JOHN HANCOCK U.S. GOVERNMENT CASH RESERVE
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997
This Statement of Additional Information ("SAI") provides information about John
Hancock U.S. Government Cash Reserve (the "Fund"), a diversified series of John
Hancock Current Interest (the "Trust"), in addition to the information that is
contained in the combined Money Market Funds' Prospectus (the "Prospectus"),
dated March 1, 1997.
This SAI is not a prospectus. It should be read in conjunction with the
Prospectus, a copy of which can be obtained free of charge by writing or
telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way STE 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
Table of Contents
Page
Organization of the Trust........................................ 2
Investment Objective and Policies................................ 2
Investment Restrictions.......................................... 4
Those Responsible for Management................................. 6
Investment Advisory and Other Services........................... 15
Distribution Contracts........................................... 17
Net Asset Value.................................................. 19
Purchase of Shares............................................... 19
Special Redemptions.............................................. 20
Additional Services and Programs................................. 20
Description of the Fund's Shares................................. 20
Tax Status....................................................... 21
Calculation of Performance....................................... 23
Brokerage Allocation............................................. 25
Transfer Agent Services.......................................... 26
Custody of Portfolio............................................. 27
Independent Auditors............................................. 27
Financial Statements............................................. F-1
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ORGANIZATION OF THE TRUST
John Hancock Current Interest (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust under a
Declaration of Trust dated October 3, 1991. Prior to December 22, 1994, the Fund
was called Transamerica U.S. Government Cash Reserve.
John Hancock Advisers, Inc. (the "Adviser"), is the Fund's investment
adviser, a wholly- owned indirect subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company") a Massachusetts life insurance company
chartered in 1862 with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The Fund invests only in securities issued or guaranteed by the U.S.
Government which mature within 13 months from the date of purchase and
repurchase agreements with respect to these securities with an average portfolio
maturity of 90 days or less. The Fund seeks to obtain maximum current income
from these short-term investments to the extent consistent with maintaining
liquidity and preserving capital. There can be no assurance that the Fund's
investment objective will be realized.
Securities issued or guaranteed by the U.S. Government differ only in
their interest rates, maturities and dates of issuance. Treasury bills have a
maturity of one year or less. Treasury notes have maturities of 1-10 years and
Treasury bonds have maturities of greater than 10 years at the date of issuance.
Securities in which the Fund invests may not earn as high a level of
current income as longer-term or lower quality securities, which generally have
less liquidity, greater market risk and more fluctuation in market value.
The return on an investment in the Fund will depend on the interest
earned by the Fund's investments after expenses of the Fund are deducted. The
return is paid to shareholders in the form of dividends.
The Fund seeks to maintain a net asset value of $1.00 per share at all
times. There can be no assurance that the Fund will be able to maintain a
constant $1.00 share price. However, because the Fund purchases high quality
U.S. Government securities with short maturities, this policy helps to minimize
any price decreases or increases that could result from changes in interest
rates or an issuer's creditworthiness. The Fund's investment objective, policies
and restrictions (including a restriction on borrowing money and pledging
assets), except as noted, are fundamental and may not be changed without the
approval of the Fund's shareholders.
Government Securities. U.S. Government securities are issued or
guaranteed as to principal and interest by the U.S. Government or one of its
agencies or instrumentalities. Treasury bills, bonds and notes and certain
obligations of government agencies and instrumentalities, such as Government
National Mortgage Association pass-through certificates ("Ginnie Maes") are
supported by the full faith and credit of the U.S. Treasury (the "Treasury").
Other obligations such as securities of the Federal Home Loan Bank and the
Federal Home Loan Mortgage Corporation ("Freddie Macs") are supported by the
right of the issuer to borrow from the Treasury; while others, such as bonds
issued by the Federal National Mortgage Association ("Fannie Maes"), which is a
private corporation, are supported only by the credit of the issuing
instrumentality. No assurance can be given that the U.S. Government will provide
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financial support to such Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Obligations not backed by the full faith and credit of the U.S.
Government may be secured, in whole or in part, by a line of credit with the
Treasury or collateral consisting of cash or other securities which are backed
by the full faith and credit of the U.S. Government. In the case of other
obligations, the agency issuing or guaranteeing the obligation must be looked to
for ultimate repayment. Variable Amount Demand Master Notes are obligations that
permit the investment by the Fund of fluctuating amounts as determined by the
Fund at varying rates of interest pursuant to direct arrangements between the
Fund and the issuing government agency. Although callable on demand by the Fund,
these obligations are not marketable to third parties.
Repurchase Agreements. In a repurchase agreement the Fund buys a
security for a relatively short period (generally not more than 7 days) subject
to the obligation to sell it back to the issuer at a fixed time and price plus
accrued interest. The Fund will enter into repurchase agreements only with
member banks of the Federal Reserve System and with "primary dealers" in U.S.
Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements.
The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income decline in
value of the underlying securities or lack of access to income during this
period as well as the expense of enforcing its rights.
The Fund will not enter into repurchase agreements of more than one
week's duration if more than 10% of its net assets would then be so
invested-considering only the remaining days to maturity of existing repurchase
agreements. In addition, the securities underlying repurchase agreements are not
subject to the restrictions applicable to maturity of the portfolio or its
securities.
Reverse Repurchase Agreements. The Fund may also enter into reverse
repurchase agreements which involve the sale of U.S. Government securities held
in its portfolio to a bank with an agreement that the Fund will buy back the
securities at a fixed future date at a fixed price plus an agreed amount of
"interest" which may be reflected in the repurchase price. Reverse repurchase
agreements are considered to be borrowings by the Fund. Reverse repurchase
agreements involve the risk that the market value of securities purchased by the
Fund with proceeds of the transaction may decline below the repurchase price of
the securities sold by the Fund which it is obligated to repurchase. The Fund
will also continue to be subject to the risk of a decline in the market value of
the securities sold under the agreements because it will reacquire those
securities upon effecting their repurchase. The Fund will not enter into reverse
repurchase agreements and other borrowings exceeding in the aggregate 33 1/3% of
its net assets. The Fund will enter into reverse repurchase agreements only with
federally insured banks or savings and loan associations which are approved in
advance as being creditworthy by the Trustees. Under procedures established by
the Trustees, the Adviser will monitor the creditworthiness of the banks
involved.
Money Market Instruments. Because interest rates on money market
instruments fluctuate in response to economic factors, the rates on short-term
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investments made by the Fund and the daily dividend paid to investors will vary,
rising or falling with short- term rates generally. All of these obligations in
which the Fund invests are guaranteed by the U.S. Government or one of its
agencies or instrumentalities.
Short Term Trading and Portfolio Turnover. The Fund may attempt to
maximize current income through short-term portfolio trading. This will involve
selling portfolio instruments and purchasing different instruments to take
advantage of yield disparities in different segments of the market for
Government Obligations. Short-term trading may have the effect of increasing
portfolio turnover rate. A high rate of portfolio turnover (100% or greater)
involves corresponding higher transaction expenses and may make it more
difficult for the Fund to qualify as a regulated investment company for federal
income tax purposes.
The Fund does not intend to invest for the purpose of seeking
short-term profits. The Fund's portfolio securities may be changed, however,
without regard to the holding period of these securities (subject to certain tax
restrictions), when the Adviser deems that this action will help achieve the
Fund's objective given a change in an issuer's operations or changes in general
market conditions.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The Fund has adopted certain fundamental investment restrictions upon
its investments as set forth below which may not be changed without the approval
of the holders of a majority of the outstanding shares of the Fund. A majority
for this purpose means: (a) more than 50% of the outstanding shares of the Fund
or (b) 67% or more of the shares represented at a meeting where more than 50% of
the outstanding shares of the Fund are represented, whichever is less. Under
these restrictions, the Fund may not:
1. Purchase common stocks, preferred stocks, warrants, other equity
securities, private placements, corporate bonds or debentures maturing
beyond one year from the date of purchase, state bonds, or industrial
revenue bonds, except through the purchase of debt obligations
referred to under "Investment Objective and Policies" in this
Statement of Additional Information.
2. Sell securities short;
3. Write or purchase put or call options;
4. Underwrite the securities of another issuer, purchase securities
subject to restrictions on disposition under the Securities Act of
1933 (so-called "restricted securities") or purchase securities which
are not readily marketable;
5. Purchase or sell real estate, real estate investment trust securities,
commodities, or oil and gas interests;
6. Make loans to other persons, except the Fund may enter into repurchase
agreements as provided in the investment practices. The purchase of an
issue of publicly distributed bonds, debentures or other securities,
whether or not the purchase was made upon the original issuance of
securities, is not considered to be the making of a loan;
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7. Purchase any securities which would cause more than 25% of the value
of the Fund's total assets at the time of such purchase to be invested
in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that this
limitation does not apply to investments in bank obligations of
domestic branches of U.S. banks including deposits with and obligation
of savings institutions, obligations of foreign branches of domestic
banks when the Adviser believes that the domestic parent will be
ultimately responsible for payment if the issuing bank should fail to
do so, U.S. Treasury Bills or other obligations issued or guaranteed
by the U.S. Government, or one of its agencies or instrumentalities;
8. Invest in companies for the purpose of exercising control;
9. Invest more than 5% of the value of the Fund's assets in the
securities of any one issuer (other than securities issued or
guaranteed as to principal and interest by the U.S. Government, or one
of its agencies or instrumentalities).
10. Borrow money except from banks for temporary or emergency purposes
(but not to purchase investment securities) in an amount up to 1/3 of
the value of the Fund's total assets. 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; or
11. Pledge its assets except in amounts not in excess of the lesser of the
dollar amount borrowed or 15% of the value of the Fund's total assets
at the time of borrowing and only to secure borrowings for temporary
or emergency purposes.
In order to comply with certain state regulatory policies, the Fund
will not, as a matter of non-fundamental policy, pledge, mortgage or hypothecate
its assets in amounts that would exceed 10% of its net assets at market value.
Nonfundamental Investment Restriction
The following restriction is designated as nonfundamental and may be
changed by the Trustees without shareholder approval:
The Fund may not:
1. 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 of 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
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within the John Hancock Group of Funds. The Fund may not purchase the
shares of any closed-end investment company except in the open market
where no commission or profit to a sponsor or dealer results from the
purchase, other than customary brokerage fees.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Trust and 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 John Hancock Funds.
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<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp."); Director,
John Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Capital Corporation and New
England/Canada Business Council;
Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April
1994); Director, John Hancock
Freedom Securities Corporation
(until September 1996); Director,
John Hancock Signature Services,
Inc. ("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
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Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea (until
August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
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Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds; Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993); Director, Signature
Services (until January 1996).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
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Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
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* 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.
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Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp. and NM Capital; Trustee,
The Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, John Hancock Property and
Casualty Insurance and its
affiliates (until November 1993);
Director, Signature Services (until
January 1997).
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
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* 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.
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Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
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Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, SAMCorp.,
Insurance Agency, Inc. and NM
Capital; Counsel, John Hancock
Mutual Life Insurance Company (until
January 1997).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group, Vice
March 1950 President, John Hancock
Distributors, Inc. (until 1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
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* 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.
13
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All of the officers listed are officers or employees of the Adviser of
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of October 31, 1996, the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the outstanding shares of the Fund. At such
date, no person owned of record or beneficially as much as 5% of the outstanding
shares of the Fund.
As of December 22, 1994, the Trustees established an Advisory Board which acts
to facilitate a smooth transition of management over a two-year period (between
Transamerica Fund Management Company ("TFMC"), the prior investment adviser, and
the Adviser). The members of the Advisory Board are distinct from the Board of
Trustees, do not serve the Fund in any other capacity and are persons who have
no power to determine what securities are purchased or sold on behalf of the
Fund. Each member of the Advisory Board may be contacted at 101 Huntington
Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal occupations during
the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas;
co-founder, Houston Parents' League; former board member of various civic
and cultural organizations in Houston, including the Houston Symphony,
Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in various
civic and cultural activities in the Washington, D.C. area, including
membership on the Area Board for The March of Dimes and is a National
Trustee for the Botanic Gardens of Washington, D.C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce Bank;
Trustee, Memorial Hospital System; Chairman of the Board of Regents of
Baylor University; Member, Board of Governors, National Association of
Securities Dealers, Inc.; Formerly, Chairman, Investment Company Institute;
formerly, President, Houston Chapter of Financial Executive Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation); Member,
Board of Managers, Harris County Hospital District; Advisory Director,
Commercial State Bank, El Campo; Advisory Director, First National Bank of
Bryan; Advisory Director, Sterling Bancshares; Former Director and Vice
Chairman, Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
14
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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 Fund who are interested persons of the Adviser, are compensated
by the Adviser and receive no compensation from the Fund for their services. The
compensation to the Trustees and members of the Advisory Board from the Fund
shown below is for the Fund's fiscal year ended May 31, 1996.
Total Compensation
from all Funds in
Aggregate Compensation John Hancock Fund
Trustees from the Fund Complex to Trustees
- -------- -------------
James F. Carlin $ 307 $ 60,700
William H. Cunningham* $ 430 $ 69,700
Charles F. Fretz $ 322 $ 56,200
Harold R. Hiser, Jr.* $ 305 $ 60,200
Charles L. Ladner $ 322 $ 60,700
Leo E. Linbeck, Jr. $ 430 $ 73,200
Patricia P. McCarter $ 322 $ 60,700
Steven R. Pruchansky $ 325 $ 62,700
Norman H. Smith $ 325 $ 62,700
John P. Toolan* $ 320 $ 60,700
------ --------
Totals $3,408 $627,500
* As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock Fund complex for Mr.
Cunningham was $54,413 for Mr. Hiser was $31,324, and for Mr. Toolan was
$71,437 under the John Hancock Deferred Compensation Plan for Trustees.
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1995. On
that date there were 61 funds in the John Hancock Fund Complex, with each
of these Independent Trustees, except for Messrs. Cunningham and Linbeck,
serving 33. Messrs. Cunningham and Linbeck served 31 of these funds.
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Total Compensation
from all Funds in John
Aggregate Compensation Hancock Fund Complex to
Advisory Board from the Fund Advisory Board***
- -------------- ------------- -----------------
R Trent Campbell $534 $54,000
Mrs. Lloyd Bentsen $534 $54,000
Thomas R. Powers $534 $54,000
Thomas B. McDade $534 $54,000
---- -------
TOTAL $2,136 $216,000
*** The total compensation paid by the John Hancock Fund Complex to the
Advisory Board members is as of the calendar year ended December 31, 1995.
On that date there were 61 funds in the John Hancock Fund Complex, with
each Advisory Board member serving 33 of these funds.
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 $80 billion, the Life Company is one of the ten largest life
insurance companies in the United States and carries high ratings from Standard
& Poor's and A.M. Best's. Founded in 1862, the Life Company has been serving
clients for over 130 years.
The Fund has entered into an investment management contract with the
Adviser. Under the investment management contract, the Adviser provides the Fund
with (i) a continuous investment program, consistent with the Fund's stated
investment objective and policies, and (ii) supervision of all aspects of the
Fund's operations except those that are delegated to a custodian, transfer agent
or other agent. The Adviser is responsible for the day-to-day management of the
Fund's portfolio assets.
Under the terms of the investment management contract with the Trust on
behalf of the Fund, all expenses which are not specifically paid by the Adviser
and which are incurred in the operation of the Fund including, but not limited
to, (i) the fees of the Trustees of the Fund who are not "interested persons,"
as such term is defined in the 1940 Act (the "Independent Trustees"), (ii) the
fees of the members of the Fund's Advisory Board (described above) and (iii) the
continuous public offering of the shares of the Fund are borne by the Fund.
Subject to the positions of the Internal Revenue Service relating to mutual
funds with a multiple-class structure, class expenses properly allocable to any
Class A shares will be borne exclusively by such class of shares.
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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 a percentage of the Fund's average daily
net asset value as follows:
Fee
Average Daily Net Assets of the Fund (annual rate)
First $500 million.......................................... 0.500%
Next $250 million........................................... 0.425%
Next $250 million........................................... 0.375%
Next $500 million........................................... 0.350%
Next $500 million........................................... 0.325%
Next $500 million........................................... 0.300%
Amount Over $2.5 billion.................................... 0.275%
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.
In the event normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any state limit where
the Fund is registered to sell shares of beneficial interest, the fee payable to
the Adviser will be reduced to the extent of such excess and the Adviser will
make any additional arrangements necessary to eliminate any remaining excess
expenses. Currently, the most restrictive limit applicable to the Fund is 2.5%
of the first $30,000,000 of the Fund's average daily net asset value, 2% of the
next $70,000,000 and 1.5% of the remaining average daily net asset value.
Pursuant to the investment management contract, the Adviser is not
liable to the Fund or its shareholders for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
the contract relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Adviser in the performance of its
duties or from its reckless disregard of the obligations and duties under the
applicable contract.
The investment management contract initially expires on December 22,
1996 and will continue in effect from year to year thereafter if approved
annually by a vote of a majority of the Independent Trustees of the Fund, cast
in person at a meeting called for the purpose of voting on such approval, and by
either a majority of the Trustees or the holders of a majority of the Fund's
outstanding voting securities. The management contract may, on 60 days' written
notice, be terminated at any time without the payment of any penalty to the Fund
by vote of a majority of the outstanding voting securities of the Fund, by the
Trustees or by the Adviser. The management contract terminates automatically in
the event of its assignment.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
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
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respective affiliates may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If the Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
name or any other name indicating that it is advised by or otherwise connected
with the Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
other corporation or entity, including but not limited to any investment company
of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
For the fiscal years ended May 31, 1994 and 1995 advisory fees paid by
the Fund to TFMC, the Fund's former investment adviser, amounted to $690,268 and
$310,040, respectively. For the fiscal years ended May 31, 1995 and 1996,
advisory fees paid by the Fund to the Adviser amounted to $130,358 and $143,299,
respectively. However, a portion of such fees were not imposed pursuant to the
voluntary fee and expense limitation arrangements then in effect.
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, such 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 May 31, 1994 and 1995, the Fund paid to TFMC
(pursuant to the Services Agreement) $48,703 and $27,466 respectively, of which
$35,000 and $19,884, respectively, was paid to TFMC and $13,703 and $7,582,
respectively, were paid for certain data processing and pricing information
services.
DISTRIBUTION CONTRACTS
Distribution Agreements. The Fund's shares are sold on a continuous
basis at the public offering price. John Hancock Funds, a wholly-owned
subsidiary of the Adviser, has the exclusive right, pursuant to the Distribution
Agreement dated December 22, 1994 (the "Distribution Agreement"), to purchase
shares from the Fund at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all broker-dealers
("Selling Brokers") with whom it has sales agreements, John Hancock Funds may
allow such Selling Brokers up to the full applicable sales charge during periods
specified in such notice. During these periods, such Selling Brokers may be
deemed to be underwriters as that term is defined in the 1933 Act.
The Distribution Agreement was initially adopted by the affirmative
vote of the Fund's Trustees including the vote a majority of Independent
Trustees, cast in person at a meeting called for such purpose. The Distribution
Agreement shall continue in effect until December 22, 1996 and from year to year
thereafter if approved by either the vote of the Fund's shareholders or the
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Trustees including the vote of a majority of Independent Trustees, cast in
person at a meeting called for such purpose. The Distribution Agreement may be
terminated at any time, without penalty, by either party upon sixty (60) days'
written notice or by a vote of a majority of the outstanding voting securities
of the Fund and terminates automatically in the case of an assignment by John
Hancock Funds.
Distribution Plan. The Trustees, including the Independent Trustees of
the Fund, approved a distribution plan pursuant to Rule 12b-1 under the 1940 Act
for shares of the Fund (the "Plan"). The Plan was approved by a majority of the
outstanding shares of the Fund on December 16, 1994 and became effective on
December 22, 1994.
Under the Plan, the Fund will pay distribution and service fees at an
aggregate annual rate of 0.15% of the Fund's daily net assets. The fee may be
spent by John Hancock Funds on Distribution Expenses or Service Expenses.
"Distribution Expenses" include any activities or expenses primarily intended to
result in the sale of shares of the Fund, including, but not limited to: (i)
initial and ongoing sales compensation payable out of such fee as such
compensation is received by John Hancock Funds or by Selling Brokers, (ii)
direct out-of- pocket expenses incurred in connection with the distribution of
shares, including expenses related to printing of prospectuses and reports;
(iii) preparation, printing and distribution of sales literature and advertising
material; (iv) an allocation of overhead and other branch office expenses of
John Hancock Funds related to the distribution of Fund Shares (v) distribution
expenses that were incurred by the Fund's former distributor and not recovered
through payments under the former plan; and (vi) in the event that any other
investment company (the "Acquired Fund") sells all or substantially all of its
assets to, merges with or otherwise engages in a combination with the Fund,
distribution expenses originally incurred in connection with the distribution of
the Acquired Fund's shares. Service Expenses under the Plan include payments
made to, or on account of, account executives of selected broker-dealers
(including affiliates of John Hancock Funds) and others who furnish personal and
shareholder account maintenance services to shareholders of the Fund. The
payment of fees by the Fund under the Plan has been indefinitely suspended.
The Plan 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. The Plan 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 Fund's outstanding voting securities or (b) by
John Hancock Funds on 60 days' notice in writing to the Fund. The Plan 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 Fund. The Plan provides that no material amendment to
the Plan will, in any event, be effective unless it is approved by a majority
vote of the Trustees and the Independent Trustees of the Fund. In adopting the
Plan, the Board of Trustees has determined that, in their judgment, there is a
reasonable likelihood that the Plan will benefit the holders of the shares of
the Fund.
Pursuant to the Plan, at least quarterly, John Hancock Funds provides
the Fund a written report of the amounts expended under the Plan and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their contract appropriateness.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund
shares, the following procedures are utilized whenever applicable. The Fund
utilizes the amortized cost valuation method of valuing portfolio instruments in
the absence of extraordinary or unusual circumstances. Under the amortized cost
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method, assets are valued by constantly amortizing over the remaining life of an
instrument the difference between the principal amount due at maturity and the
cost of the instrument to the Fund. The Trustees will from time to time review
the extent of any deviation of the net asset value, as determined on the basis
of the amortized cost method, from net asset value as it would be determined on
the basis of available market quotations. If any deviation occurs which may
result in unfairness either to new investors or existing shareholders, the
Trustees will take such actions as they deem appropriate to eliminate or reduce
such unfairness to the extent reasonably practicable. These actions may include
selling portfolio instruments prior to maturity to realize gains or losses or to
shorten the Fund's average portfolio maturity, withholding dividends, splitting,
combining or otherwise recapitalizing outstanding shares or utilizing available
market quotations to determine net asset value per share.
Since a dividend is declared to shareholders each time net asset value
is determined, the net asset value per share of the Fund will normally remain
constant at $1.00 per share. There is no assurance that the Fund can maintain
the $1.00 per share value. Monthly, any increase in the value of a shareholder's
investment from dividends is reflected as an increase in the number of shares in
the shareholder's account or is distributed as cash if a shareholder has so
elected.
It is expected that the Fund's net income will be positive each time it
is determined. However, if because of a sudden rise in interest rates or for any
other reason the net income of the Fund determined at any time is a negative
amount, the Fund will offset the negative amount against income accrued during
the month for each shareholder account. If at the time of payment of a
distribution such negative amount exceeds a shareholder's portion of accrued
income, the Fund may reduce the number of its outstanding shares by treating the
shareholder as having contributed to the capital of the Fund that number of full
or fractional shares which represents the amount of excess. By investing in the
Fund, shareholders are deemed to have agreed to make such a contribution. This
procedure is intended to permit the Fund to maintain its net asset value at
$1.00 per share.
If in the view of the Trustees it is inadvisable to continue the
practice of maintaining net asset value at $1.00 per share, the Trustees reserve
the right to alter the procedures for determining net asset value. The Fund will
notify shareholders of any such alteration.
The NAV for the Fund is determined twice each business day at 12 noon
and at the close of regular trading on the New York Stock Exchange (typically 4
p.m. Eastern Time), by dividing the net assets by the number of its shares
outstanding. To help the Fund maintain its $1 constant share price, portfolio
investments are valued at cost, and any discount or premium created by market
movements is amortized to maturity.
PURCHASE OF SHARES
Shares of the Fund are offered at a price equal to their net asset
value per share which will normally be constant at $1.00. Share certificates
will not be issued unless requested by the shareholder in writing, and then only
will be issued for full shares.
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 the Trustees. When the shareholder sells portfolio
securities received in this fashion, he/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
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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 Fund shares for
shares of other funds and portfolios managed by the Adviser.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the
Fund permits the establishment of a Systematic Withdrawal Plan. Payments under
this plan represent proceeds arising from the redemption of Fund shares. 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 John Hancock Signature
Services, Inc. ("Signature Services").
Monthly Automatic Accumulation Program ("MAAP"). This program is
explained in the Prospectus and the Account Privileges Application. 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 John Hancock Signature Services without
prior notice if any investment is not honored by the shareholder's bank. The
bank shall be under no obligation to notify the shareholder as to the
non-payment of any checks.
The program may be discontinued by the shareholder either by calling
Signature Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
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
Trust 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. Additional series may be added in the future. The Declaration
of Trust also authorizes the Trustees to classify and reclassify the shares of
the Fund, or any other 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 one class of shares of the Fund.
The shares of the Fund represent an equal proportionate interest in the
aggregate net assets attributable to the Fund.
In the event of liquidation, shareholders 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.
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Unless otherwise required by the 1940 Act or the Declaration of Trust,
the Trust has no intention of holding annual meetings of shareholders. Trust
shareholders may remove a Trustee by the affirmative vote of at least two-thirds
of the Trust's outstanding shares and the Trustees shall promptly call a meeting
for such purpose when requested to do so in writing by the record holders of not
less than 10% of the outstanding shares of the Trust. Shareholders may, under
certain circumstances, communicate with other shareholders in connection with
requesting a special meeting of shareholders. However, at any time that less
than a majority of the Trustees holding office were elected by the shareholders,
the Trustees will call a special meeting of shareholders for the purpose of
electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Fund's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Furthermore, no Fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock Fund. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
In order to avoid conflicts with portfolio trades for the Fund, the
Adviser and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. Some of these
restrictions are: pre-clearance for all personal trades and a ban on the
purchase of initial public offerings, as well as contributions to specified
charities of profits on securities held for less than 91 days. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts.
TAX STATUS
The Fund is treated as a separate entity for accounting and tax
purposes. The Fund has qualified and has elected to be treated as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to continue to so qualify in the future. As
such and by complying with the applicable provisions of the Code regarding the
sources of its income, the timing of its distributions, and the diversification
of its assets, the Fund will not be subject to Federal income tax on taxable
income (including net realized capital gains, if any) which is distributed to
shareholders in accordance with the timing requirements of the Code.
The Fund will be subject to a four percent nondeductible federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to seek to avoid or
minimize liability for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P") will be taxable under the Code for investors who are subject to
tax. If these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
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capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss investment company taxable income is all taxable income
and capital gains or losses, other than those gains or losses taken into account
in computing net capital gain, after reduction by deductible expenses. It is not
likely that the Fund will earn or distribute any net capital gain.) Some
distributions may be paid in January but may be taxable to shareholders as if
they had been received on December 31 of the previous year. Distributions from
the Fund will not qualify for the dividends-received deduction for any corporate
shareholder. 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.
Upon a redemption of shares (including by exercise of the exchange
privilege) a shareholder ordinarily will not realize a taxable gain or loss if,
as anticipated, the Fund maintains a constant net asset value per share. If the
Fund is not successful in maintaining a constant net asset value per share, a
redemption may produce a taxable gain or loss.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and would not be distributed as such to shareholders.
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.
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 any 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, 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 may be
subject to backup withholding of federal income tax at the rate of 31% in the
case of non-exempt shareholders who fail to furnish the Fund with their correct
taxpayer identification number and certain certifications required by the IRS or
if the IRS or a broker notifies the Fund that the number furnished by the
shareholders is incorrect or that the shareholder is subject to backup
withholding as a result of failure to report interest or dividend income. The
Fund may refuse to accept an application that does not contain any required
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taxpayer identification number or certification that the number provided is
correct. If the backup withholding provisions are applicable, any such
distributions, 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.
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, the Fund will also not be required to pay any Massachusetts income
tax.
The foregoing discussion relates solely to U.S. Federal income tax laws
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 (if any), and ownership of
or gains realized (if any) on the redemption (including an exchange) of shares
of the Fund may also be subject to state and local taxes. Shareholders should
consult their own tax advisers as to the federal, state or local tax
consequences of ownership of shares of, and receipt of distributions from, the
Fund in their particular circumstances.
Non-U.S. investors not engaged in U.S. trade or business with which
their Fund investment is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
CALCULATION OF PERFORMANCE
For the purposes of calculating yield, daily income per share consists
of interest and discount earned on the Fund's investments less provision for
amortization of premiums and applicable expenses, divided by the number of
shares outstanding, but does not include realized or unrealized appreciation or
depreciation.
In any case in which the Fund reports its annualized yield, it will
also furnish information as to the average portfolio maturities of the Fund. It
will also report any material effect of realized gains or losses or unrealized
appreciation on dividends which have been excluded from the computation of
yield.
Yield calculations are based on the value of a hypothetical preexisting
account with exactly one share at the beginning of the seven day period. Yield
is computed by determining the net change in the value of the account during the
base period and dividing the net change by the value of the account at the
beginning of the base period to obtain the base period return. Base period is
multiplied by 365/7 and the resulting figure is carried to the nearest 100th of
a percent. Net change in account value during the base period includes dividends
declared on the original share, dividends declared on any shares purchased with
dividends of that share and any account or sales charges that would affect an
account of average size, but excludes any capital changes.
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Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7]-1
The yield of the Fund is not fixed or guaranteed. Yield quotations
should not be considered to be representations of yield of the Fund for any
period in the future. The yield of the Fund is a function of available interest
rates on money market instruments, which can be expected to fluctuate, as well
as of the quality, maturity and types of portfolio instruments held by the Fund
and of changes in operating expenses. The Fund's yield may be affected if,
through net sales of its shares, there is a net investment of new money in the
Fund which the Fund invests at interest rates different from that being earned
on current portfolio instruments. Yield could also vary if the Fund experiences
net redemptions, which may require the disposition of some of the Fund's current
portfolio instruments.
From time to time, in reports and promotional literature, the Fund's
yield and total return will be ranked or compared to indices of mutual funds and
bank deposit vehicles such as Lipper Analytical Services, Inc. "Lipper-Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on mutual funds in the United States or
"IBC/Donahue's Money Fund Report," a similar publication. Comparisons may also
be made to bank Certificates of Deposit, which differ from mutual funds, like
the Fund, in several ways. The interest rate established by the sponsoring bank
is fixed for the term of a CD, there are penalties for early withdrawal from
CD's and the principal on a CD is insured. Unlike CD's, which are insured as to
principal, an investment in the Fund is not insured or guaranteed.
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 BARRONS, will also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities are
made by the Adviser pursuant to recommendations made by its investment
committee, which consists of officers and directors of the Adviser and
affiliates and officers and Trustees who are interested persons of the Fund.
Orders for purchases and sales of securities are placed in a manner which, in
the opinion of the Adviser will offer the best price and market for the
execution of each such transaction. Purchases from underwriters of portfolio
securities may include a commission or commissions paid by the issuer and
transactions with dealers serving as market makers reflect a "spread."
Investments in debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
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commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and other policies that the Trustees may determine, the Adviser
may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser of the
Fund, and their value and expected contribution to the performance of the Fund.
It is not possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. The receipt of research information is not
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 Adviser officers will be
primarily responsible for the allocation of the Fund's brokerage business, their
policies and practices in this regard must be consistent with the foregoing and
will at all times be subject to review by the Trustees. For the fiscal years
ended May 31, 1996, 1995 and 1994, no negotiated brokerage commissions were paid
on portfolio transactions.
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 May 31, 1996, the Fund
did not pay commissions as compensation to any brokers for research services
such as industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. ("Distributors"), a broker-dealer
and John Hancock Freedom Securities Corporation and its two broker-dealer
subsidiaries, Tucker Anthony Incorporated ("Tucker Anthony") and Sutro &
Company, Inc. ("Sutro") all affiliated brokers. Pursuant to procedures
determined by the Trustees and consistent with the above policy of obtaining
best net results, the Fund may execute portfolio transactions with or through
Tucker Anthony, Sutro or John Hancock Distributors. During the year ended May
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
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1940 Act) of the Fund, the Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
and related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also
invest in the same securities as the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser may average the
transactions as to price and allocate the amount of available investments in a
manner which the Adviser believes to be equitable to each client, including the
fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund of the size of the position obtainable for
it. On the other hand, to the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Boston, MA
02217-1000, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee of $25.00 per account plus out-of-pocket expenses.
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CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts. Under the custodian agreement, State Street Bank
performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. The independent auditors audit and render
an opinion on the Fund's annual financial statements and prepare the Fund's
annual income tax returns. The financial statements of the Fund included in the
Prospectus and this SAI as of the Fund's fiscal year ended May 31, 1996 have
been audited by Ernst & Young LLP for the periods indicated in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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FINANCIAL STATEMENTS
F-1
