debt obligations rated in the lower ratings categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income. In addition, lower ratings reflect a greater possibility of an adverse
change in financial condition affecting the issuer's ability to make payments of
interest and principal. The market price and liquidity of lower rated fixed
income securities generally respond more to short-term corporate and market
developments than do those of higher rated securities, because these
developments are perceived to have a more direct relationship to the ability of
an issuer of lower rated securities to meet its ongoing debt obligations. The
Adviser seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions.
Reduced volume and liquidity in the high yield high risk bond market,
or the reduced availability of market quotations, will make it more difficult to
dispose of the bonds and to value accurately the Fund's assets. The reduced
availability of reliable, objective data may increase the Fund's reliance on
management's judgment in valuing high yield high risk bonds. In addition, the
Fund's investments in high yield high risk securities may be susceptible to
adverse publicity and investor perceptions, whether or not justified by
fundamental factors. The Fund's investments, and consequently its net asset
value, will be subject to the market fluctuations and risk inherent in all
securities. Increasing rate note securities are typically refinanced by the
issuers within a short period of time.
The Fund may invest in pay-in-kind (PIK) securities, which pay interest
in either cash or additional securities, at the issuer's option, for a specified
period. The Fund also may invest in zero coupon bonds, which have a determined
interest rate, but payment of the interest is deferred until maturity of the
bonds. Both kinds of bonds may be more speculative and subject to greater
fluctuations in value than securities which pay interest periodically and in
cash, due to changes in interest rates.
The market value of debt securities which carry no equity participation
usually reflects yields generally available on securities of similar quality and
type. When such yields decline, the market value of a portfolio already invested
at higher yields can be expected to rise if such securities are protected
against early call. In general, in selecting securities for its portfolio, the
Fund intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Investments in corporate fixed income securities may be in bonds,
convertible debentures and convertible or non-convertible preferred stock. The
value of convertible securities, while influenced by the level of interest
rates, is also affected by the changing value of the underlying common stock
into which the securities are convertible. The value of fixed income securities
varies inversely with interest rates.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage
"dollar roll" transactions with selected banks and broker-dealers pursuant to
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which the Fund sells mortgage-backed securities and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. The Fund will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction. Covered rolls are not
treated as a borrowing or other senior security and will be excluded from the
calculation of the Fund's borrowing and other senior securities. For financial
reporting and tax purposes, the Fund treats mortgage dollar rolls as two
separate transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar roll transactions that are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset- backed securities which are rated in the highest rating category by a
nationally recognized statistical rating organization (e.g., Standard & Poor's
Corporation or Moody's Investors Services, Inc.) or if not so rated, of
equivalent investment quality in the opinion of the Adviser.
Asset-backed securities are often subject to more rapid repayment than
their stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, the Fund's ability to maintain positions in
these securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Rights and Warrants. The Fund may purchase warrants and rights which
are securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's
Fundamental Investment Restriction,. Generally, warrants and stock purchase
rights do not carry with them the right to receive dividends or exercise voting
rights with respect to the underlying securities, and they do not represent any
rights in the assets of the issuer. As a result, an investment in warrants and
rights may be considered to entail greater investment risk than certain other
types of investments. In addition, the value of warrants and rights does not
necessarily change with the value of the underlying securities, and they cease
to have value if they are not exercised on or prior to their expiration date.
Investment in warrants and rights increases the potential profit or loss to be
realized from the investment of a given amount of the Fund's assets as compared
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with investing the same amount in the underlying stock.
Short-Sales. The Fund may engage in short sales "against the box", as
well as short sales to hedge against or profit from an anticipated deline in the
value of a security. When the Fund engages in a short sale, it will place in a
segregated account and mark to market daily, cash or U.S. Government securities
in accordance with applicable regulatory requirements.
Structured or Hybrid Notes. The Fund may invest in "structured" or
"hybrid" notes. The distinguishing feature of a structured or hybrid note is
that the amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate exceeds
an agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in a foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Caps and floors have an effect
similar to buying or writing options. Depending on how they are used, swap
agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
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to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Participation Interests. Participation interests, which may take the
form of interests in, or assignments of certain loans, are acquired from banks
who have made these loans or are members of a lending syndicate. The Fund's
investments in participation interests are subject to its 15% limitation on
investments in liquid securities.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-
in-kind, delayed and zero coupon bonds. These are securities issued at a
discount from their face value because interest payments are typically postponed
until maturity. The amount of the discount rate varies depending on factors
including the time remaining until maturity, prevailing interest rates, the
security's liquidity and the issuer's credit quality. These securities also may
take the form of debt securities that have been stripped of their interest
payments. A portion of the discount with respect to stripped tax-exempt
securities or their coupons may be taxable. The market prices in pay-in-kind,
delayed and zero coupon bonds generally are more volatile than the market prices
of interest-bearing securities and are likely to respond to a grater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status."
Brady Bonds. The Fund may also invest in so-called "Brady Bonds." The
Fund may invest in Brady Bonds and other sovereign debt securities of countries
that have restructured or are in the process of restructuring sovereign debt
pursuant to the Brady Plan. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external indebtedness (generally, commercial bank debt). In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the World Bank and the International Monetary Fund (the "IF"). The Brady
Plan framework, as it has developed, contemplates the exchange of commercial
bank debt for newly issued bonds (Brady Bonds). The World Bank and/or the IF
support the restructuring by providing funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to repurchase outstanding bank debt at a discount. Under these
arrangements with the World Bank and/or the IF, debtor nations have been
required to agree to the implementation of certain domestic monetary and fiscal
reforms. Such reforms have included the liberalization of trade and foreign
investment, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs seek to
promote the debtor country's ability to service its external obligations and
promote its economic growth and development. Investors should recognize that the
Brady Plan only sets forth general guiding principles for economic reform and
debt reduction, emphasizing that solutions must be negotiated on a case-by-case
basis between debtor nations and their creditors. The Adviser believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries which have issued or have announced plans
to issue Brady Bonds an attractive opportunity for investment.
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Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of the date of this Statement of Additional Information, the Fund is not
aware of the occurrence of any payment defaults on Brady Bonds. Investors should
recognize however, that Brady Bonds have been issued only recently, and,
accordingly, they do not have a long payment history. Agreements implemented
under the Brady Plan to date are designed to achieve debt and debt-service
reduction through specific options negotiated by a debtor nation with its
creditors. As a result, the financial packages offered by each country differ.
The types of options have included the exchange of outstanding commercial bank
debt for bonds issued at 100% of face value of such debt, bonds issued at a
discount of face value of such debt, bonds bearing an interest rate which
increases over time and bonds issued in exchange for the advancement of new
money by existing lenders. Certain Brady Bonds have been collateralized as to
principal due at maturity by U.S. Treasury zero coupon bonds with a maturity
equal to the final maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds. Collateral
purchases are financed by the IF, the World Bank and the debtor nations'
reserves. In addition, the first two or three interest payments on certain types
of Brady Bonds may be collateralized by cash or securities agreed upon by
creditors. Although Brady Bonds may be collateralized by U.S. Government
securities, repayment of principal and interest is not guaranteed by the U.S.
Government.
Short Term Trading and Portfolio Turnover. The Fund may attempt to
maximize current income through short-term portfolio trading. This will involve
selling portfolio instruments and purchasing different instruments to take
advantage of yield disparities in different segments of the market for
Government Obligations. Short-term trading may have the effect of increasing
portfolio turnover rate. A high rate of portfolio turnover (100% or greater)
involves corresponding higher transaction expenses and may make it more
difficult for the Fund to qualify as a regulated investment company for federal
income tax purposes.
Defensive Investments. For temporary defensive purposes, the Fund may
invest some or all of its assets in investment grade short-term securities.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment
restrictions will not be changed without approval of a majority of the Fund's
outstanding voting securities which, as used in the Prospectus and this
Statement of Additional Information, means approval by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at a meeting if at least
50% of the Fund's outstanding shares are present in person or by proxy at that
meeting or (2) more than 50% of the Fund's outstanding shares.
The Fund observes the fundamental restrictions listed in items (1)
through (9) below.
The Fund may not:
(1) Issue senior securities, except as permitted by paragraph (2)
below. For purposes of this restriction, the issuance of
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shares in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts,
forward foreign currency exchange contracts, forward
commitments and repurchase agreements entered into in
accordance with the Fund's investment policies, and the
pledge, mortgage or hypothecation of the Fund's assets within
the meaning of paragraph (3) below, are not deemed to be
senior securities.
(2) Borrow money in amounts exceeding 33% of the Fund's total
assets (including the amount borrowed) taken at market value.
Interest paid on borrowings will reduce income available to
shareholders.
(3) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if
the assets subject to such pledging, mortgaging or
hypothecation do not exceed 33% of the Fund's total assets
taken at market value.
(4) Act as an underwriter, except to the extent that, in
connection with the disposition of portfolio securities, the
Fund may be deemed to be an underwriter for purposes of the
Securities Act of 1933.
(5) Purchase or sell real estate or any interest therein,
including real estate limited partnerships, except that the
Fund may invest in securities of corporate or governmental
entities secured by real estate or marketable interests
therein or securities issued by companies that invest in real
estate or interests therein.
(6) Make loans, except for collateralized loans of portfolio
securities in accordance with the Fund's investment policies.
The Fund does not, for this purpose, consider the purchase of
all or a portion of an issue of bonds, bank certificates of
deposit, bankers' acceptances, debentures or other securities,
whether or not the purchase is made upon the original issuance
of the securities, to be the making of a loan.
(7) Buy or sell commodities, commodity contracts, puts, calls or
combinations thereof, except futures contracts and options on
securities, securities indices, currency and other financial
instruments, options on such futures contracts, forward
foreign currency exchange contracts, forward commitments,
interest rate or currency swaps, securities index put or call
warrants and repurchase agreements entered into in accordance
with the Fund's investment policies.
(8) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after
such purchase, the value of its investments in such industry
would exceed 25% of its total assets taken at market value at
the time of each investment. This limitation does not apply to
investments in obligations of the U.S. Government or any of
its agencies or instrumentalities.
(9) Purchase securities of an issuer (other than the U.S.
Government, its agencies or instrumentalities), if, with
respect to 75% of the Fund's total assets,
(i) more than 5% of the Fund's total assets taken at
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market value would be invested in the securities of
such issuer, or,
(ii) such purchase would at the time result in more than
10% of the outstanding voting securities of such
issuer being held by the Fund.
In connection with the lending of portfolio securities under item (6)
above, such loans must at all times be fully collateralized and the Fund's
custodian must take possession of the collateral either physically or in book
entry form. Securities used as collateral must be marked to market daily.
Nonfundamental Investment Restrictions. The following investment
restrictions are designated as nonfundamental and may be changed by the Trustees
without shareholders' approval.
The Fund may not:
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser to save commissions or to average prices
among them is not deemed to result in a joint securities trading
account.
(b) Purchase securities on margin (except that it may obtain such
short-term credits as may be necessary for the clearance of
transactions in securities and forward foreign currency exchange
contracts and may make margin payments in connection with transactions
in futures contracts and options on futures) or make short sales of
securities unless by virtue of its ownership of other securities, the
Fund has the right to obtain, without the payment of any additional
consideration, securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is made upon
the same conditions.
(c) Purchase securities of an issuer if, to the Fund's knowledge, one or
more of the Trustees or officers of the Trust or the directors or
officers of the Adviser individually owns beneficially more than 0.5%
and together own beneficially more than 5% of the securities of such
issuer.
(d) Purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii)
more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not
apply to (a) the investment of cash collateral, received by the Fund in
connection with lending the Fund's portfolio securities, in the
securities of open-end investment companies or (b) the purchase of
shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the
assets of another investment company. Subject to the above percentage
limitations, the Fund may, in connection with the John Hancock Group of
Funds Deferred Compensation Plan for Independent Trustees/Trustees,
purchase securities of other investment companies within the John
Hancock Group of Funds. The Fund may not purchase the shares of any
closed-end investment company except in the open market where no
commission or profit to a sponsor or dealer results from the purchase,
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other than customary brokerage fees.
(e) Purchase securities of any issuer which, together with any predecessor,
has a record of less than three years' continuous operations if such
purchase would cause investments of the Fund in all such issuers to
exceed 5% of the value of the total assets of the Fund.
(f) Invest for the purpose of exercising control over or management of any
company.
(g) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Fund's total assets would be invested
in warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange or more than 5% of the value of the total
assets of the Fund would be invested in warrants generally, whether or
not so listed. For these purposes, warrants are to be valued at the
lesser of cost or market, but warrants acquired by the Fund in units
with or attached to debt securities shall be deemed to be without
value.
(h) Purchase any security, including any repurchase agreement maturing in
more than 7 days, which is not readily marketable, if more than 15% of
the net assets of the Fund, taken at market value, would be invested in
such securities. (The staff of the Securities and Exchange Commission
may consider over-the-counter options to be illiquid securities subject
to the 15% limit.)
(i) Purchase interests in oil, gas or other mineral leases or exploration
programs or leases; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or
transmission of oil, gas or other minerals.
(j) Purchase a security if, as a result, more than 15% of the Fund's assets
would be invested in securities which are restricted as to disposition;
however, this policy will not restrict the acquisition of restricted
securities offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act of 1933 or to foreign securities
purchased in accordance with Regulation S under the Securities Act of
1933.
In order to permit the sale of shares of the Fund in certain states,
the Trustees may, in its sole discretion, adopt restrictions or investment
policies more restrictive than those described above. Should the Trustees
determine that any such more restrictive policy is no longer in the best
interest of the Fund and its shareholders, the Fund may cease offering shares in
the state involved and the Board may revoke such restrictive policy. Moreover,
if the states involved shall no longer require any such restrictive policy, the
Trustees may, at its sole discretion, revoke such policy. The Fund has agreed
with state securities administrators that it will not purchase the following
securities:
The Fund agrees that, in accordance with the Ohio Securities Division
and until such regulations are no longer required, it will comply with rule
1301:6-3-09(E)(9) by not investing in the securities of other open-end and
closed-end investment companies except by purchase in the open market where no
commission or profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or except when the purchase is part of a plan
of merger, consolidation, reorganization or acquisition.
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If a percentage restriction on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the value of the Fund's assets will not
be considered a violation of the restriction.
RATINGS
As described in this Statement of Additional Information, at least 75%
of the Fund's investments in fixed income securities will be comprised of
securities in the four highest applicable ratings of S&P and Moody's or their
equivalent or unrated securities deemed of comparable quality by the Adviser.
See the Appendix attached to this Statement of Additional Information, which
describes the characteristics of the securities in the various categories.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers
who are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Trust are also officers or directors of the Adviser or officers or directors of
John Hancock Funds, Inc. ("John Hancock Funds") the Fund's principal
distributor.
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp."); Director,
John Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Capital Corporation and New
England/Canada Business Council;
Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April
1994); Director, John Hancock
Freedom Securities Corporation
(until September 1996); Director,
John Hancock Signature Services,
Inc. ("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
22
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea (until
August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
23
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds; Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993); Director, Signature
Services (until January 1996).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
24
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
25
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp. and NM Capital; Trustee,
The Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, John Hancock Property and
Casualty Insurance and its
affiliates (until November 1993);
Director, Signature Services (until
January 1997).
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
26
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
27
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, SAMCorp.,
Insurance Agency, Inc. and NM
Capital; Counsel, John Hancock
Mutual Life Insurance Company (until
January 1997).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group, Vice
March 1950 President, John Hancock
Distributors, Inc. (until 1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
28
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.
As of October 31, 1996, the officers and Trustees of the Fund as a
group beneficially owned less than 1% of the outstanding shares of the Fund and
to the knowledge of the registrant, no persons owned of record or beneficially
5% or more of any class of the registrant's outstanding securities.
The following table provides information regarding the compensation
paid by the Fund and the other investment companies in the John Hancock Fund
Complex to the Independent Trustees for their services for the Fund's most
recently completed fiscal year. The four non-independent Trustees, Messrs.
Boudreau, Cameron, Scipione and Ms. Hodsdon and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and
received no compensation from the Fund for their services.
Total Compensation
Aggregate From the Fund and
Independent Compensation John Hancock Fund
Trustees From the Fund Complex to Trustees(1)
-------- ------------- ----------------------
James F. Carlin $ 1,777 $ 60,700
Charles F. Fretz 2,568 56,200
Harold R. Hiser, Jr.* ---- 60,200
Charles L. Ladner 1,510 60,700
Patricia P. McCarter 1,510 60,700
Steven R. Pruchansky 1,560 62,700
Norman H. Smith 1,560 62,700
John P. Toolan* ---- 60,700
$10,485 $627,500
(1) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31,
1995. As of this date there were sixty-one funds in the John Hancock
Fund Complex, of which each of the Independent Trustees served as
Directors or Trustees of thirty-three funds.
* As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock Fund Complex for Mr.
Hiser was $31,324 and for Mr. Toolan was $71,437 under the John Hancock
Deferred Compensation Plan for Independent Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and presently has more than $19 billion in
assets under management in its capacity as investment adviser to the Fund and
other mutual funds and publicly traded investment companies in the John Hancock
group of funds having a combined total of over 1,080,000 shareholders. The
Adviser is an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
29
<PAGE>
management of more than $80 billion, the Life Company is one of the ten largest
life insurance companies in the United States, and carries high ratings from S&P
and A.M. Best's. Founded in 1862, the Life Company has been serving clients for
over 130 years.
The Fund has entered into an investment management contract with the
Adviser, under which the Adviser provides the Fund with a continuous investment
program, consistent with the Fund's stated investment objective and policies.
The Adviser is responsible for the day to day management of the Fund's portfolio
assets.
No person other than the Adviser and its directors and employees
regularly furnish advice to the Fund with respect to the desirability of the
Fund's investing in, purchasing or selling securities. The Adviser may from time
to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life Company
and its affiliates.
All expenses which are not specifically paid by the Adviser and which
are incurred in the operation of the Fund, including fees of Trustees of the
Trust who are not "interested persons," as such term is defined in the
Investment Company Act (the "Independent Trustees") and the continuous public
offering of the shares of the Fund are borne by the Fund but excluding certain
distribution-related activities required to be paid by the Adviser or John
Hancock Funds.
As discussed in the Prospectus and as provided by the investment
management contract, the Fund pays the Adviser monthly an investment management
fee, which is accrued daily, based on an annual rate of 0.60% of the average of
the daily net assets of the Fund. From time to time, the Adviser may reduce its
fee or make other arrangements to limit the Fund's expenses to a specified
percentage of average net assets. The Adviser retains the right to re-impose a
fee and recover other payments to the extent that, at the end of any fiscal
year, the Fund's actual expenses at year end fall below any such limit.
Investment Advisory fees to the Adviser during the fiscal year ended
December 31, 1995, 1994 and 1993 amounted to $891,221, $864,666 and $474,915,
respectively.
The Fund compensates the Adviser for performing necessary tax and
financial management services. The compensation for 1996 is estimated to be an
annual rate of 0.01875% of the average net assets of the Fund.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or any affiliate provides
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made, insofar as feasible,
for the respective funds or clients in a manner deemed equitable to all of them.
To the extent that transactions on behalf of more than one client of the Adviser
or affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Pursuant to the investment management contract, the Adviser is not
30
<PAGE>
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the investment management
contract relates, except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its duties or
from reckless disregard of its obligations and duties under the investment
management contract.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Company may grant the nonexclusive right to use the name "John Hancock"
or any similar name to any other corporation or entity, including but not
limited to any investment company of which the Life Company or any subsidiary or
affiliate thereof or any successor to the business of any subsidiary or
affiliate thereof shall be the investment adviser.
The Adviser has entered into a service agreement with Sovereign Asset
Management Corporation ("SAMCORP") which is an indirect wholly-owned subsidiary
of the Life Company. The service agreement provides that SAMCORP will provide to
the Adviser certain portfolio management services with respect to the equity
securities held in the portfolio of the Fund. The service agreement further
provides that the Adviser will remain ultimately responsible for all of its
obligations under the investment management contract between the Adviser and the
Fund. Subject to the supervision of the Adviser, SAMCORP furnishes the Fund with
recommendations with respect to the purchase, holding and disposition of equity
securities in the Fund's portfolio; furnishes the Fund with research, economic
and statistical data in connection with the Fund's equity investments; and
places orders for transactions in equity securities.
The Adviser pays to SAMCORP 40% of the monthly investment management
fee received by the Adviser with respect to the equity securities held in the
portfolio of the Fund during such month. The fees paid by the Fund to the
Adviser under the investment management contract are not affected by this
arrangement.
During the fiscal years ended December 31, 1995, 1994 and 1993, the
Adviser paid SAMCORP the sum of $118,896, $105,821, and $73,242, respectively,
in connection with the service agreement with SAMCORP.
The investment management contract and the distribution contract
discussed below continue in effect from year to year if approved annually by
vote of a majority of the Independent Trustees who are not interested persons of
one of the parties to the contract, cast in person at a meeting called for the
purpose of voting on approval, and by either the Trustees or the holders of a
majority of the Fund's outstanding voting securities. Each contract
automatically terminates upon assignment. Each contract may be terminated
without penalty on 60 days' notice at the option of either party to the
respective contract or by vote of a majority of the outstanding voting
securities of the Fund.
32
<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
31
<PAGE>
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National
Market Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the
primary market in which they are traded. If quotations are not readily available
or the value has been materially affected by events occurring after the closing
of a foreign market, assets are valued by a method that the Trustees believe
accurately reflects their value.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank based on London currency
exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of a Fund's NAV.
The Fund will not price its securities on the following national
holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day. On any day an
international market is closed and the New York Stock Exchange is open, any
foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
DISTRIBUTION CONTRACTS
The Fund has entered into a Distribution Agreement with John Hancock
Funds. Under the agreement, John Hancock Funds is obligated to use its best
efforts to sell shares of each class of the Fund. Shares of the Fund are also
sold by selected broker-dealers (the "Selling Brokers") which have entered into
selling agency agreements with John Hancock Funds. John Hancock Funds accepts
orders for the purchase of the shares of the Fund which are continually offered
at net asset value next determined, plus any applicable sales charge. In
connection with the sale of Class A or Class B shares, John Hancock Funds and
Selling Brokers receive compensation in the form of a sales charge imposed, in
the case of Class A shares, at the time of sale or, in the case of Class B
shares, on a deferred basis. Upon notice to all Selling Brokers, John Hancock
Funds may allow them up to the full applicable sales charge during periods
32
<PAGE>
specified in such notice. During these periods, Selling Brokers may be deemed to
be underwriters as that term is defined in the 1933 Act. The sales charges are
discussed further in the Prospectus.
The Fund's Trustees adopted Distribution Plans with respect to Class A
and Class B shares ("the Plans"), pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Under the Plans, the Fund will pay distribution and service
fees at an aggregate annual rate of up to 0.30% and 1.00% respectively, of the
Fund's daily net assets attributable to shares of that class. However, the
service fee will not exceed 0.25% of the Fund's average daily net assets
attributable to each class of shares. The distribution fees are used to
reimburse John Hancock Funds for its distribution expenses, including but not
limited to: (i) initial and ongoing sales compensation to Selling Brokers and
others (including affiliates of John Hancock Funds) engaged in the sale of Fund
shares; (ii) marketing, promotional and overhead expenses incurred in connection
with the distribution of Fund shares; and (iii) with respect to Class B shares
only, interest expenses on unreimbursed distribution expenses. The service fees
will be used to compensate Selling Brokers for providing personal and account
maintenance services to shareholders. In the event that John Hancock Funds is
not fully reimbursed for payments it makes or expenses it incurs under the Class
A Plan, these expenses will not be carried beyond one year from the date they
were incurred. In the event that John Hancock Funds is not fully reimbursed for
expenses incurred by it under the Class B Plan in any fiscal year, John Hancock
Funds may carry these expenses forward together with interest on the balance of
these unreimbursed expenses, provided, however, that the Trustees may terminate
the Class B Plan and thus the Fund's obligation to make further payments at any
time. Accordingly, the Fund does not treat unreimbursed expenses relating to the
Class B shares as a liability of the Fund. The Plans were approved by a majority
of the voting securities of the Fund. The Plans and all amendments were approved
by the Trustees, including a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plans (the "Independent Trustees"), by votes cast in person at
meetings called for the purpose of voting on such Plans.
For the year ended December 31, 1995, an aggregate of $3,097,061 of
distribution expenses or 3.7% of the average net assets of Class B shares were
not reimbursed or recovered by John Hancock Funds through the receipt of
deferred sales charges or 12b-1 fees.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides
the Fund with a written report of the amounts expended under the Plans and the
purpose for which the expenditures were made. The Trustees review these reports
on a quarterly basis to determine their continued appropriateness.
33
<PAGE>
During the fiscal year ended December 31, 1995 the Funds paid John
Hancock Funds the following amounts of expenses with respect to the Class A and
Class B shares of the Funds.
<TABLE>
<CAPTION>
Expense Items
Printing and Expenses of Interest
Mailing of Compensation John Carrying or
Prospectus to to Hancock Other Finance
Advertising New Shareholders Selling Brokers Funds Charges
----------- ---------------- --------------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A Shares $33,515 $3,846 $98,915 $59,699 None
Class B Shares $53,861 $4,475 $328,674 $83,603 $351,388
</TABLE>
Each of the Plans provides that it will continue in effect only so long
as their continuance is approved at least annually by the Trustees and by the
Independent Trustees. Each of the Plans provides that it may be terminated
without penalty (a) by a vote of a majority of the Independent Trustees (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class
having voting rights with respect to the Plan upon 60 days' written notice to
John Hancock Funds, and (c) automatically in the event of assignment. Each of
the Plans further provides that it may not be amended to increase the maximum
amount of the fees for the services described therein without the approval of a
majority of the outstanding shares of the class of the Fund which has voting
rights with respect to the Plan. Each of the Plans also provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a vote of the Trustees and the Independent Trustees of the Fund. The
holders of Class A shares and Class B shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that each Plan will benefit the holders of the applicable class of
shares of the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset
value plus a sales charge which, at the option of the purchaser, may be imposed
either at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then they will only be issued for full shares. The Trustees reserve the
right to change or waive the Fund's minimum investment requirements and to
reject any order to purchase shares (including purchases by exchange) when in
the judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund
are described in the Prospectus. Methods of obtaining reduced sales charges
referred to generally in the Prospectus are described in detail below. In
calculating the sales charge applicable to current purchases of Class A shares,
the investor is entitled to cumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund owned by the
investor, or if John Hancock Signature Services, Inc. ("Signature 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
34
<PAGE>
purchases of Class A shares made at one time, the purchases will be combined if
made by (a) an individual, his or her spouse and their children under the age of
21, purchasing securities for his or their own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account, and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Signature
Services or a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment
laws from paying a sales charge or commission when it purchases shares
of any registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if
it is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, mother, father, sister, brother, mother-in-law,
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into an agreement with John Hancock
Funds providing specifically for the use of Fund shares in fee-based
investment products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any
or all of his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed defined contribution plans with at least 100 eligible
employees at the inception of the Fund account, may purchase Class A
shares with no initial sales charge. However, if the shares are
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
<PAGE>
Amount Invested CDSC Rate
--------------- ---------
$1 to$4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
36
<PAGE>
Accumulation Privilege. Investors (including investors combining
purchases) who are already Class A shareholders may also obtain the benefit of a
reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or current value of the Class A shares
already held by such person.
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<PAGE>
Combination Privilege. Reduced sales charges (according to the schedule
set forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. Reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may opt to make the necessary
investments called for by the LOI over a forty-eight (48) month period. These
qualified retirement plans include group IRA's, SEP, TSA, 401(k) plans, 403(b)
plans, and Section 457 plans. Such an investment (including accumulations and
combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Signature Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period
within 13 or 48 months, the sales charge applicable will not be higher than that
which would have been applied (including accumulations and combinations) had the
LOI been for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient
Class A shares (approximately 5% of the aggregate) to make up any difference in
sales charges on the amount intended to be invested and the amount actually
invested, until such investment is completed within the 13-month period, at
which time the escrowed Class A shares will be released. If the total investment
specified in the LOI is not completed, the Class A shares held in escrow may be
redeemed and the proceeds used as required to pay such sales charge as may be
due. By signing the LOI, the investor authorizes Signature Services to act as
his attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant directed
defined contribution plans with at least 100 eligible employees at the inception
of the Fund account may purchase Class A shares with no initial sales charge.
However, if the shares are redeemed within 12 months after the end of the
calendar year in which the purchase was made, a CDSC will be imposed at the
above rate.
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per
36
<PAGE>
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within six years of purchase will be subject to a contingent deferred sales
charge ("CDSC") at the rates set forth in the Prospectus as a percentage of the
dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the current market value or the original purchase cost of
the shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase price, including shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution
plans administered by Investor Services or the Life Company that had more than
100 eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six-year CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount, please
indicate if you require the proceeds to equal the dollar amount requested. If
not indicated, only the specified dollar amount will be redeemed from your
account and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
-----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to Investor Services and are used in
37
<PAGE>
whole or in part by Signature Services to defray its expenses related to
providing distribution- related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees facilitates the ability of the Fund to sell the
Class B shares without a sales charge being deducted at the time of the
purchase. See the Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Investor
Services. (Please note, this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plan and
Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
38
<PAGE>
<TABLE>
<CAPTION>
CDSC Waiver Matrix for Class B Funds
- ---------------------------------------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-Retirement
Distribution (401(k), MPP, Rollover
PSP)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ---------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account value
distributions annually in
or 12% of periodic
account value payments
annually in
periodic
payments.
- ---------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of
and 70 1/2 Expectancy or account value
12% of account annually in
value annually periodic
in periodic payments
payments.
- ---------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account value
payments (72t) payments (72t) payments (72t) annually in
or 12% of or 12% of or 12% of periodic
account value account value account value payments
annually in annually in annually in
periodic periodic periodic
payments. payments. payments.
- ---------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- ---------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you
must notify Signature Services at the time you make your redemption. The waiver
will be granted once Signature Services has confirmed that you are entitled to
the waiver.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectus, the Fund
permits exchanges of shares of the Fund for shares of the same class in any
other John Hancock fund offering that class.
39
<PAGE>
Systematic Withdrawal Plan. The Fund permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent proceeds arising
from the redemption of Fund's shares. Since the redemption price of the Fund's
shares may be more or less than the shareholder's cost, depending upon the
market value of the securities owned by the Fund at the time of redemption, the
distribution of cash pursuant to this plan may result in realization of gain or
loss for purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
Class B shares of the Fund could be disadvantageous to a shareholder because of
the initial sales charge payable on purchases of Class A shares and the CDSC
imposed on redemptions of Class B shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase Class A or Class B shares
at the same time as a Systematic Withdrawal Plan is in effect. The Fund reserves
the right to modify or discontinue the Systematic Withdrawal Plan of any
shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Investor Services.
Monthly Automatic Accumulation Program (MAAP). This program in the
Prospectus. The program, as it relates to automatic investment drafts, is
subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly
Automatic Accumulation Program may be revoked by Signature
Services without prior notice if any investment is not honored
by your bank. The bank shall be under no obligation to notify
the shareholder as to the non-payment of any checks.
The Program may be discontinued by the shareholder either by
calling Investor Services or upon written notice to Signature
Services which is received at least five (5) business days
prior to the processing date of any investment.
Reinvestment Privilege. A shareholder who has redeemed shares of the
Fund may, within 120 days after the date of redemption, reinvest without payment
of a sales charge any part of the redemption proceeds in shares of the same
class of the Fund or another John Hancock funds, subject to the minimum
investment limit in any fund. The proceeds from the redemption of Class A shares
may be reinvested at net asset value without paying a sales charge in Class A
shares of any John Hancock funds. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from such redemption at net asset value in
additional shares of the class from which the redemption was made. Such
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and such new shares will continue to be subject to the
CDSC. For purposes of determining the amount of any CDSC imposed upon a
subsequent redemption, the holding period of the shares acquired through
reinvestment will include the holding period of the redeemed shares. The Fund
may modify or terminate the reinvestment privilege at any time.
A redemption or exchange of shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
shares will be treated for tax purposes as described below.
40
<PAGE>
DESCRIPTION OF FUND SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund, without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have authorized shares of the Fund and
two other series. The Declaration of Trust also authorizes the Trustees to
classify and reclassify the shares of the Fund, or any new series of the Trust,
into one or more classes. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund, designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective distribution plans. The different
classes of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences resulting from the
facts that (i) the distribution and service fees relating to Class A and Class B
shares will be borne exclusively by that class; (ii) Class B shares will pay
higher distribution and service fees than Class A shares; and (iii) each of
Class A shares and Class B shares will bear any class expenses properly
allocable to such class of shares, subject to the requirements imposed by the
Internal Revenue Service on funds having a multiple-class structure.
Accordingly, the net asset value per share may vary depending whether Class A
shares or Class B shares are purchased.
In the event of liquidation, shareholders of each class are entitled to
share pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund shareholders may remove a Trustee by the affirmative vote of
at least two-thirds of the Trust's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
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
41
<PAGE>
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Furthermore, no fund included in the Fund's prospectus shall
be liable for any other John Hancock Fund. Liability is therefore limited to
circumstances in which the Fund itself would be unable to meet its obligations,
and the possibility of this occurrence is remote.
In order to avoid conflicts with portfolio trades for the Fund, the
Adviser and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. Some of these
restrictions are: pre-clearance for all personal trades and a ban on the
purchase of initial public offerings, as well as contributions to specified
charities of profits on securities held for less than 91 days. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
A shareholders account is goverend by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and has elected
to be treated as a "regulated investment company" under Subchapter M of the
Code. As such and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions and the
diversification of its assets, the Fund will not be subject to Federal income
tax on taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
The Fund will be subject to a four percent nondeductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to seek to avoid or
minimize liability for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P") will be taxable under the Code for investors who are subject to
tax. If these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's federal tax basis
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
42
<PAGE>
pursuant to such a reinvestment equal to the amount of cash they would have
received had they elected to receive the distribution in cash, divided by the
number of shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, foreign currency forward contracts, certain foreign currency futures
and options, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to the Fund's investment in stock or
securities, possibly including certain currency positions or derivatives not
used for hedging purposes, may increase the amount of gain it is deemed to
recognize from the sale of certain investments or derivatives held for less than
three months, which gain is limited under the Code to less than 30% of its gross
income for each taxable year and may under future Treasury regulations produce
income not among the types of "qualifying income" from which the Fund must
derive at least 90% of its gross income for each taxable year. If the net
foreign exchange loss for a year treated as ordinary loss under Section 988 were
to exceed the Fund's investment company taxable income computed without regard
to such loss the resulting overall ordinary loss for such year would not be
deductible by the Fund or its shareholders in future years.
The Fund may be subject to withholding and other taxes imposed by
foreign countries with respect to its investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Because more than 50% of the Fund's assets at the close of any taxable
year will not consist of stocks or securities of foreign corporations, the Fund
will be unable to pass such taxes through to shareholders, who consequently will
not take such taxes into account on their own tax returns. However, the Fund
will deduct such taxes in determining the amount it has available for
distribution to shareholders.
If the Fund acquires stock in certain foreign corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may, if available, ameliorate there
adverse tax consequences, but any such election would require the Fund to
recognize taxable income or gain without the concurrent receipt of cash. The
Fund may limit and/or manage its holdings in passive foreign investment
companies to minimize its tax liability or maximize its return from these
investments.
The amount of net realized capital gains, if any, in any given year
will result from sales of securities or transactions in options or futures made
with a view to the maintenance of a portfolio believed by the Fund's management
to be most likely to attain the Fund's objective. Such sales, and any resulting
gains or losses, may therefore vary considerably from year to year. At the time
of an investor's purchase of shares of the Fund, a portion of the purchase price
is often attributable to realized or unrealized appreciation in the Fund's
43
<PAGE>
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions on these shares from such appreciation or income may be taxable to
such investor even if the net asset value of the investor's shares is, as a
result of the distributions, reduced below the investor's cost for such shares
and the distributions in reality represent a return of a portion of the purchase
price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
90 days after their purchase to the extent Class A shares of the Fund or another
John Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. Such disregarded charge will
result in an increase in the shareholder's tax basis in the Class A shares
subsequently acquired. Also, any loss realized on a redemption or exchange may
be disallowed to the extent the shares disposed of are replaced with other
shares of the Fund within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of, such as pursuant to automatic
dividend reinvestments. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long- term capital gain with respect to such shares.
Although the Fund's present intention is to distribute, at least
annually, all net capital gain, if any, the Fund reserves the right to retain
and reinvest all or any portion of the excess, as computed for Federal income
tax purposes, of net long-term capital gain over net short-term capital loss in
any year. The Fund will not in any event distribute net capital gain realized in
any year to the extent that a capital loss is carried forward from prior years
against such gain. To the extent such excess was retained and not exhausted by
the carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares by the
difference between his pro rata share of such excess and his pro rata share of
such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and as noted above would not be distributed as such to
shareholders. The Fund has $259,999 of a capital loss carryforward available, to
the extent provided by regulations, to offset future net realized capital gains.
The carryforward expires December 31, 2002.
44
<PAGE>
For purposes of the dividends received deduction available to
corporations, dividends received by the Fund, if any, from U.S. domestic
corporations in respect of the stock of such corporations held by the Fund, for
U.S. Federal income tax purposes, for at least 46 days (91 days in the case of
certain preferred stock) and distributed and properly designated by the Fund may
be treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
shares of the Fund in order to qualify for the deduction and, if they have any
debt that is deemed under the Code directly attributable to such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability, if any. Additionally, any corporate
shareholder should consult its tax adviser regarding the possibility that its
basis in its shares may be reduced, for Federal income tax purposes, by reason
of "extraordinary dividends" received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of the
shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The Fund is required to accrue income on any debt securities that have
more than a de minimis amount of original issue discount (or debt securities
acquired at a market discount, if the Fund elects to include market discount in
income currently) prior to the receipt of the corresponding cash payments. The
mark to market rules applicable to certain options, futures contracts, and
forward contracts may also require the Fund to recognize income or gain without
a concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or may have to leverage itself by borrowing the cash, to
satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. The Fund will not
seek to satisfy any threshold or reporting requirements that may apply in
particular taxing jurisdictions, although the Fund may in its sole discretion
provide relevant information to shareholders.
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all taxable distributions to shareholders, as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt recipients, i.e., corporations and certain other investors distributions
to which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
45
<PAGE>
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
Investments in debt obligations that are at risk of or in default
present special tax issues for the Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount; when and to what extent deductions may be taken
for bad debts or worthless securities; how payments received on obligations in
default should be allocated between principal and income; and whether exchanges
of debt obligations in a workout context are taxable. These and other issues
will be addressed by the Fund, in the event it invests in such securities, in
order to reduce the risk of distributing insufficient income to preserve its
status as a regulated investment company and seek to avoid becoming subject to
Federal income or excise tax.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into futures, options, foreign
currency positions and foreign currency forward contracts. Certain of these
transactions undertaken by the Fund may cause the Fund to recognize gains or
losses from marking to market even though its positions have not been sold or
terminated and affect their character as long-term or short-term (or, in the
case of certain currency forwards, options, or futures, as ordinary income or
loss) and timing of some gains and losses realized by the Fund. Also, some of
the Fund's losses on its transactions involving options, futures and forward
contracts and/or offsetting or successor portfolio positions may be deferred
rather than being taken into account currently in calculating the Fund's taxable
income or gain. Certain of these transactions may also cause the Fund to dispose
of investments sooner than would otherwise have occurred. Some of the applicable
tax rules may be modified if the Fund is eligible and chooses to make one or
more of certain tax elections that may be available. These transactions may
therefore affect the amount, timing and character of the Fund's distributions to
shareholders. The Fund will take into account the special tax rules applicable
to options, futures and forward contracts (including consideration of any
available elections) in order to minimize any potential adverse tax
consequences.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax exempt entities, insurance companies
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of shares of the
Fund may also be subject to state and local taxes. Shareholders should consult
their own tax advisers as to the Federal, state or local tax consequences of
ownership of shares of, and receipt of distributions from, the Fund in their
particular circumstances.
46
<PAGE>
Non-U.S. investors not engaged in a U.S. trade or business with which
their Fund investment is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund. The Fund is not subject to Massachusetts corporate excise or
franchise taxes. Provided that the Fund qualifies as a regulated investment
company under the Code, it will not be required to pay any Massachusetts income
tax.
CALCULATION OF PERFORMANCE
The average annual total return is determined separately for each class
of shares at June 30, 1996 with all distributions reinvested in shares. The
average annualized total returns for Class A shares for the 1-year period and
since the Fund's inception on October 5, 1992, were 9.99% and 8.72%,
respectively, and reflect payment of the maximum sales charge of 5.00%. The
average annualized total returns for Class B shares for the 1-year period and
since the Fund's inception on October 5, 1992, were 9.95% and 9.07%,
respectively, and reflects applicable contingent deferred sales charge (maximum
contingent deferred sales charge of 5% declines to 0% over six years).
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 year and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1 year and life-of-fund periods.
Because each share has its own sales charge and fee structure, the
classes have different performance results. In the case of Class A or Class B
48
<PAGE>
shares, this calculation assumes the maximum sales charge is included in the
initial investment or the CDSC is applied at the end of the period,
respectively. This calculation assumes that all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the period. The
47
<PAGE>
"distribution rate" is determined by annualizing the result of dividing the
declared dividends of the Fund during the period stated by the maximum offering
price or net asset value at the end of the period. Excluding the Fund's sales
charge from the distribution rate produces a higher rate.
In addition to average annual total returns, the Fund may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's sales charge on
Class A shares or the CDSC on Class B shares into account. Excluding the Fund's
sales charge on Class A and the CDSC on Class B shares from a total return
calculation produces a higher total return figure.
The Fund's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price per share on
the last day of the period, according to the following standard formula:
Yield = 2 ([(a - b) + 1] 6 - 1)
---
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued during the period (net of fee reductions and expense
limitation payments, if any).
c = the average daily number of shares outstanding during the period
that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The Class A and Class B shares' yield at June 30, 1996 was 2.87% and
2.32%, respectively. Both total return and yield calculations for Class A shares
include the effect of paying the maximum sales charge of 5.00%. Investments at
lower sales charges would result in higher performance figures. Both total
return and yield for the Class B shares reflect deduction of the applicable CDSC
imposed on a redemption of shares held for the applicable period. All
calculations assume that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the periods. The total return and
yield of Class A and Class B shares will differ; the Fund will include the total
return and yield of both classes in any advertisement or promotional material
including Fund performance data. The value of Fund shares, when redeemed, may be
more or less than their original cost. Both total return and yield are
historical calculations and are not an indication of future performance.
From time to time, in reports and promotional literature, the Fund's
yield and total return will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper-Fund
48
<PAGE>
Performance Analysis," a publication which tracks mutual fund net assets, total
return, and yield. Comparisons may also be made to bank certificates of deposit
("CDs"), which differ from mutual funds, such as the Fund, in several ways. The
interest rate established by the sponsoring bank is fixed for the term of a CD,
there are penalties for early withdrawal from CDs, and the principal on a CD is
insured.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, the WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, BARRON'S and IBBOTION ASSOCIATES
will also be utilized as well as the RUSSELL and WILSHIRE indices. The Fund may
also cite Morningstar Mutual Values, an independent mutual fund information
service which ranks mutual funds. The Fund's promotional and sales literature
may make reference to the Fund's "beta." Beta is a reflection of the
market-related risk of the Fund by showing how responsive the Fund is to the
market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares; and changes in operating expenses
are all examples of items that can increase or decrease the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of
the Fund are made by the Adviser pursuant to recommendations made by its
investment committee of the Adviser, which consists of directors of the Adviser
and officers and Trustees who are interested persons of the Trust. Orders for
purchases and sales of securities are placed in a manner, which, in the opinion
of the Adviser, will offer the best price and market for the execution of each
such transaction. Purchases from underwriters of portfolio securities may
include a commission or commissions paid by the issuer and transactions with
dealers serving as market maker reflect a "spread." Debt securities are
generally traded on a net basis through dealers acting for their own account as
principals and not as brokers; no brokerage commissions are payable on these
transactions.
In the U.S. and in some other countries, debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. In other countries, both debt and
equity securities are traded on exchanges at fixed commission rates. Commissions
on foreign transactions are generally higher than the negotiated commission
rates available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and other policies as the Board of Trustees may determine, the
49
<PAGE>
Adviser may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser of the
Fund, and their value and expected contribution to the performance of the Fund.
It is not possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser, and,
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no commitment to allocate portfolio
transactions upon any prescribed basis. While the Adviser will be primarily
responsible for the allocation of the Fund's brokerage business, the policies
and practices of the Adviser in this regard must be consistent with the
foregoing and will at all times be subject to review by the Trustees. For the
fiscal years ended December 31, 1995, 1994 and 1993, the Fund paid brokerage
commissions in the amount of $187,534, $106,785 and $163,746, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Fund may pay to a broker which provides brokerage and research services to
the Fund an amount of disclosed commission in excess of the commission which
another broker would have charged for effecting that transaction. This practice
is subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to these policies as the Board
may adopt from time to time.
For the fiscal year ended December 31, 1995, the Fund paid commissions
in the amount of $40,621 to compensate brokers for research services evaluations
of securities.
The Adviser's indirect parent, the Life Company, is an indirect
shareholder of Tucker Anthony Incorporated and Sutro & Company, Inc. and the
indirect sole shareholder of John Hancock Distributors, which are all
broker-dealers ("Affiliated Brokers"). Pursuant to procedures determined by the
Board of Trustees and consistent with the above policy of obtaining best net
results, the Fund may execute portfolio transactions with or through Affiliated
Brokers. During the fiscal years ending December 31, 1995, 1994 and 1993, the
Fund did not execute any portfolio transactions with Affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Fund on
securities or commodities exchange transactions, subject, however, to the
general policy of the Fund set forth above and the procedures adopted by the
Board of Trustees pursuant to the Investment Company Act. Commissions paid to an
Affiliated Broker must be at least as favorable as those which the Board
believes to be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or sold. A
transaction would not be placed with an Affiliated Broker if the Fund would have
to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
50
<PAGE>
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Trust, the Adviser or the Affiliated Broker. Any such transactions
would be subject to a good faith determination by the Trustees that the
compensation paid to Affiliated Brokers is fair and reasonable. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
and related skills will not be used by the Affiliated Broker as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria. The Fund will not engage in principal transactions with
Affiliated Brokers.
Other investment advisory clients advised by the Adviser may also
invest in the same securities as the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transactions as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable for
it. On the other hand, to the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way STE 1000,
Boston, MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company,
is the transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee for Class A shares of $19.00 per shareholder account and
for Class B shares of $22.50 per shareholder account, plus certain out-of-pocket
expenses. These expenses are aggregated and charged to the Fund and allocated to
each class on the basis of the related net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Trust and Investors Bank & Company, 89 South Street,
Boston, Massachusetts 02111. Under the custodian agreement, Investors Bank &
Company performs custody, portfolio and fund accounting services. These expenses
are aggregated and charged to the Fund and allocated to each class on the basis
of their relative net asset values.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116. The independent auditors audit
and render an opinion on the Fund's annual financial statements and prepare the
Fund's income tax returns.
51
<PAGE>
APPENDIX
Moody's describes its ratings for fixed income securities as follows:
Fixed income securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Fixed income securities which are rated "Aa" are judged to be of high quality by
all standards. Together with the Aaa group they are generally referred to as
"high grade" obligations. They are rated lower than the best fixed income
securities because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
Fixed income securities which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Fixed income securities which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such fixed income securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Fixed income securities which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes fixed income securities in this class.
Fixed income securities which are rated "B" generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Fixed income securities which are rated "Caa" are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Fixed income securities which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
Fixed income securities which are rated "C" are the lowest rated class of fixed
income securities and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
S&P describes its ratings for fixed income securities as follows:
A-1
<PAGE>
Fixed income securities rated "AAA" have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
Fixed income securities rated "AA" have a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.
Fixed income securities rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than fixed income
securities in higher rated categories.
Fixed income securities rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas such securities normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for fixed income securities in this category than in higher
rated categories.
Fixed income securities rated "BB," "B," "CCC," "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. "BB" indicates the lowest degree of speculation and "C" the highest
degree of speculation. While such fixed income securities will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Moody's describes its three highest ratings for commercial paper as follows:
Issuers rated "P-1" (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. "P-1" repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well- established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protections; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated "P-2" (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Issuers rated "P-3" (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
A-2
<PAGE>
S&P describes its three highest ratings for commercial paper as follows:
"A-1." This designation indicates that the degree of safety regarding timely
payment is very strong.
"A-2." Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1."
"A-3." Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
Quality Distribution
The average quality distribution of the portfolio for the fiscal year ended
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Y-T-D Rating Rating Assigned
Security Average % of Assigned by % of Assigned by % of
Rating Value Portfolio Adviser Portfolio Service Portfolio
<S> <C> <C> <C> <C> <C> <C>
AAA $23,631,725 16.0% 0 0.05 $23,631,725 16.0%
AA 3,340,775 2.2% 0 0.0% 3,340,775 2.2%
A 9.990.026 6.8% 0 0.0% 9,990,026 6.8%
BAA 8,349,007 5.6% 0 0.0% 8,349,007 5.6%
BA 5,156,810 3.5% 0 0.0% 5,156,810 3.5%
B 7,779,377 5.3% 0 0.0% 7,779,377 5.3%
CAA 0 0.0% 0 0.0% 0 0.0%
CA 0 0.0% 0 0.0% 0 0.0%
C 0 0.0% 0 0.0% 0 .00%
D 0 0.0% 0 0.0% 0 0.0%
================================================================================================
0
Debt 58,247,720 39.4% 0 0.0% 58,247,720 39.4%
Securities
0
Equity 84,752,103 57.5%
Securities
0
Short-Term 4,512,692 3.1%
Securities
0
Total 147,512,515 100.0%
Portfolio
0
Other 997,940
Assets-Net
0
Net Assets 148,510,455
===========
</TABLE>
A-4
<PAGE>
FINANCIAL STATEMENTS
F-1
