JOHN HANCOCK GROWTH AND INCOME FUND
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1997
This Statement of Additional Information provides information about John
Hancock Growth and Income Fund (the "Fund"), in addition to the information that
is contained in the combined Growth and Income Fund's Prospectus, dated January
1, 1997 (the "Prospectus"). The Fund is a diversified series of John Hancock
Investment Trust (the "Trust").
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.
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Trust ........................................... 2
Investment Objectives and Policies .................................. 2
Investment Restrictions ............................................. 12
Those Responsible for Management .................................... 15
Investment Advisory and Other Services .............................. 24
Distribution Contracts .............................................. 26
Net Asset Value ..................................................... 29
Initial Sales Charge on Class A Shares .............................. 30
Deferred Sales Charge on Class B Shares ............................. 32
Special Redemptions ................................................. 36
Additional Services and Programs .................................... 36
Description of the Fund's Shares .................................... 37
Tax Status .......................................................... 39
Calculation of Performance .......................................... 44
Brokerage Allocation ................................................ 46
Transfer Agent Services ............................................. 48
Custody of Portfolio ................................................ 48
Independent Auditors ................................................ 49
Appendix A .......................................................... A-1
Financial Statements ................................................ F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Trust is an open-end management investment company organized as a
Massachusetts business trust under a Declaration of Trust dated December 12,
1984. Prior to December 22, 1994, the Fund was called Transamerica Growth and
Income Fund. The investment objective of the Fund is to obtain the highest total
return, a combination of capital appreciation and current income, consistent
with reasonable safety of capital.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment
adviser. The Adviser is an indirect wholly-owned indirect subsidiary of John
Hancock Mutual Life Insurance Company (the "Life Company"), chartered in 1862
with national headquarters at John Hancock Place, Boston, Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
In selecting equity securities for the Fund, the Adviser emphasizes
issuers whose equity securities trade at valuation ratios lower than comparable
issuers or the Standard & Poor's Composite Index. Some of the valuation tools
used include price to earnings, price to cash flow and price to sales ratios and
earnings discount models. The Fund's portfolio will also include securities that
the Adviser considers to have the potential for capital appreciation, due to
potential recognition of earnings power or asset value which is not fully
reflected in the securities' current market value. The Adviser attempts to
identify investments which possess characteristics, such as high relative value,
intrinsic value, going concern value, net asset value and replacement book
value, which are believed to limit sustained downside price risk, generally
referred to as the "margin of safety" concept. The Adviser also considers an
issuer's financial strength, competitive position, projected future earnings and
dividends and other investment criteria.
The Fund's investment policy reflects the Adviser's belief that while
the securities markets tend to be efficient, sufficiently persistent price
anomalies exist which the strategically disciplined active equity manager can
exploit in seeking to achieve an above-average rate of return.
Each of the investment practices described in this section, unless
otherwise specified, is deemed to be a fundamental policy and may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities.
Investment in Foreign Securities. As a matter of non-fundamental policy
the Fund may invest up to 25% (and up to 35% during time of adverse U.S. market
conditions) of its total assets in securities of foreign issuers including
securities in the form of sponsored or unsponsored American Depository Receipts
("ADRs"), European Depository Receipts ("EDRs") or other securities convertible
into securities of foreign issuers. These securities may include debt and equity
securities of corporate and governmental issuers in countries with emerging
economies or securities markets. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe which
evidence a similar ownership arrangement. Issuers of unsponsored ADRs are not
2
<PAGE>
contractually obligated to disclose material information, including financial
information, in the United States. Generally, ADRs are designed for use in the
United States securities markets and EDRs are designed for use in European
securities markets.
Investments in foreign securities may involve a greater degree of risk
than those in domestic securities. There is generally less publicly available
information about foreign companies in the form of reports and ratings similar
to those that are published about issuers in the United States. Also, foreign
issuers are generally not subject to uniform accounting, auditing and financial
reporting requirements comparable to those applicable to United States issuers.
Because foreign securities may be denominated in currencies other than
the U.S. dollar, changes in foreign currency exchange rates will affect the
fund's net asset value, the value of dividends and interest earned, gains and
losses realized on the sale of securities, and any net investment income and
gains that the Fund distributes to shareholders. Securities transactions
undertaken in some foreign markets may not be settled promptly, so that the
Fund's investments on foreign exchanges may be less liquid and subject to the
risk of fluctuating currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market
whether through over-the-counter markets or exchanges located in the countries
where principal offices of the issuers are located. Foreign securities markets
are generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation, limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United State's economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiently and balance of
payments position.
The dividends in some cases, capital gains and interest payable on
certain of the Fund's foreign portfolio securities may be subject to foreign
withholding or other foreign taxes, thus reducing the net amount of income or
gains available for distribution to the Fund's shareholders.
Options on Foreign Currencies. Although the Fund has no current
intention of doing so, the Fund may purchase and write put and call options on
3
<PAGE>
foreign currencies for the purpose of protecting against declines in the dollar
value of portfolio securities and against increases in the dollar cost of
securities to be acquired.
As in the case of other types of options, however, the writing of an
option on foreign currency will constitute only a partial hedge, up to the
amount of the premium received, and the Fund could be required to purchase or
sell foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event of
rate movements adverse to the Fund's position, it may forfeit the entire amount
of the premium plus related transaction costs.
Options on foreign currencies are traded in a manner substantially
similar to options on securities. In particular, an option on foreign currency
provides the holder with the right to purchase, in the case of a call option, or
to sell, in the case of a put option, a stated quantity of a particular currency
for a fixed price up to a stated expiration date. The writer of the option
undertakes the obligation to deliver, in the case of a call option, or to
purchase, in the case of a put option, the quantity of the currency called for
in the option, upon exercise of the option by the holder.
As in the case of other types of options, the holder of an option on
foreign currency is required to pay a one-time, non-refundable premium, which
represents the cost of purchasing the option. The holder can lose the entire
amount of this premium, as well as related transaction costs, but not more than
this amount. The writer of the option, in contrast, generally is required to
make initial and variation margin payments similar to margin deposits required
in the trading of futures contracts and the writing of other types of options.
The writer is therefore subject to risk of loss beyond the amount originally
received and above the value of the option at the time it is entered into.
Certain options on foreign currencies, like forward contracts, are traded
over-the-counter through financial institutions acting as market-makers in such
options and the underlying currencies. Such transactions therefore involve risks
not generally associated with exchange-traded instruments. Options on foreign
currencies may also be traded on national securities exchanges regulated by the
SEC or commodities exchanges regulated by the Commodity Futures Trading
Commission.
Foreign Currency Transactions. The foreign currency exchange
transactions of the Fund may be conducted on a spot (i.e., cash) basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. The Fund may enter into forward foreign currency exchange contracts
involving currencies of the different countries in which it may invest as a
hedge against possible variations in the foreign exchange rate between these
currencies. This is accomplished through contractual agreements to purchase or
sell a specified currency at a specified future date and price set at the time
of the contract. The Fund's dealings in forward foreign currency contracts will
be limited to hedging either specific transactions or portfolio positions. The
Fund will not attempt to hedge all of its foreign portfolio positions and will
not engage in speculative forward currency transactions.
4
<PAGE>
If the Fund enters into a forward contract it to purchase foreign
currency, its custodian bank will segregate cash or liquid high grade debt
securities (i.e., securities rated in one of the top three rating categories by
Moody's or S&P) in a separate account of the Fund in an amount necessary to
complete the forward contract. These assets will be marked to market daily, and,
if the value of the securities in the separate account declines, additional cash
or liquid securities will be added so that the value of the account will be
equal to the amount of the Fund's commitments in forward contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. These transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency exchange
transactions varies with such factors as the currency involved, the length of
the contract period and the market conditions then prevailing. Since
transactions in foreign currency are usually conducted on a principal basis, no
fees or commissions are involved.
Lower Rated High Yield "High Risk" Debt Obligations. As a matter of
nonfundamental policy, the Fund may invest up to 5% of its net assets in high
yielding, fixed income instruments below investment grade; that is, securities
rated as low as B by Moody's Investors Service, Inc. ("Moody's") or B by
Standard & Poor's Ratings Group S&P.
Lower Rated High Yield "High Risk" Debt Obligations. As a matter of
nonfundamental policy, the Fund may invest up to 15% of its net assets in high
yielding, fixed income instruments below investment grade; that is, securities
rated as low as Ca by Moody's Investors Service, Inc. ("Moody's") or CC by
Standard & Poor's Ratings Group S&P.
Securities rated lower than Baa by Moody's or BBB by Standard & Poor's
are sometimes referred to as junk bonds. See the Appendix attached to this
Statement of Additional Information which describes the characteristics of the
securities in the various ratings categories. The Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the above-stated ratings. The credit ratings of Moody's and
Standard & Poor's, such as those ratings described here, may not be changed by
Moody's and Standard & Poor's in a timely fashion to reflect subsequent economic
events. The credit ratings or securities do not reflect an evaluation of market
risk. Debt obligations rated in the lower ratings categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income. In addition, lower ratings reflect a greater possibility of an adverse
change in financial condition affecting the issuer's ability to make payments of
interest and principal. The market price and liquidity of lower rated fixed
income securities generally respond more to short-term corporate and market
developments than do those of higher rated securities, because these
developments are perceived to have a more direct relationship to the ability of
an issuer of lower rated securities to meet its on going debt obligations. The
Adviser seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions.
5
<PAGE>
Reduced volume and liquidity in the high yield high risk bond market,
or the reduced availability of market quotations, will make it more difficult to
dispose of the bonds and to value accurately the Fund's assets. The reduced
availability of reliable, objective data may increase the Fund's reliance on
management's judgment in valuing high yield high risk bonds. In addition, the
Fund's investment in high yield high risk securities may be susceptible to
adverse publicity and investor perceptions, whether or not justified by
fundamental factors. The Fund's investments, and consequently its net asset
value, will be subject to the market fluctuations and risk inherent in all
securities. Increasing rate note securities are typically refinanced by the
issuers within a short period of time. The Fund may invest in pay-in-kind (PIK)
securities, which pay interest in either cash or additional securities, at the
issuer's option, for a specified period. The Fund also may invest in zero coupon
bonds, which have a determined interest rate, but payment of the interest is
deferred until maturity of the bonds. Both types of bonds may be more
speculative and subject to greater fluctuations in value than securities which
pay interest periodically and in cash, due to changes in interest rates.
The market value of debt securities which carry no equity participation
usually reflects yields generally available on securities of similar quality and
type. When such yields decline, the market value of a portfolio already invested
at higher yields can be expected to rise if such securities are protected
against early call. In general, in selecting securities for its portfolio, the
Fund intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Government Securities. As a matter of nonfundamental policy, the Fund's
investments in fixed income securities may include U.S. Government securities,
which are obligations issued or guaranteed by the U.S. Government and its
agencies, authorities or instrumentalities. Certain U.S. Government securities,
including U.S. Treasury bills, notes and bonds, and Government National Mortgage
Association certificates ("Ginnie Maes"), are supported by the full faith and
credit of the United States. Certain other U.S. Government securities issued or
guaranteed by Federal agencies or government sponsored enterprises, are not
supported by the full faith and credit of the United States, but may be
supported by the right of the issuer to borrow from the U.S. Treasury. These
securities include obligations of the Federal Home Loan Mortgage Corporation
("Freddie Macs"), and obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association bonds ("Fannie
Maes"). No assurance can be given that the U.S. Government will provide
financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Short-Term Bank and Corporate Obligations. As a matter of
nonfundamental policy, the Fund's investments in short-term investment grade
securities may include depository-type obligations of banks and savings and loan
associations and other high quality money market instruments consisting of
short-term obligations of the U.S. Government or its agencies and commercial
paper rated at least P-1 by Moody's or A-1 by Standard & Poor's. Commercial
6
<PAGE>
paper represents short-term unsecured promissory notes issued in bearer form by
banks or bank holding companies, corporations and finance companies.
Depository-type obligations in which the Fund may invest include certificates of
deposit, bankers' acceptances and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument at maturity. Fixed time deposits
are bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to domestic deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
Repurchase Agreements. In a repurchase agreement the Fund buy security
for a relatively short period (usually not more than seven days) subject to the
obligation to sell it back to the issuer at a fixed time and price plus accrued
interest. The Fund will enter into repurchase agreements only with member banks
of the Federal Reserve System and with securities dealers. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements. The Fund has established a procedure
providing that the securities serving as collateral for each repurchase
agreement must be delivered to the Fund's custodian either physically or in
book-entry form and that the collateral must be marked to market daily to ensure
that each repurchase agreement is fully collateralized at all times. In the
event of bankruptcy or other default by a seller of a repurchase agreement, the
Fund could experience delays in liquidating the underlying securities and could
experience losses, including the possible decline in the value of the underlying
securities during the period in which the Fund seeks to enforce its rights
thereto, possible subnormal levels of income decline in value of the underlying
securities or lack of access to income during this period, as well as the
expense of enforcing its rights. The Fund will not invest in a repurchase
agreement maturing in more than seven days, if such investment, together with
other illiquid securities held by the Fund (including restricted securities)
would exceed 10% of the Fund's net assets.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of U.S. Government securities held
in its portfolio to a bank with an agreement that the Fund will buy back the
securities at a fixed future date at a fixed price plus an agreed amount of
"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
7
<PAGE>
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The Fund
will also continue to be subject to the risk of a decline in the market value of
the securities sold under the agreements because it will reacquire those
securities upon effecting their repurchase. To minimize various risks associated
with reverse repurchase agreements, the Fund will establish and maintain of the
Fund's custodian separate account consisting of highly liquid, marketable
securities an amount at least equal to the repurchase process of the securities
(plus any accrued interest thereon) under such agreements. The Fund will not
enter into reverse repurchase agreements exceeding in the aggregate 33 1/3% of
the market value of its total assets. 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 the
securities (plus any accrued interest thereon) under such agreements. In
addition, the Fund will not purchase additional securities while any borrowings
are outstanding. The Fund will enter into reverse repurchase agreements only
with federally insured banks or savings and loan associations which are approved
in advance as being creditworthy by the Trustees. Under procedures established
by the Trustees, the Adviser will monitor the creditworthiness of the banks
involved.
Options on Securities, Securities Indices and Currency. The Fund may
purchase and write (sell) call and put options on any securities in which it may
invest, or on any securities index based on securities in which it may invest or
any currency in which Fund investments may be denominated. These options may be
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. The Fund may write covered put and
call options and purchase put and call options to enhance total return, as a
substitute for the purchase or sale of securities or currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency
written by the Fund obligates the Fund to sell specified securities or currency
to the holder of the option at a specified price if the option is exercised at
any time before the expiration date. A put option on securities or currency
written by the Fund obligates the Fund to purchase specified securities or
currency from the option holder at a specified price if the option is exercised
at any time before the expiration date. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash settlement payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
Writing covered call options may deprive the Fund of the opportunity to profit
from an increase in the market price of the securities or foreign currency
assets in its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities or
foreign currency assets to be acquired for its portfolio.
All call and put options written by the Fund are covered. A written
call option or put option may be covered by (i) maintaining cash or liquid
8
<PAGE>
securities, either of which may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position. A written call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. The Fund may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities or currency at a specified price
during the option period. The Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities or currency exceeded the sum of the exercise price, the premium paid
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for
the premium paid, to sell specified securities or currency at a specified price
during the option period. The purchase of protective puts is designed to offset
or hedge against a decline in the market value of the Fund's portfolio
securities or the currencies in which they are denominated. Put options may also
be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities or currencies which it does not own. The Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying securities or currency decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing
changes in the value of the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities on which such options are traded. These limitations govern the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which the
Fund may write or purchase may be affected by options written or purchased by
9
<PAGE>
other investment advisory clients of the Adviser. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that
a liquid secondary market on a domestic or foreign options exchange will exist
for any particular exchange-traded option or at any particular time. If the Fund
is unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the underlying
securities or currencies or dispose of assets held in a segregated account until
the options expire or are exercised. Similarly, if the Fund is unable to effect
a closing sale transaction with respect to options it has purchased, it would
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities or
currencies.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. The Adviser will determine the liquidity of each over-the-counter
option in accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
10
<PAGE>
Futures Contracts and Options on Futures Contracts. To seek to increase
total return or hedge against changes in interest rates, securities prices or
currency exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on these futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and any other financial instruments and indices. All
futures contracts entered into by the Fund are traded on U.S. or foreign
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures contracts on securities or currency
will usually be liquidated in this manner, the Fund may instead make, or take,
delivery of the underlying securities or currency whenever it appears
economically advantageous to do so. A clearing corporation associated with the
exchange on which futures contracts are traded guarantees that, if still open,
the sale or purchase will be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with
more certainty than would otherwise be possible the effective price or rate of
return on portfolio securities or securities that the Fund proposes to acquire
or the exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, the Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. The Fund may
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
The Fund may, for example, take a "short" position in the futures
market by selling futures contracts in an attempt to hedge against an
anticipated rise in interest rates or a decline in market prices or foreign
currency rates that would adversely affect the dollar]value of the Fund's
portfolio securities. Such futures contracts may include contracts for the
future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities. Similarly,
the Fund may sell futures contracts on any currencies in which its portfolio
securities are quoted or denominated or in one currency to hedge against
11
<PAGE>
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies.
If, in the opinion of the Adviser, there is a sufficient degree of
correlation between price trends for the Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in the
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any differential by
having the Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting the
Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the
value of portfolio securities will be substantially offset by appreciation in
the value of the futures position. On the other hand, any unanticipated
appreciation in the value of the Fund's portfolio securities would be
substantially offset by a decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing
futures contracts. This would be done, for example, when the Fund anticipates
the subsequent purchase of particular securities when it has the necessary cash,
but expects the prices or currency exchange rates then available in the
applicable market to be less favorable than prices that are currently available.
The Fund may also purchase futures contracts as a substitute for transactions in
securities or foreign currency, to alter the investment characteristics of or
currency exposure associated with]portfolio securities or to gain or increase
its exposure to a particular securities market or currency.
Options on Futures Contracts. The Fund may purchase and write options
on futures for the same purposes as its transactions in futures contracts. The
purchase of put and call options on futures contracts will give the Fund the
right (but not the obligation) for a specified price to sell or to purchase,
respectively, the underlying futures contract at any time during the option
period. As the purchaser of an option on a futures contract, the Fund obtains
the benefit of the futures position if prices move in a favorable direction but
limits its risk of loss in the event of an unfavorable price movement to the
loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the premium
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that the Fund intends to
purchase. However, the Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. The loss incurred by the Fund in writing options
on futures is potentially unlimited and may exceed the amount of the premium
received.
12
<PAGE>
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related
options transactions either for bona fide hedging purposes or to seek to
increase total return as permitted by the CFTC. To the extent that the Fund is
using futures and related options for hedging purposes, futures contracts will
be sold to protect against a decline in the price of securities (or the currency
in which they are quoted or denominated) that the Fund owns or futures contracts
will be purchased to protect the Fund against an increase in the price of
securities [(or the currency in which they are quoted or denominated)] it
intends to purchase. The Fund will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. As evidence of its
hedging intent, the Fund expects that on 75% or more of the occasions on which
it takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash market at the time when the futures or option
position is closed out. However, in particular cases, when it is economically
advantageous for the Fund to do so, a long futures position may be terminated or
an option may expire without the corresponding purchase of securities or other
assets.
To the extent that the Fund engages in nonhedging transactions in
futures contracts and options on futures, the aggregate initial margin and
premiums required to establish these nonhedging positions will not exceed 5% of
the net asset value of the Fund's portfolio, after taking into account
unrealized profits and losses on any such positions and excluding the amount by
which such options were in-the-money at the time of purchase. The Fund will
engage in transactions in futures contracts and related options only to the
extent such transactions are consistent with the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for maintaining its
qualifications as a regulated investment company for federal income tax
purposes.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating the Fund to purchase securities or currencies, require the
Fund to establish with the custodian a segregated account consisting of cash or
liquid securities in an amount equal to the underlying value of such contracts
and options.
While transactions in futures contracts and options on futures may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates, securities prices or
currency exchange rates may result in a poorer overall performance for the Fund
than if it had not entered into any futures contracts or options transactions.
13
<PAGE>
Perfect correlation between the Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Some futures contracts or options on futures may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a futures contract or related
option, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges may also establish daily limits on the amount that
the price of a futures contract or related option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Lending of Securities. The Fund may lend portfolio securities to
brokers, dealers, and financial institutions if the loan is collateralized by
cash or U.S. Government securities according to applicable regulatory
requirements. The Fund may reinvest any cash collateral in short-term securities
and money market funds. When the Fund lends portfolio securities, there is a
risk that the borrower may fail to return the securities involved in the
transaction. As a result, the Fund may incur a loss or, in the event of the
borrower's bankruptcy, the Fund may be delayed in or prevented from liquidating
the collateral. The Fund may not lend portfolio securities having a total value
exceeding 33% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which
are securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's
fundamental Investment Restrictions. Generally, warrants and stock purchase
rights do not carry with them the right to receive dividends or exercise voting
rights with respect to the underlying securities, and they do not represent any
rights in the assets of the issuer. As a result, an investment in warrants and
rights may be considered to entail greater investment risk than certain other
types of investments. In addition, the value of warrants and rights does not
necessarily change with the value of the underlying securities, and they cease
to have value if they are not exercised on or prior to their expiration date.
Investment in warrants and rights increase the potential profit or loss to be
realized from the investment of a given amount of the Fund's assets as compared
with investing the same amount in the underlying stock. No such purchase will be
made by the Fund, however, if the Fund's holdings of warrants (valued at lower
of cost or market) would exceed 5% of the value of the Fund's net assets as a
result of the purchase. In addition, the Fund will not purchase rights or
14
<PAGE>
warrants which is not listed on the New York or American Stock Exchange of the
purchase would result in the Fund's only unlisted warrants on an amount exceed
of 2% of its net assets.
Short-Term Trading and Portfolio Turnover. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. As a matter of nonfundamental policy, the Fund
may engage in short-term trading in response to stock market conditions, changes
in interest rates or other economic trends and developments, or to take
advantage of yield disparities between various fixed income securities in order
to realize capital gains or improve income. Short-term trading may have the
effect of increasing the Fund's portfolio turnover rate. A high rate of
portfolio turnover (100% or greater) involves correspondingly greater brokerage
expenses and may make it more difficult for the Fund to qualify as a regulated
investment company for Federal income tax purposes. The Fund's portfolio
turnover rate is set forth in the table under the caption "Financial Highlights"
in the Prospectus.
Restricted Securities. As a matter of nonfundamental policy, the Fund
will not invest more than 10% of its total assets in securities that are not
registered ("restricted securities") under the Securities Act of 1933 (the "1933
Act"), including commercial paper issued in reliance on section 4(2) of the 1933
Act and securities offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act. In addition, as a matter of nonfundamental policy,
the Fund will not invest more than 10% of its net assets in illiquid
investments. If the Trustees determines, based upon a continuing review of the
trading markets for specific section 4(2) paper or Rule 144A securities, that
are liquid, they will not be subject to the 10% limit on illiquid investments.
The Trustees may adopt guidelines and delegate to the Adviser the daily function
of determining and monitoring the liquidity of restricted securities. The
Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations. The Trustees will carefully monitor the
Fund's investments in these securities, focusing on such important factors,
among others, as valuation, liquidity and availability of information. This
investment practice could have the effect of increasing the level of illiquidity
in the Fund if qualified institutional buyers become for a time uninterested in
purchasing these restricted securities.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment
restrictions will not be changed without the approval of the holders of a
majority of the outstanding shares of the Fund. A majority for this purpose
means approval by the lesser of: (1) the holders of 67% or more of the Fund's
shares represented at a meeting if at least 50% of the Fund's outstanding shares
are present in person or by proxy at that meeting or (2) more than 50% of the
Fund's outstanding shares.
The Fund may not:
1. Invest in real estate (including interests in real estate
investment trusts) or commodities.
15
<PAGE>
2. Invest in a company having a record of less than three years'
continuous operation, which may include the operations of any
predecessor company or enterprise to which the company has
succeeded by merger, consolidation, reorganization or purchase
of assets.
3. Buy securities on margin or sell short.
4. Purchase securities of a company in which any officer or
trustee of the Trust or the Adviser owns beneficially more
than of 1% of the securities of such company and all such
officers and trustees own beneficially in the aggregate more
than 5% of the securities of such company.
5. Borrow money except for temporary or emergency purposes, and
then not in excess of 10% of its gross assets taken at cost.
Assets taken at market may not be pledged to an extent greater
than 15% of gross assets taken at cost (although this would
permit the Fund to pledge, mortgage or hypothecate its
portfolio securities to the extent that the percentage of
pledged securities would exceed 10% of the offering price of
the Fund's shares, it will not do so as a matter of operating
policy in order to comply with certain state statutes or
investment restrictions); any such loan must be from a bank
and the value of the Fund's assets, including the proceeds of
the loan, less other liabilities of the Fund, must be at least
three times the amount of the loan. (Although the Fund has
never borrowed any money or pledged any portion of its assets,
and has no intention of doing so, in the event that such
borrowing became necessary, the Fund expects that additional
portfolio securities would not be purchased while the
borrowing is outstanding). The borrowing restriction set forth
above does not prohibit the use of reverse repurchase
agreements, in an amount (including any borrowings) not to
exceed 33 1/3% of net assets.
6. Make loans to any of its officers or trustees, or to any
firms, corporations or syndicates in which officers or
trustees of the Trust have an aggregate interest of 10% or
more. It is the intention of the Trust not to make loans of
any nature, except the Fund may enter into repurchase
agreements and lend its portfolio securities (as permitted by
the Investment Company Act of 1940) as referred to under
"Investment Objectives and Policies" above. In addition, the
purchase of a portion of an issue of a publicly issued
corporate debt security is not considered to be the making of
a loan.
7. Purchase any securities, other than obligations of domestic
banks or of the U.S. Government, or its agencies or
instrumentalities, if as a result of such purchase more than
25% of the value of the Fund's total assets would be invested
in the securities of issuers in any one industry.
16
<PAGE>
8. Issue senior securities as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules
thereunder; except insofar as the Fund may be deemed to have
issued a senior security by reason of entering into a
repurchase agreement or engaging in permitted borrowings.
9. Purchase securities which will result in the Fund's holdings
of the issuer thereof to be more than 5% of the value of the
Fund's total assets (exclusive of U.S. Government securities).
10. Purchase more than 10% of the voting securities of any class
of securities of any one issuer.
Nonfundamental Investment Restriction. The following restrictions are
designated as nonfundamental and may be changed by the Trustees with the
shareholder approval.
The Fund may not purchase a security if, as a result, (i) more than 10%
of the Fund's total assets would be invested in the securities of other
investment companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii) more than
5% of the Fund's total assets would be invested in the securities of any one
investment company. These limitations do not apply to (a) the investment of cash
collateral, received by the Fund in connection with lending the Fund's portfolio
securities, in the securities of open-end investment companies or (b) the
purchase of shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the assets of
another investment company. Subject to the above percentage limitations, the
Fund may, in connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase securities of
other investment companies within the John Hancock Group of Funds. In addition,
as a nonfundamental restriction, the Fund may not purchase the shares of any
closed-end investment company except in the open market where no commission or
profit to a sponsor or dealer results from the purchase, other than customary
brokerage fees.
The Fund has also undertaken to one or more states to abide by
additional restrictions so long as its securities are registered for sale in
such states. The most restrictive undertakings presently in effect are that the
Fund shall not invest in oil, gas or other mineral or development programs and
that the Fund's use of margin shall be only for such short-term loans as are
necessary for the clearance of purchases and sales of securities.
Additionally, the Fund will not invest more than 15% of its total assets in the
aggregate in securities of issuers which, together with any predecessors, have a
record of less than three years continuous operation, and in securities of
issuers which are restricted as to disposition, including securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 and the Fund
will not, with respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer.
17
<PAGE>
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trust's Trustees who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Trust are also officers and directors of the Adviser or officers
and directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), John
Hancock Signature Services, Inc.
("Signature Services"), First
Signature Bank and Trust Company and
Sovereign Asset Management
Corporation ("SAMCorp."); Director,
John Hancock Freedom Securities
Corporation, John Hancock Insurance
Agency, Inc. ("Insurance Agency,
Inc."), John Hancock Capital
Corporation and New England/Canada
Business Council; Member, Investment
Company Institute Board of
Governors; Director, Asia Strategic
Growth Fund, Inc.; Trustee, Museum
of Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April,
1994).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea (until
August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
20
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Anne C. Hodsdon * President and Director (1, 2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds, Signature Services (since
October 1996); Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
21
<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, Signature Services, John
August 1937 Hancock Distributors, Inc.,
Insurnace Agency, Inc., John Hancock
Subsidiaries, Inc., SAMCorp. and NM
Capital; Trustee, The Berkeley
Group; Director, JH Networking
Insurance Agency, Inc.; Director,
John Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993),
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
22
<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, Signature
Services, SAMCorp., Insurance
Agency, Inc., Southeastern Thrift &
Bank Fund and NM Capital; Senior
Vice President, The Berkeley Group;
President, the Adviser (until
December 1994);
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
23
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Signature Services.
February 1935
Susan S. Newton Vice President and Secretary Vice President and Assistant
101 Huntington Avenue Secretary, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds,
March 1950 Signature Services; Secretary,
SAMCorp; Vice President, The
Berkeley Group, John Hancock
Distributors, Inc. (until 1994).
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Counsel, John Hancock Mutual
Life Insurance Company.
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
24
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Trustees and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of November 29, 1996, the officers and trustees of the Trust as a
group beneficially owned less than 1% of the outstanding shares of the Trust and
the Fund and to the knowledge of the registrant, owner of 5% or more of the
shares of either class of the Fund's shares:
No other person(s) owned of record or was known by the Trust to
beneficially own as much as 5% of the outstanding shares of the Trust or of
either class of the Fund's shares.
Between December 22, 1994 and December 22, 1996, the Trustees
established an Advisory Board to facilitate a smooth transition of management
between Transamerica Fund Management Company ("TFMC"), the prior investment
adviser, and the Adviser. The members of the Advisory Board were distinct from
the Trustees, did not serve the Fund in any other capacity and were persons who
had no power to determine what securities were purchased or sold on behalf of
the Fund.
Compensation of the Trustees and Advisory Board. The following table
provides information regarding the compensation paid by the Fund and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services. Ms. Hodsdon and
Messrs. Boudreau and Scipione, each a non-Independent Trustee, and each of the
officers of the Trust are interested persons of the Adviser, are compensated by
the Adviser and received no compensation from the Funds for their services. The
compensation to the Trustees from the Fund shown below is for the Fund's fiscal
year ended August 31, 1996.
25
<PAGE>
Total Compensation
Aggregate from all Funds in
Compensation John Hancock Fund
Independent Trustees from the Fund+ Complex to Trustees**
- -------------------- -------------- ---------------------
James F. Carlin $ 2,609 $ 74,250
William H. Cunningham* 3,668 74,250
Charles F. Fretz 2,747 74,500
Harold R. Hiser, Jr.* 2,587 70,250
Charles L. Ladner 2,747 74,500
Leo E. Linbeck, Jr. 3,668 74,250
Patricia P. McCarter* 2,747 74,250
Steven R. Pruchansky* 2,801 77,500
Norman H. Smith* 2,801 77,500
John P. Toolan* 2,737 74,250
------- --------
Totals $29,112 $745,500
+ Compensation made pursuant to different compensation arrangements then in
effect for the fiscal year ended August 31, 1996.
* As of November 30, 1996, the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock Fund complex for Mr.
Cunningham was $131,670, for Mr. Hiser was $90,742, for Ms. McCarter was
$69,177, for Mr. Pruchansky was $28,966, for Mr. Smith was 32,582 and for
Mr. Toolan was $165,963 under the John Hancock Deferred Compensation Plan
for Trustees.
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees as of the calendar year ended December 31, 1996. As of
such date there were 68 funds in the John Hancock Funds Complex, of which
each of these Independent Trustees serve 32.
26
<PAGE>
Total Compensation from
Aggregate all Funds in John
Compensation Hancock Fund Complex
Advisory Board* from the Fund to Advisory Board*
- --------------- ------------- ------------------
R. Trent Campbell $ 4,525 $ 47,000
Mrs. Lloyd Bentsen 4,669 47,000
Thomas R. Powers 4,525 47,000
Thomas B. McDade 4,525 47,000
------- --------
TOTALS $18,244 $188,000
* As of December 31, 1996
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199- 7603, was organized in 1968 and currently has more than $19 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,080,000 shareholders.
The Adviser is an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
management of more than $80 billion, the Life Company is one of the ten largest
life insurance companies in the United States and carries high ratings from
Standard & Poor's and A.M. Best's. Founded in 1862, the Life Company has been
serving clients for over 130 years.
The Trust on behalf of the Fund has entered into an investment
management contract with the Adviser. Under the investment management contract,
the Adviser provides the Fund with (i) a continuous investment program,
consistent with the Fund's stated investment objective and policies, and (ii)
supervision of all aspects of the Fund's operations except those that are
delegated to a custodian, transfer agent or other agent. The Adviser is
responsible for the day-to-day management of the Fund's portfolio assets.
The Fund bears all costs of its organization and operation, including
expenses of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodian
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund; the compensation and
expenses of trustees who are not otherwise affiliated with the Trust, the
27
<PAGE>
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As provided by the investment management contract, the Fund pays the
Adviser an investment management fee, which is accrued daily and paid monthly in
arrears, equal on an annual basis to 0.625% of the Fund's average daily net
asset value.
The Adviser may reduce its advisory fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to re-impose the advisory fee and recover any
other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Pursuant to the investment management contract, the Adviser is not
liable to the Fund or its shareholders for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
its contract relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of its
duties or from its reckless disregard of the obligations and duties under the
investment management contract.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If the Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
name or any other name indicating that it is advised by or otherwise connected
with the Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
other corporation or entity, including but not limited to any investment company
of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
For the fiscal years ended August 31, 1994 advisory fees paid by the
Fund to TFMC, the Fund's former investment adviser, amounted to $1,322,162. For
the fiscal year ended August 31, 1995 , advisory fees paid by the Fund to TFMC,
28
<PAGE>
the Fund's former investment adviser and the Adviser amounted to $468,939 and
$972,142 respectively. For the fiscal year ended August 31, 1996, the advisory
fee paid by the Fund to the Adviser amounted to $ 1,616,654.
The investment management contract, and the distribution contract
discussed below, continue in effect from year to year if approved annually by
vote of a majority of the Trustees who are not interested persons of one of the
parties to the contract, cast in person at a meeting called for the purpose of
voting on such approval, and by either the Fund's Trustees or the holders of a
majority of the Fund's outstanding voting securities. Each of these contracts
automatically terminates upon assignment and may be terminated without penalty
on 60 days' notice at the option of either party to the respective contract or
by vote of a majority of the outstanding voting securities of the Fund.
Administrative Services Agreement. The Fund was a party to an
administrative services agreement with TFMC (the "Services Agreement"), pursuant
to which TFMC performed bookkeeping and accounting services and functions,
including preparing and maintaining various accounting books, records and other
documents and keeping such general ledgers and portfolio accounts as are
reasonably necessary for the operation of the Fund. Other administrative
services included communications in response to shareholder inquiries and
certain printing expenses of various financial reports. In addition, staff and
office space, facilities and equipment was provided as necessary to provide
administrative services to the Fund. The Services Agreement was amended in
connection with the appointment of the Adviser as adviser to the Fund to permit
services under the Agreement to be provided to the Fund by the Adviser and its
affiliates. The Services Agreement was terminated during the fiscal year 1995.
For the fiscal years ended August 31, 1994 and 1995, the Fund paid to
TFMC (pursuant to the Services Agreement) $153,060 and $31,385, respectively, of
which $132,005 and $20,130, respectively, was retained by TFMC and $21,055 and
$11,255, respectively, was paid for certain data processing and pricing
information services.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under
the agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class of the Fund. Shares of the Fund are also 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 an applicable sales charge, if any. 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. The sales charges are discussed further in the Prospectus.
29
<PAGE>
The Fund's Trustees adopted Distribution Plans with respect to Class B
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 25% and 1.00%, respectively, of the
Fund's daily net assets attributable to shares of that class. However, the
service fee will not exceed 0.25% of the Fund's average daily net assets
attributable to each class of shares. In each case, up to 0.25% is for service
expenses and the remaining amount is for distribution expenses. The distribution
fees will be used to reimburse John Hancock Funds for their 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 the John Hancock Funds is not fully reimbursed for payments or
expenses they incur under the Class A Plan, these expenses will not be carried
beyond twelve months from the date they were incurred. Unreimbursed expenses
under the Class B Plan will be carried forward together with interest on the
balance of these unreimbursed expenses. The Fund does not treat unreimbursed
expenses at any time. For the fiscal year ended August 31, 1996, an aggregate of
$3,997,564 of distribution expenses or 3.24% of the average net assets of the
Class B shares of the Fund, was not reimbursed or recovered by John Hancock
Funds through the receipt of deferred sales charges or Rule 12b-1 fees in prior
periods.
The Plans were approved by a majority of the voting securities of the
Fund. The Plans and all amendments were approved by the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plans (the
"Independent Trustees"), by votes cast in person at meetings called for the
purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provide
the Fund with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as
their continuance is approved at least annually by a majority of both the
Trustees and Independent Trustees. The Plans provide that they may be terminated
without penalty, (a) by 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 upon
60 days' written notice to John Hancock Funds, and (c) automatically in the
event of assignment. The Plans further provide that they 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 that Plan. Each plan provides, that
no material amendment to the Plans will, in any event, be effective unless it is
approved by a vote of a majority of the Trustees and the Independent Trustees of
30
<PAGE>
the Fund. The holders of Class A 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, these is a
reasonable likelihood that the Plans will benefit the holders of the applicable
class of shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund
will not be used to pay the expenses incurred with respect to any other class of
shares of the Fund; provided, however, that expenses attributable to the Fund as
a whole will be allocated, to the extent permitted by law, according to a
formula based upon gross sales dollars and/or average daily net assets of each
such class, as may be approved from time to time by vote of a majority of
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
During the fiscal year ended August 31, 1996, the Funds paid John
Hancock Funds the following amounts of expenses with respect to the Class A and
Class B shares of the Fund:
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of Interest, Carrying
Prospectuses to New Compensation to Expenses of or Other Finance
Advertising Shareholders Selling Brokers Distributor Charges
----------- ------------ --------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Class A shares $ 37,425 $ 4,091 $201,159 $ 95,793 $ 0
Class B shares $104,010 $11,833 $423,676 $423,676 $202,997
</TABLE>
Pursuant to the Plans, at least quarterly, John Hancock Funds provides
the Fund with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
Each of the Plans provides that it will continue in effect only as long
as its continuance is approved at least annually by a majority of both the
Trustees and the Independent Trustees. Each of the Plans provides that it may be
terminated (a) at any time by vote of a majority of the Trustees, a majority of
the Independent Trustees, or a majority of the respective Class' outstanding
voting shares or (b) by John Hancock Funds on 60 days' notice in writing to the
Fund. Each of the Plans further provides that it may not be amended to increase
the maximum amount of the fees for the services described therein without the
approval of a majority of the outstanding shares of the class of the Fund which
has voting rights with respect to the Plan. Each of the Plans provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a majority vote of the Trustees and the Independent Trustees of the
31
<PAGE>
Fund. The holders of Class A Shares and Class B Shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
In adopting the Plans, Trustees concluded that, in their judgment, there is a
reasonable likelihood that each Plan will benefit the holders of the applicable
class of shares of the Fund.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices. Equity securities traded on a principal exchange or
NASDAQ National Market Issues are generally valued at last sale price on the day
of valuation. Securities in the aforementioned category for which no sales are
reported and other securities traded over-the-counter are generally valued at
the mean between the current closing bid and asked prices. Short-term debt
investments which have a remaining maturity of 60 days or less are generally
valued at amortized cost which approximates market value. If market quotations
are not readily available or if in the opinion of the Adviser any quotation or
price is not representative of true market value, the fair value of the security
may be determined in good faith in accordance with procedures approved by the
Trustees.
Foreign securities are valued on the basis of quotations from the
primary market in which they are traded. Any assets or liabilities expressed in
terms of foreign currencies are translated into U.S. dollars by the custodian
bank based on London currency exchange quotations as of 5:00 p.m., London time
(12:00 noon, New York time) on the date of any determination of the Fund's NAV.
If quotations are not readily available , or the value has been materially
affected by the events occurring after closing of a foreign market, assets are
valued by a method that Trustees believed accurately reflects fair value. The
NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net assets by the number of its shares outstanding.
On any day an international market is closed an the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
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
32
<PAGE>
certificates will not be issued unless requested by the shareholder in writing,
and then they will only be issued for full shares. The Trustees reserve the
right to change or waive a Fund's minimum investment requirements and to reject
any order to purchase shares (including purchase by exchange) when in the
judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund
are described in the Prospectus. Methods of obtaining reduced sales charges
referred to generally in the Prospectus are described in detail below. In
calculating the sales charge applicable to current purchases of Class A shares,
the investor is entitled to cumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund, owned by
the Investor, or if John Hancock 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
purchases of Class A shares made at one time, the purchases will be combined if
made by (a) an individual, his or her spouse and their children under the age of
21 purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from 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 or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, mother, father, sister, brother, mother-in-law,
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan of the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into an agreement with John Hancock
Funds providing specifically for the use of Fund shares in fee-based
investment products or services made available to their clients.
33
<PAGE>
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:
Amount Invested CDSC Rate
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Accumulation Privilege. Investors (including investors combining
purchases) who are already Class A shareholders may also obtain the benefit of a
reduced sales charge by taking into account not only the amount then being
invested but also the purchase price or current account value of the Class A
shares already held by such person.
Combination Privilege. Reduced sales charges (according to the schedule
set forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. Reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may opt to make the necessary
investments called for by the LOI over a forty-eight (48) month period. These
qualified retirement plans include IRA, SEP, SARSEP, 401(k), 403(b) (including
34
<PAGE>
TSAs) and 457 plans. Such an investment (including accumulations and
combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to 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 specified period, at
which time the escrowed Class A shares will be released. If the total investment
specified in the LOI is not completed, the Class A shares held in escrow may be
redeemed and the proceeds used as required to pay such sales charges as may be
due. By signing the LOI, the investor authorizes Signature Services to act as
his attorney-in-fact to redeem any escrow shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional shares and may be terminated at
any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per
share without the imposition of a sales charge so the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within six years of purchase will be subject to a contingent deferred sales
charge ("CDSC") at the rates set forth in the Prospectus as a percentage of the
dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the current market value or the original purchase cost of
the Class B shares being redeemed. No CDSC will be imposed on increases in
account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution
plans administered by Signature Services or the Life Company that had more than
100 eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
35
<PAGE>
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. However, you cannot redeem appreciation value only in order to
avoid a CDSC.
When requesting a redemption for a specific dollar amount please
indicate if you require the proceeds to equal the dollar amount requested. If
not indicated, only the specified dollar amount will be redeemed from your
account and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after
your purchase, your investment's net asset value per share has increased by $2
to $12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
o Proceeds of 50 shares redeemed at $12 per share $ 600
o Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
o Minus appreciation on remaining shares
(40 shares X 2) -80
--------
o Amount subject to CDSC $ 400
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by John Hancock Funds to defray its expenses related to
providing distribution-related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees facilitates the ability of the Fund to sell the
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.
36
<PAGE>
* 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 Signature
Services. (Please note that this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC).
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other qualified plans as
described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under Section
401(a) of the Code (such as 401(k), Money Purchase Pension Plan, Profit
Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA accounts that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
37
<PAGE>
CDSC Waiver Matrix for Class B Funds
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Type of Distribution 401(a) Plan 403(b) 457 IRA, IRA Non-retirement
(401(k), MPP, Rollover
PSP)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -----------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually in
distributions or periodic payments
12% of account
value annually
in periodic
payments
- -----------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expec- tancy or value annually in
12% of account periodic payments
value annually
in periodic
payments
- -----------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of account
annuity annuity annuity payments value annually in
payments (72t) payments (72t) (72t) or 12% of periodic payments
or 12% of or 12% of account value
account value account value annually in
annually in annually in periodic payments
periodic periodic
payments payments
- -----------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -----------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
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.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, he or she will incur a brokerage charge.
Any such securities would be valued for the purposes of making such payment at
the same value as used in determining net asset value. The Fund has elected to
be governed by Rule 18f-1 under the 1940 Act, pursuant to which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class
of the Fund for shares of the same class in any John Hancock fund offering that
class.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the
Fund permits the establishment of a Systematic Withdrawal Plan. Payments under
this plan represent proceeds arising from the redemption of Fund's shares. Since
the redemption price of Fund shares may be more or less than the shareholder's
cost, depending upon the market value of the securities owned by the Fund at the
time of redemption, the distribution of cash pursuant to this plan may result in
recognition of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional Class A or Class B shares of the Fund could be
disadvantageous to a shareholder because of the initial sales charge payable on
the purchases of Class A shares and the CDSC imposed on redemptions of Class B
shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Fund shares at the same time as a Systematic Withdrawal Plan
is in effect. The Fund reserves the right to modify or discontinue the
Systematic Withdrawal Plan of any shareholder on 30 days' prior written notice
to such shareholder, or to discontinue the availability of such plan in the
future. The shareholder may terminate the plan at any time by giving proper
notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is
explained in the Prospectus. The program, as it relates to automatic investment
checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Signature Services without prior notice
39
<PAGE>
if any investment is not honored by the shareholder's bank. The bank shall be
under no obligation to notify the shareholder as to the non-payment of any
checks.
The program may be discontinued by the shareholder either by calling
Signature Services or upon written notice to Signature Services which is
received at least five (5) business days prior to the due date of any
investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or another John Hancock mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A shares may be
reinvested at net asset value without paying a sales charge in Class A shares of
the Fund or in Class A shares of another John Hancock fund. If a CDSC was paid
upon a redemption, a shareholder may reinvest the proceeds from that redemption
at net asset value in additional shares of the class from which the redemption
was made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund, without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have authorized shares of the Fund and
one other series. The Declaration of Trust also authorizes the Trustees to
classify and reclassify the shares of the Fund, or any new series of the Trust,
into one or more classes. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund, designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective distribution plans. The different
classes of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
40
<PAGE>
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 that class of shares, subject to the conditions the Internal
Revenue Service imposes with respect to multiple- class structure. Similarily,
the net asset value per share may vary depending whether Class A shares or Class
B shares are purchased.
In the event of liquidation, shareholders of each class are entitled to
share pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund shareholders may remove a Trustee by the affirmative vote of
at least two-thirds of the Trust's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with a request for a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations and affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Furthermore, no Fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock Fund. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
In order to avoid conflicts with portfolio trades for the Fund, the
Adviser and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. Some of these
restrictions are: pre-clearance for all personal trades and a ban on the
purchase of initial public offerings, as well as contributions to specified
charities of profits on securities held for less than 91 days. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
41
<PAGE>
A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
The Fund has qualified and elected to be treated as a "regulated
investment company" under Subchapter M of the Code, and intends to continue to
so qualify in the future. As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its taxable income (including net short-term
and long-term capital gains) which is distributed to shareholders in accordance
with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to seek to avoid or minimize liability
for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P") will be taxable under the Code for investors who are subject to
tax. If these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's federal tax basis
in Fund shares and then, to the extent such basis is exceeded, will generally
give rise to capital gains. Shareholders who have chosen automatic reinvestment
of their distributions will have a federal tax basis in each share received
pursuant to such a reinvestment equal to the amount of cash they would have
received had they elected to receive the distribution in cash, divided by the
number of shares received in the reinvestment.
If the Fund acquires stock in certain foreign corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
42
<PAGE>
deduction for such a tax. Certain elections may, if available, ameliorate these
adverse tax consequences, but any such election would require the Fund to
recognize taxable income or gain without the concurrent receipt of cash. The
Fund may limit and/or manage its holdings in passive foreign investment
companies to minimize its tax liability or maximize its return from these
investments.
Foreign exchange gains and losses realized by the Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, certain foreign currency options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to the Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments or derivatives held for
less than three months, which gain is limited under the Code to less than 30% of
its gross income for each taxable year, and could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed the Fund's investment company taxable income computed without
regard to such loss after consideration of certain regulations on the treatment
of "post-October losses" the resulting overall ordinary loss for such year would
not be deductible by the Fund or its shareholders in future years.
The Fund may be subject to withholding and other taxes imposed by
foreign countries with respect to its investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. The Fund does not expect to qualify to pass such taxes through to its
shareholders, who consequently will not take such taxes into account on their
own tax returns. However, the Fund will deduct such taxes in determining the
amount it has available for distribution to shareholders.
The amount of the Fund's net short-term and long-term capital gains, if
any, in any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities or enter into options transactions that
will generate capital gains. At the time of an investor's purchase of Fund
shares, a portion of the purchase price is often attributable to realized or
unrealized appreciation in the Fund's portfolio or undistributed taxable income
of the Fund. Consequently, subsequent distributions from such appreciation or
income may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
43
<PAGE>
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands and will be long-term or short-term, depending
upon the shareholder's tax holding period for the shares and subject to the
special rules described below. A sales charge paid in purchasing Class A shares
of the Fund cannot be taken into account for purposes of determining gain or
loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of the Fund or another John Hancock Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Such disregarded load will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to an election to reinvest dividends in
additional shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares.
Although its present intention is to distribute, at least annually, all
net capital gain, if any, the Fund reserves the right to retain and reinvest all
or any portion of the excess, as computed for Federal income tax purposes, of
net long-term capital gain over net short-term capital loss in any year. The
Fund will not in any event distribute net capital gain realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain income in his return for his taxable year in which the last day of
the Fund's taxable year falls, (b) be entitled either to a tax credit on his
return for, or to a refund of, his pro rata share of the taxes paid by the Fund,
and (c) be entitled to increase the adjusted tax basis for his shares in the
Fund by the difference between his pro rata share of such excess and his pro
rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset its net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in Federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders.
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
44
<PAGE>
be treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
shares of the Fund in order to qualify for the deduction and, if they have any
debt that is deemed under the Code directly attributable to such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability, if any. Additionally, any corporate
shareholder should consult its tax adviser regarding the possibility that its
basis in its shares may be reduced, for Federal income tax purposes, by reason
of "extraordinary dividends" received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of the
shares.
The Fund is required to accrue income on any debt securities that have
more than a de minimis amount of original issue discount (or debt securities
acquired at a market discount, if the Fund elects to include market discount in
income currently) prior to the receipt of the corresponding cash payment. The
mark to market rules applicable to certain options and forward contracts may
also require the Fund to recognize income or gain without a concurrent receipt
of cash. However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. The Fund will not
seek to satisfy any threshold or reporting requirements that may apply in
particular taxing jurisdictions, although the Fund may in its sole discretion
provide relevant information to shareholders.
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all taxable distributions to shareholders, as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt recipients, i.e., corporations and certain other investors distributions
to which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. A Fund may refuse to
accept an application that does not contain any required taxpayer identification
45
<PAGE>
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into options, foreign currency
positions, and foreign currency forward contracts.
Certain options and forward foreign currency transactions undertaken by
the Fund may cause the Fund to recognize gains or losses from marking to market
even though its positions have not been sold or terminated and affect the
character as long-term or short-term (or, in the case of certain foreign
currency-related forward contracts or options, as ordinary income or loss) and
timing of some capital gains and losses realized by the Fund. Also, certain of
the Fund's losses on its transactions involving options or forward contracts
and/or offsetting or successor portfolio positions may be deferred rather than
being taken into account currently in calculating the Fund's taxable income or
gains. Certain of such transactions may also cause the Fund to dispose of
investments sooner than would otherwise have occurred. These transactions may
therefore affect the amount, timing and character of the Fund's distributions to
shareholders. Certain of the applicable tax rules may be modified if the Fund is
eligible and chooses to make one or more of certain tax elections that may be
available. The Fund will take into account the special tax rules (including
consideration of available elections) applicable to options and forward
contracts in order to seek to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of Fund shares
may also be subject to state and local taxes. Shareholders should consult their
own tax advisers as to the Federal, state or local tax consequences of ownership
of shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in the Fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
46
<PAGE>
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended August 31, 1996, the annualized yields of
the Fund's Class A shares and Class B shares were 1.16% and 0.48%, respectively.
As of August 31, 1996, the average annual total returns of the Class A shares of
the Fund for the one, five and ten year periods were 9.60%, 9.86% and 10.48%,
respectively. As of August 31, 1996, the average annual returns for the Fund's
Class B shares for the one and five year periods and since inception on August
22, 1991 were 9.49%, 9.89% and 10.57%, respectively.
The Fund's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price per share
(which includes the full sales charge) on the last day of the period, according
to the following standard formula:
Yield = 2([(a - b) + 1] 6 - 1
---
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the
period (NAV where applicable).
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1-year, 5-year, and 10-year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula:
47
<PAGE>
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1 year, 5 year and life-of-fund periods.
In the case of Class A shares or Class B shares, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC is applied at the end of the period. This calculation assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sale charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A shares or the CDSC on Class B shares into account. Excluding
the Fund's sales charge on Class A shares and the CDSC on Class B shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's
yield and total return will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well as the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
48
<PAGE>
also be utilized. The Fund's promotional and sales literature may make reference
to the Fund's "beta." Beta is a reflection of the market-related risk of the
Fund by showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of
the Fund and the allocation of brokerage commissions are made by the Adviser and
officers of the Fund pursuant to recommendations made by its investment
committee of the Adviser, which consists of officers and Trustees of the Adviser
who are interested persons of the Fund. Orders for purchases and sales of
securities are placed in a manner which, in the opinion of the Adviser, will
offer the best price and market for the execution of each transaction. Purchases
from underwriters of portfolio securities may include a commission or
commissions paid by the issuer and transactions with dealers serving as market
makers reflect a "spread." Debt securities are generally traded on a net basis
through dealers acting for their own account as principals and not as brokers;
no brokerage commissions are payable on such transactions.
In the U.S. and in some other countries, debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. In other countries, both debt and
equity securities are traded on exchanges at fixed commission rates. Commissions
on foreign transactions are generally higher than the negotiated commission
rates available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and other policies that the Trustees may determine, the Adviser
may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser of the
49
<PAGE>
Fund, and their value and expected contribution to the performance of the Fund.
It is not possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Company or other advisory clients of the Adviser, and
conversely, brokerage commissions and spreads paid by other advisory clients of
the Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no commitments to allocate portfolio
transactions upon any prescribed basis. While the Advisers will be primarily
responsible for the allocation of the Fund's brokerage business, their policies
and practices in this regard must be consistent with the foregoing and will at
all times be subject to review by the Trustees. For the fiscal years ended
August 31, 1996, 1995 and 1994, the Fund paid negotiated brokerage commissions
of $246,980, $1,135,806 and $373,133, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Fund may pay to a broker which provides brokerage and research services to
the Fund an amount of disclosed commission in excess of the commission which
another broker would have charged for effecting that transaction. This practice
is subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended August 31, 1996, the
Fund pay $42,840 commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. ("Distributors" or "Affiliated
Brokers"). Pursuant to procedures determined by the Trustees and consistent with
the above policy of obtaining best net results, the Fund may execute portfolio
transactions with or through Affiliated Brokers. During the year ended August
31, 1996, the Fund did not execute any portfolio transactions with then
affiliated brokers.
Any of the Affiliated Brokers may act as broker for the Fund on
exchange transactions, subject, however, to the general policy of the Fund set
forth above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to the Fund as determined
by a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Fund, the Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
50
<PAGE>
and related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also
invest in the same securities and the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transaction as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable for
it. On the other hand, to the extent permitted by law, the adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays an annual fee of
$19.00 for each Class A shareholder and $21.50 for each Class B shareholder plus
certain out-of- pocket expenses. These expenses are aggregated and charged to
the Fund and allocated to each class on the basis of their relative net asset
values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and Investors Bank & Trust Company ("IBT"), 89 South
Street, Boston, Massachusetts 02111. Under the custodian agreement, IBT performs
custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116,
has been selected as the independent auditors of the Fund. The financial
statements of the Fund included in the Prospectus and this Statement of
Additional Information have been audited by Ernst & Young LLP for the periods
indicated in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
51
<PAGE>
APPENDIX A
Description of Bond Ratings
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment at some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-1
<PAGE>
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represented obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB, and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
A-2
