FILE NOS. 2-48925
811-2402
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
---------
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 45 (X)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 28 (X)
---------
JOHN HANCOCK SOVEREIGN BOND FUND
(Exact Name of Registrant as Specified in Charter)
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (617) 375-1700
---------
SUSAN S. NEWTON
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and Address of Agent for Service)
---------
It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
( ) on (DATE) pursuant to paragraph (b) of Rule 485
( ) 60 days after filing pursuant to paragraph (a) of Rule 485
(x) on October 1, 1998 pursuant to paragraph (a) of Rule 485
If appropiate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
JOHN HANCOCK
Income Funds
[Logo] Prospectus
October 1, 1998
- --------------------------------------------------------------------------------
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
Government Income Fund
High Yield Bond Fund
Intermediate Maturity
Government Fund
Sovereign Bond Fund
Sovereign U.S. Government Income Fund
Strategic Income Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
A fund-by-fund summary Government Income Fund 4
of goals, strategies, risks,
performance and expenses. High Yield Bond Fund 6
Intermediate Maturity Government Fund 8
Sovereign Bond Fund 10
Sovereign U.S. Government Income Fund 12
Strategic Income Fund 14
Policies and instructions for Your account
opening, maintaining and
closing an account in any Choosing a share class 16
income fund.
How sales charges are calculated 16
Opening an account 17
Buying shares 18
Selling shares 19
Transaction policies 21
Dividends and account policies 21
Additional investor services 22
Further information on the Fund details
income funds.
Business structure 23
Financial highlights 24
For more information back cover
</TABLE>
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Your expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
JOHN HANCOCK INCOME FUNDS
These funds seek current income without sacrificing total return. Some of the
funds also invest for stability of principal. Each fund has its own strategy and
its own risk/reward profile. Please understand that mutual funds are not bank
deposits and are not insured or endorsed by any bank, government agency or the
FDIC. Because you could lose money by investing in these funds, be sure to read
all risk disclosure carefully before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are seeking a regular stream of income
o are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
o want to diversify their portfolios
o are seeking a mutual fund for the income portion of an asset allocation
portfolio
o are retired or nearing retirement
Income funds may NOT be appropriate if you:
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock income funds are managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Mutual Life Insurance Company and manages more than $30 billion in assets.
<PAGE>
Government Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income consistent with
preservation of capital. Maintaining a stable share price is a secondary goal.
In pursuing these goals, the fund normally invests at least 80% of assets in
U.S. government and agency securities.
The fund may invest up to 20% of assets in certain higher risk securities. These
may include dollar-denominated foreign government securities and asset-backed
securities. They may also include high-yield debt securities of lower credit
quality -- junk bonds -- that are rated no lower than B and their unrated
equivalents. Junk bonds are limited to 10% of assets.
In managing its portfolio, the fund concentrates on sector allocation: deciding
which types of bonds to emphasize at a given time. The fund typically focuses on
mortgage-related securities and U.S. Treasuries. It generally uses higher risk
securities to enhance its current yields as well as to diversify its portfolio.
The fund generally keeps its overall duration (a common indicator of volatility)
similar to that of the bond market as a whole. The fund may use certain
derivatives, especially in managing its exposure to interest rate risk, although
it does not intend to use them extensively.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 20% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1995
Joined adviser in 1986
Began career in 1986
Seth Robbins, CFA
- ---------------------------------------
Second Vice President of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1985
Dawn Baillie
- ---------------------------------------
Joined team in 1998
Joined adviser in 1985
Began career in 1985
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
10.55% 6.98% 15.78% 5.30% 7.65% -5.29% 17.71% 1.29% 8.67%
Best quarter: up 6.57% thrid quarter 1991
Worst quarter: down 3.52% first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index
- --------------------------------------------------------------------------------
1 year 4.55% 3.67% 9.57%
- --------------------------------------------------------------------------------
5 years -- 5.43% 7.33%
- --------------------------------------------------------------------------------
10 years -- -- 8.87%
- --------------------------------------------------------------------------------
Index: Lehman Brothers Treasury Composite Index, an unmanaged index of
fixed-income securities that are similar, but not identical, to those in the
fund's portfolio.
4
<PAGE>
MAIN RISKS
[Clip Art] As with most bond funds, the major factor in this fund's performance
is interest rates. When interest rates rise, bond prices typically fall. The
longer the fund's duration, the more sensitive it may be to interest rate
movements. A fall in the worldwide demand for U.S. government securities could
also lower the prices of these securities.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's mortgage-backed and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could fall.
o Junk bonds and foreign securities could may make the fund more sensitive to
market or economic shifts in the U.S. and abroad.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.63% 0.63%
- --------------------------------------------------------------------------------
Distribution fee 0.25% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.21% 0.21%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.09% 1.84%
- --------------------------------------------------------------------------------
Expense reimbursement (may be changed or dropped) -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.09% 1.84%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B
- --------------------------------------------------------------------------------
Year 1 $556 $687 / $187
- --------------------------------------------------------------------------------
Year 3 $781 $879 / $579
- --------------------------------------------------------------------------------
Year 5 $1,024 $1,196 / $996
- --------------------------------------------------------------------------------
Year 10 $1,719 $1,960 / $1,960
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHGIX
CUSIP 41014P854
Newspaper GvIncA
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSGIX
CUSIP 41014P847
Newspaper GvIncB
SEC number 811-3006
5
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks to maximize current income without assuming undue
risk. Capital appreciation is a secondary goal. In pursuing these goals, the
fund normally invests at least 65% of assets in high-yield debt securities of
lower credit quality, commonly known as junk bonds. The fund may invest up to
30% of assets in junk bonds rated as low as CC/Ca and their unrated equivalents.
In managing its portfolio, the fund concentrates on industry allocation and
securities selection: deciding which types of industries to emphasize at a given
time, and which individual bonds to buy. The fund uses top-down analysis to
determine which industries may benefit from current and future changes in the
economy.
In choosing individual securities, the fund uses bottom-up research to find
securities that appear comparatively undervalued. The fund looks at the
financial condition of the issuers as well as the collateralization and other
features of the securities themselves. The fund also looks at companies'
financing cycles to determine which types of securities (for example, bonds,
preferred stocks or common stocks) to favor. The fund typically invests in a
broad range of industries, although it may invest up to 40% of assets in
electric utilities and telecommunications companies.
The fund may use certain higher risk investments, including derivatives and
restricted or illiquid securities, and may invest up to 20% of assets in stocks.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 35% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Arthur N. Calavritinos, CFA
- ---------------------------------------
Vice President of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1986
Frederick L. Cavanaugh, Jr.
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1988
Joined adviser in 1986
Began career in 1973
Janet Clay
- ---------------------------------------
Vice President of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1990
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
6.87% -5.05% -6.57% 33.84% 13.33% 21.40% -6.06% 14.53% 15.13% 16.88%
</TABLE>
Best quarter: up 13.37% first quarter 1991
Worst quarter: down 4.20% fourth quarter 1990
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index 1
- --------------------------------------------------------------------------------
1 year 12.46% 11.88% -- 12.76%
- --------------------------------------------------------------------------------
5 years -- 11.70% -- 11.64%
- --------------------------------------------------------------------------------
10 years -- 9.72% -- 11.65%
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers High Yield Bond Index, an unmanaged index of
fixed-income securities that are similar, but not identical, to those in the
fund's portfolio.
(1) Class C shares commenced operations on May 1, 1998.
6
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is the economy. Junk bond
prices can fall on bad news about the economy, an industry or a company.
Investors should expect greater fluctuations in share price, yield and total
return than with less aggressive bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain industries or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o When interest rates rise, bond prices typically fall. The longer the fund's
duration (a common indicator of volatility), the more sensitive it may be to
interest rate movements.
o If interest rate movements cause the fund's callable securities to be paid off
substantially earlier or later than expected, the fund's share price or yield
could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.52% 0.52% 0.52%
- --------------------------------------------------------------------------------
Distribution fee 0.25% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.20% 0.20% 0.20%
- --------------------------------------------------------------------------------
Total fund operating expenses 0.97% 1.72% 1.72%
- --------------------------------------------------------------------------------
Expense reimbursement
(may be changed or dropped) -- -- --
- --------------------------------------------------------------------------------
Actual operating expenses 0.97% 1.72% 1.72%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B Class C
- --------------------------------------------------------------------------------
Year 1 $545 $675 / $175 $275 / $175
- --------------------------------------------------------------------------------
Year 3 $745 $842 / $542 $542 / $542
- --------------------------------------------------------------------------------
Year 5 $962 $1,133/$933 $933 / $933
- --------------------------------------------------------------------------------
Year 10 $1,586 $1,830/$1,830 $2,030/$2,030
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHHBX
CUSIP 41014P839
Newspaper HiYldA
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSHYX
CUSIP 41014P821
Newspaper HiYldB
SEC number 811-3006
Class C
- --------------------------------------------------------------------------------
Ticker N/A
CUSIP 41014P813
Newspaper N/A
SEC number 811-3006
7
<PAGE>
Intermediate Maturity Government Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income consistent with
preservation of capital and maintenance of liquidity. In pursuing this goal, the
fund normally invests at least 80% of assets in U.S. government and agency
securities.
In managing its portfolio, the fund concentrates on sector allocation: deciding
which types of bonds to emphasize at a given time. The fund typically focuses on
mortgage-related securities and U.S. Treasuries.
While the fund may invest in securities of any maturity, it almost always keeps
its overall duration (a common indicator of volatility) between two and ten
years, and generally keeps it between three and four years.
The fund may use certain derivatives, especially in managing its exposure to
interest rate risk, and may invest up to 20% of assets in asset-backed or
corporate debt securities in the highest credit category (rated AAA/Aaa and
their unrated equivalents). However, it does not intend to use derivatives or
asset-backed securities extensively.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 20% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1995
Joined adviser in 1986
Began career in 1986
Seth Robbins, CFA
- ---------------------------------------
Second Vice President of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1985
Dawn Baillie
- ---------------------------------------
Joined team in 1998
Joined adviser in 1985
Began career in 1985
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns (%) -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
6.56% 3.95% 1.07% 10.27% 3.32% 8.79%
Best quarter: up 3.25% fourth quarter 1995
Worst quarter: down 1.35% first quarter 1996
- --------------------------------------------------------------------------------
Average annual total returns-- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index 1 Index 2
- --------------------------------------------------------------------------------
1 year 5.52% 4.97% 8.52% 7.72%
- --------------------------------------------------------------------------------
5 years 4.78% 4.72% 6.22% 6.39%
- --------------------------------------------------------------------------------
10 years -- -- N/A 8.13%
- --------------------------------------------------------------------------------
Index 1: Lipper Intermediate U.S. Government Index, an equally weighted
unmanaged index that measures the performance of funds with at least 65% of
their assets in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, with dollar-weighted average maturities of five
to ten years.
Index 2: Lehman Brothers Government Bond Index, an unmanaged index that measures
the performance of the U.S. Treasury bonds and U.S. government agency bonds.
8
<PAGE>
MAIN RISKS
[Clip Art] As with most bond funds, the major factor in this fund's performance
is interest rates. When interest rates rise, bond prices typically fall. The
longer the fund's duration, the more sensitive it may be to interest rate
movements. A fall in the worldwide demand for U.S. government securities could
also lower the prices of these securities.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's mortgage-backed and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 3.00% none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 3.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.40% 0.40%
- --------------------------------------------------------------------------------
Distribution fee 0.25% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.51% 0.51%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.16% 1.91%
- --------------------------------------------------------------------------------
Expense reimbursement (may be changed or dropped) -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.16% 1.91%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B
- --------------------------------------------------------------------------------
Year 1 $415 $494 / $194
- --------------------------------------------------------------------------------
Year 3 $657 $800 / $600
- --------------------------------------------------------------------------------
Year 5 $919 $1,032 / $1,032
- --------------------------------------------------------------------------------
Year 10 $1,667 $1,775 / $1,775
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker TAUSX
CUSIP 41014P102
Newspaper IntGva
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSUSX
CUSIP 41014P201
Newspaper N/A
SEC number 811-3006
9
<PAGE>
Sovereign Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks to generate a high level of current income consistent
with prudent investment risk. In pursuing this goal, the fund normally invests
in a diversified portfolio of marketable debt securities. These securities
include corporate bonds, U.S. government and agency securities and preferred
securities. Most of these securities are investment-grade, although the fund may
invest up to 25% of assets in junk bonds.
In managing its portfolio, the fund concentrates on sector allocation, industry
allocation and securities selection: deciding which types of bonds and
industries to emphasize at a given time, and which individual bonds to buy. When
making its sector and industry allocations, the fund tries to anticipate shifts
in the business cycle, using top-down analysis to determine which sectors and
industries may benefit over the next 12 months.
In choosing individual securities, the fund uses bottom-up research to find
securities that appear comparatively undervalued. The fund looks at bonds of all
different quality levels and maturities from many different issuers, potentially
including foreign governments and corporations.
The fund generally keeps its overall duration (a common indicator of volatility)
similar to that of the bond market as a whole. The fund may use certain
derivatives, especially in managing its exposure to interest rate risk, although
it does not intend to use them extensively.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 20% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- ---------------------------------------
Executive Vice President of adviser
Joined team in 1988
Joined adviser in 1985
Began career in 1977
Anthony A. Goodchild
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1988
Joined adviser in 1994
Began career in 1968
Benjamin Matthews
- ---------------------------------------
Vice President of adviser
Joined team in 1995
Joined adviser in 1995
Began career in 1970
Seth Robbins, CFA
- ---------------------------------------
Second Vice President of adviser
Joined team in 1994
Joined adviser in 1994
Began career in 1985
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
9.85% 12.13% 6.68% 16.59% 8.19% 11.69% -2.74% 19.46% 4.05% 9.64%
</TABLE>
Best quarter: up 6.57% second quarter 1995
Worst quarter: down 2.71% first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index
- --------------------------------------------------------------------------------
1 year 4.70% 3.90% -- 3.36%
- ------------------------------------------------------------------------------
5 years 7.17% -- -- 7.72%
- --------------------------------------------------------------------------------
10 years 8.89% -- -- 9.16%
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers Corporate Bond Index, an unmanaged index that mirrors
the investment objectives and characteristics of the fund.
(1) Class C Shares commenced operations on October 1, 1998.
10
<PAGE>
MAIN RISKS
[Clip Art] As with most bond funds, the major factor in this fund's performance
is interest rates. When interest rates rise, bond prices typically fall. The
longer the fund's duration, the more sensitive it may be to interest rate
movements.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Junk bonds and foreign securities may make the fund more sensitive to market
or economic shifts in the U.S. and abroad.
o If interest rate movements cause the fund's mortgage-backed and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution fee 0.30% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.28% 0.28% 0.28%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.08% 1.78% 1.78%
- --------------------------------------------------------------------------------
Expense reimbursement (may be changed or dropped) -- -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.08% 1.78% 1.78%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B Class C
- --------------------------------------------------------------------------------
Year 1 $555 $681 / $181 $ 281 / $ 181
- --------------------------------------------------------------------------------
Year 3 $778 $860 / $560 $ 560 / $ 560
- --------------------------------------------------------------------------------
Year 5 $1,019 $1,164 / $964 $ 964 / $ 964
- --------------------------------------------------------------------------------
Year 10 $1,708 $1,908 / $1,908 $2,095 / $2,095
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHNBX
CUSIP 410223101
Newspaper SvBndA
SEC number 811-2402
Class B
- --------------------------------------------------------------------------------
Ticker JHBBX
CUSIP 410223309
Newspaper SvBndB
SEC number 811-2402
Class C
- --------------------------------------------------------------------------------
Ticker N/A
CUSIP
Newspaper N/A
SEC number 811-2402
11
<PAGE>
Sovereign U.S. Government Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks as high a level of income as is consistent with
long-term total return. In pursuing this goal, the fund normally invests at
least 65% of assets in U.S. government and agency securities. It may also invest
up to 35% of assets in investment-grade short-term securities.
In managing its portfolio, the fund concentrates on sector allocation: deciding
which types of bonds to emphasize at a given time. The fund typically focuses on
mortgage-related securities and U.S. Treasuries.
While the fund may invest in securities of any maturity, it generally keeps its
overall duration (a common indicator of volatility) similar to that of the bond
market as a whole. In seeking to manage its exposure to interest rate risk, the
fund may use several strategies, including actively managing the weightings of
long- and short-term securities in its portfolio. It may also use certain
derivatives, for this same purpose or other purposes, although it does not
intend to use them extensively.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 35% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1995
Joined adviser in 1986
Began career in 1986
Seth Robbins
- ---------------------------------------
Second Vice President of adviser
Joined team in 1995
Joined adviser in 1994
Began career in 1985
Dawn Baillie
- ---------------------------------------
Joined team in 1998
Joined adviser in 1985
Began career in 1985
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
7.52% 14.92% 8.10% 14.44% 5.15% 9.31% -4.56% 17.79% 0.82% 8.56%
</TABLE>
Best quarter: up 8.15% second quarter 1989
Worst quarter: down 3.03% first quarter 1996
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index
- --------------------------------------------------------------------------------
1 year 4.38% 3.56% 7.72%
- --------------------------------------------------------------------------------
5 years 5.66% 5.81% 6.39%
- --------------------------------------------------------------------------------
10 years -- 8.02% 8.13%
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers Government Bond Index, an umanaged index that measures
the performance of U.S. Treasury bonds and U.S. government agency bonds.
12
<PAGE>
MAIN RISKS
[Clip Art] As with most bond funds, the major factor in this fund's performance
is interest rates. When interest rates rise, bond prices typically fall. The
longer the fund's duration, the more sensitive it may be to interest rate
movements. A fall in the worldwide demand for U.S. government securities could
also lower the prices of these securities.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's mortgage-backed and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution fee 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.34% 0.34%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.14% 1.84%
- --------------------------------------------------------------------------------
Expense reimbursement (may be changed or dropped) -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.14% 1.14%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B
- --------------------------------------------------------------------------------
Year 1 $561 $687 / $187
- --------------------------------------------------------------------------------
Year 3 $796 $879 / $579
- --------------------------------------------------------------------------------
Year 5 $1,049 $1,196 / $996
- --------------------------------------------------------------------------------
Year 10 $1,774 $1,973 / $1,973
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHSGX
CUSIP 410227805
Newspaper SvUSGA
SEC number 811-4651
Class B
- --------------------------------------------------------------------------------
Ticker FGOPX
CUSIP 410227706
Newspaper SvUSGB
SEC number 811-4651
13
<PAGE>
Strategic Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income without assuming undue
risk. Competitive long-term total return is a secondary goal. In pursuing these
goals, the fund invests in the following types of securities:
o foreign government and corporate debt securities
o U.S. government and agency securities
o high-yield, or junk, bonds rated as low as CC/Ca and their unrated equivalents
(although it generally intends to keep its average credit quality in the
investment grade range)
In managing its portfolio, the fund uses top-down analysis to allocate assets
among the three major sectors mentioned above. Although it could invest all
assets in one sector, it generally expects to remain diversified among all
three.
In the foreign sector, the fund seeks high-quality investments (bonds rated no
lower than AA/Aa and their unrated equivalents) in developed and emerging
markets. In the U.S. government sector, the fund selects investments primarily
for current yield. In the junk bond sector, the fund uses bottom-up research to
select individual securities from a wide range of industries.
The fund may use certain higher risk investments, including derivatives,
restricted or illiquid securities and U.S. or foreign stocks.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 35% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Frederick L. Cavanaugh, Jr.
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1986
Joined adviser in 1986
Began career in 1973
Arthur N. Calavritinos, CFA
- ---------------------------------------
Second Vice President of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1986
Roger C. Hamilton
- ---------------------------------------
Joined team in 1998
Joined adviser in 1994
Began career in 1980
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
13.74% -0.41% -9.83% 33.58% 7.68% 13.93% -3.02% 18.73% 11.63% 12.67%
</TABLE>
Best quarter: up 15.09% first quarter 1991
Worst quarter: down 6.68% third quarter 1990
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index 1
- --------------------------------------------------------------------------------
1 year 7.60% 6.89% -- 7.87%
- --------------------------------------------------------------------------------
5 years 9.52% -- -- 6.67%
- --------------------------------------------------------------------------------
10 years 8.75% -- -- 8.34%
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
that measures the performance of the U.S. goverment bonds, U.S. corporate bonds,
and Yankee bonds.
(1) Class C shares commenced operations on May 1, 1998.
14
<PAGE>
MAIN RISKS
[Clip Art] The fund's risk profile depends on its sector allocation. In general,
investors should expect fluctuations in share price, yield and total return that
are above average for bond funds.
When interest rates rise, bond prices typically fall. The longer the fund's
duration (a common indicator of volatility), the more sensitive it may be to
interest rate movements. A fall in the worldwide demand for U.S. government
securities could also lower the prices of these securities. Junk bond prices can
fall on bad news about the economy, an industry or a company.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain allocation strategies or certain industries or investments don't perform
as the fund expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's callable securities to be paid off
substantially earlier or later than expected, the fund's share price or yield
could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00% 1.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.40% 0.40% 0.40%
- --------------------------------------------------------------------------------
Distribution fee 0.30% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.22% 0.22% 0.22%
- --------------------------------------------------------------------------------
Total fund operating expenses 0.92% 1.62% 1.62%
- --------------------------------------------------------------------------------
Expense reimbursement
(may be changed or dropped) -- -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.92% 1.62% 1.62%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B Class C
- --------------------------------------------------------------------------------
Year 1 $540 $665 / $165 $265 / $165
- --------------------------------------------------------------------------------
Year 3 $730 $811 / $511 $511 / $511
- --------------------------------------------------------------------------------
Year 5 $936 $1,081 / $811 $881 / $881
- --------------------------------------------------------------------------------
Year 10 $1,530 $1,733 / $1,733 $1,922/ $1,922
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHFIX
CUSIP 410227102
Newspaper StrIncA
SEC number 811-4651
Class B
- --------------------------------------------------------------------------------
Ticker STIBX
CUSIP 410227300
Newspaper StrIncB
SEC number 811-4651
Class C
- --------------------------------------------------------------------------------
Ticker N/A
CUSIP 410227888
Newspaper N/A
SEC number 811-4651
15
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure, allowing you to choose the one that
best meets your requirements. Your financial representative can help you decide.
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
o Front-end sales charges, as described at right. For ways to reduce these
charges, see the account application.
o Distribution (12b-1) fee of 0.25%.
- --------------------------------------------------------------------------------
Class B
o No front-end sales charge; all your money goes to work for you right away.
o Distribution (12b-1) fee of 1.00%.
o A deferred sales charge, as described on following page.
o Automatic conversion to Class A shares after either five years
(Intermediate Maturity Government) or eight years (all other funds), thus
reducing future annual expenses.
- --------------------------------------------------------------------------------
Class C
Currently available only on High Yield Bond, Sovereign Bond and
Strategic Income.
o No front-end sales charge; all your money goes to work for you right away.
o Distribution (12b-1) fee of 1.00%.
o A 1% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
For actual past expenses of each share class, see the fund-by-fund information
earlier in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, Class B and Class C
shareholders could end up paying more expenses over the long term than if they
had paid a sales charge.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Sales charges - Intermediate Maturity Government
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 3.00% 3.09%
$100,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Sales charges - all other funds
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 2.75% 2.83%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments - all funds
- --------------------------------------------------------------------------------
Your investment CDSC on shares
being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the last day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
16 YOUR ACCOUNT
<PAGE>
Class B and Class C Shares are offered at their net asset value per share,
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares you sell within a certain time after you
bought them, as described in the tables below. There is no CDSC on shares
acquired through reinvestment of dividends. The CDSC is based on the original
purchase cost or the current market value of the shares being sold, whichever is
less. The CDSCs are as follows:
- --------------------------------------------------------------------------------
Class B deferred charges - all funds
- --------------------------------------------------------------------------------
Years after CDSC on Intermediate CDSC on all
purchase Maturity Government other fund shares
shares being sold being sold
1st year 3.00% 5.00%
2nd year 2.00% 4.00%
3rd year 2.00% 3.00%
4th year 1.00% 3.00%
5th year None 2.00%
6th year None 1.00%
After 6 years None None
- --------------------------------------------------------------------------------
Class C deferred charges - all applicable funds
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
For purposes of these CDSCs, all purchases made during a calendar month are
counted as having been made on the first day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion in
John Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges
later.
5 Make your initial investment using the table on the next page. You and your
financial representative can initiate any purchase, exchange or sale of
shares.
YOUR ACCOUNT 17
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable
"John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no
mail them to Signature Services slip is available, include
(address below). a note specifying the fund
name, your share class,
your account number and
the name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail
them to Signature Services
(address below).
By exchange
[Clip art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
By wire
[Clip art] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your
representative, or mail investment to:
it to Signature Services. First Signature Bank & Trust
Account # 900000260
o Obtain your account number Routing # 211475000
by calling your financial Specify the fund name, your
representative or share class, your account
Signature Services. number and the name(s)
in which the account is
o Instruct your bank to wire registered. Your bank may
the amount of your investment charge a fee to wire funds.
to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s)
in which the account is
registered. Your bank may charge
a fee to wire funds.
By phone
[Clip art] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the "Invest-By-
Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Tell the Signature Services
representative the fund name,
your share class, your
account number, the name(s)
in which the account is
registered and the amount
of your investment.
----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative
for instructions and assistance.
----------------------------------------
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
18 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip art] o Accounts of any type. o Write a letter of instruction
or complete a stock power
o Sales of any amount. indicating the fund name, your
share class, your account
number, the name(s) in which
the account is registered and
the dollar value or number of
shares you wish to sell.
o Include all signatures and any
additional documents that may
be required (see next page).
o Mail the materials to Signature
Services.
o A check will be mailed to the
name(s) and address in which
the account is registered, or
otherwise according to your
letter of instruction.
By phone
[Clip art] o Most accounts. o For automated service 24 hours
a day using your touch-tone
o Sales of up to $100,000. phone, call the EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most business
days.
By wire or electronic funds transfer (EFT)
[Clip art] o Requests by letter to o Fill out the "Telephone
sell any amount (accounts Redemption" section of your
of any type). new account application.
o Requests by phone to sell o To verify that the telephone
up to $100,000 (accounts redemption privilege is in
with telephone redemption place on an account, or to
privileges). request the forms to add it
to an existing account, call
Signature Services.
o Amounts of $1,000 or more will
be wired on the next business
day. A $4 fee will be deducted
from your account.
o Amounts of less than $1,000
may be sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day.
Your bank may charge a fee
for this service.
By exchange
[Clip art] o Accounts of any type. o Obtain a current prospectus for
the fund into which you are
o Sales of any amount. exchanging by calling your
financial representative or
Signature Services.
o Call your financial
representative or Signature
Services to request an exchange.
By check
[Clip art] o Government Income, Intermediate o Request checkwriting on your
Maturity Government, Sovereign account application.
U.S. Government and Strategic
Income Funds only. o Verify that the shares to be
sold were purchased more
o Any account with than 10 days earlier or were
checkwriting privileges. purchased by wire.
o Sales of over $100. o Write a check for any amount
over $100.
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
YOUR ACCOUNT 19
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You will need to obtain your signature guarantee from a member of the Signature
Guarantee Medallion Program. Most brokers and securities dealers are members of
this program. A Notary Public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clip art]
- --------------------------------------------------------------------------------
Owners of individual, joint, o Letter of instruction.
sole proprietorship, UGMA/UTMA o On the letter, the signatures and
(custodial accounts for minors) titles of all persons authorized to
or general partner accounts. sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or o Letter of instruction.
association accounts. o Corporate resolution, certified
within the past twelve months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o Provide a copy of the trust document
certified within the past twelve
months.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor,
certified within the past twelve
months.
o Signature guarantee if applicable
(see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
20 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time). The funds use market prices in
valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Signature Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. Also for your protection, telephone
transactions are not permitted on accounts whose names or addresses have changed
within the past 30 days. Proceeds from telephone transactions can only be mailed
to the address of record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B shares
will continue to age from the original date and will retain the same CDSC rate
as they had before the exchange, except that the rate will change to the new
fund's rate if that rate is higher. A CDSC rate that has increased will drop
again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Signature Services. Certificated
shares can only be sold by returning the certificates to Signature Services,
along with a letter of instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally declare dividends daily and pay them monthly.
Capital gains, if any, are distributed annually, typically after the end of a
fund's fiscal year. Your dividends begin accruing the day after payment is
received by the fund and continue through the day your shares are actually sold.
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
YOUR ACCOUNT 21
<PAGE>
Taxability of dividends Dividends you receive from a fund, whether reinvested or
taken as cash, are generally considered taxable. Dividends from a fund's medium
and long-term capital gains are taxable as capital gains; dividends from other
sources are generally taxable as ordinary income. Some dividends paid in January
may be taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
- --------------------------------------------------------------------------------
YEAR 2000 COMPLIANCE
The adviser and the fund's service providers are taking steps to address any
year 2000-related computer problems. However, there is some risk that these
problems could disrupt the fund's operations or financial markets generally.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your accou nt application.
o If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Signature
Services, Inc." Deliver your check and application to your financial
representative or Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they are
all on the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Signature Services.
Retirement plans John Hancock Funds offers a range of retirement plans,
including traditional and Roth IRAs, SIMPLE plans, SEPs, 401(k) plans and other
pension and profit-sharing plans. Using these plans, you can invest in any John
Hancock fund (except tax-free income funds) with a low minimum investment of
$250 or, for some group plans, no minimum investment at all. To find out more,
call Signature Services at 1-800-225-5291.
22 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the funds described
in this prospectus. Each fund's board of trustees has ultimate responsibility
for fund business activities, and retains the services of the various firms that
carry out the fund's operations.
Each fund's main business activity -- the management of its investment portfolio
- -- is carried out by the fund's investment adviser. As compensation, the adviser
receives the management fee.
- --------------------------------------------------------------------------------
MANAGEMENT FEES
The management fees paid by the John Hancock income funds last year are as
follows:
- --------------------------------------------------------------------------------
Fund Management Fee
- --------------------------------------------------------------------------------
Government Income 0.63%
- --------------------------------------------------------------------------------
High Yield Bond 0.54%
- --------------------------------------------------------------------------------
Intermediate Maturity Government 0.40%
- --------------------------------------------------------------------------------
Sovereign Bond 0.50%
- --------------------------------------------------------------------------------
Intermediate Maturity Government 0.40%
- --------------------------------------------------------------------------------
Sovereign U.S. Government Income 0.50%
- --------------------------------------------------------------------------------
Strategic Income 0.43%
- --------------------------------------------------------------------------------
[The following information was represented by a flow chart in the printed
materials.]
---------------------
Shareholders
---------------------
- --------------------------------------------------------------------------------
DISTRIBUTION AND SHAREHOLDER SERVICES
Financial services firms and
their representatives
Provide financial advice to
investors.
Principal distributor
Markets the funds through
financial representatives.
Transfer agent
Handles most investor services
and transaction requests.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET MANAGEMENT
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business
and investment activities, and
receives the funds' management
fees as compensation.
Custodian
Holds assets, settles portfolio
trades and collects valuation data.
- --------------------------------------------------------------------------------
Trustees
Supervise the funds' activities.
Auditors/Accountants
Review funds' financial figures.
FUND DETAILS 23
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
These tables detail the performance of each fund's share classes, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Government Income Fund
Figures audited by
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95(2) 10/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.85 $8.75 $9.32
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.06 0.72 0.65(4)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.10) 0.57 (0.25)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.04) 1.29 0.40
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.06) (0.72) (0.65)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.75 $9.32 $9.07
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) (0.45)(6) 15.32(7) 4.49
- -------------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) (0.46)(6) 15.28 --
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 223 470,569 396,323
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(7) (%) 0.12(6) 1.19 1.17
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets(7) (%) 0.71(6) 7.38 7.10
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 92 102(9) 106
- -------------------------------------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(10) ($) -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding during the period (000s omitted)(10) ($) 349 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Average monthly shares outstanding during the period (000s omitted) 28,696 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding per share during the period(10) ($) 0.01 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Class A - period ended: 5/97(3) 5/98
- ---------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.07
- ---------------------------------------------------------------------------------------------------
Net investment income (loss) 0.37(4)
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.14)
- ---------------------------------------------------------------------------------------------------
Total from investment operations 0.23
- ---------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------
Dividends from net investment income (0.37)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $8.93
- ---------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) 2.57(6)
- ---------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) --
- ---------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 359,758
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(7) (%) 1.13(8)
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets(7) (%) 7.06(8)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 129
- ---------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(10) ($) --
- ---------------------------------------------------------------------------------------------------
Average daily debt outstanding during the period (000s omitted)(10) ($) N/A
- ---------------------------------------------------------------------------------------------------
Average monthly shares outstanding during the period (000s omitted) N/A
- ---------------------------------------------------------------------------------------------------
Average daily debt outstanding per share during the period(10) ($) N/A
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2)
- ----------------------------------------------------------------------------------------------------------------------------
Per share operating performance
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.83 $10.05 $8.75
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.70 0.65 0.65
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.24 (1.28) 0.57
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.94 (0.63) 1.22
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.72) (0.65) (0.65)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.02) --
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.72) (0.67) (0.65)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.05 $8.75 $9.32
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) 9.86(7) (6.42)(7) 14.49(7)
- ----------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) 9.85 (6.43) 14.47
- ----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 293,413 241,061 226,954
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 2.00(7) 1.93(7) 1.89(7)
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.06(7) 6.98(7) 7.26(7)
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 138 92 102(9)
- ----------------------------------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(10) ($) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding during the period (000s omitted)(10) ($) 503 349 N/A
- ----------------------------------------------------------------------------------------------------------------------------
Average monthly shares outstanding during the period (000s omitted) 26,378 28,696 N/A
- ----------------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding per share during the period(10) ($) 0.02 0.01 N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/96 5/97(3) 5/98
- ---------------------------------------------------------------------------------------------------------------------
Per share operating performance
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $9.32 $9.08
- ---------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.58(4) 0.33(4)
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.24) (0.15)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.34 0.18
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.58) (0.33)
- ---------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (0.58) (0.33)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.08 $8.93
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) 3.84 2.02(6)
- ---------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) -- --
- ---------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 178,124 153,390
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.90 1.87(8)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.37 6.32(8)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 106 129
- ---------------------------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(10) ($) -- --
- ---------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding during the period (000s omitted)(10) ($) N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Average monthly shares outstanding during the period (000s omitted) N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding per share during the period(10) ($) N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class A shares commenced operations on September 30, 1994.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year end changed from October 31 to May
31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Excludes interest expense, which equalled 0.04% for Class A for the year
ended October 31, 1995 and 0.15%, 0.01%, 0.01% and 0.02% for Class B for
the years ended October 31, 1992, 1993, 1994 and 1995, respectively.
(8) Annualized.
(9) Portfolio turnover rate excludes merger activity.
(10) Debt outstanding consists of reverse repurchase agreements entered into
during the year.
24 GOVERNMENT INCOME FUND
<PAGE>
High Yield Bond Fund
Figures audited by
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/93(1) 10/94 10/95(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.10 $8.23 $7.33
Net investment income (loss) 0.33 0.80(4) 0.72
Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12)
Total from investment operations 0.42 (0.03) 0.60
Less distributions:
Dividends from net investment income (0.29) (0.82) (0.73)
Distributions from net realized gain on investments sold -- (0.05) --
Total distributions (0.29) (0.87) (0.73)
Net asset value, end of period $8.23 $7.33 $7.20
Total investment return at net asset value(5) (%) 4.96(6) (0.59) 8.83
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452
Ratio of expenses to average net assets (%) 0.91(7) 1.16 1.16
Ratio of net investment income (loss) to average net assets (%) 12.89(7) 10.14 10.23
Portfolio turnover rate (%) 204 153 98
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/96 5/97(3) 5/98
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.20 $7.55
Net investment income (loss) 0.76(4) 0.45
Net realized and unrealized gain (loss) on investments 0.35 0.32
Total from investment operations 1.11 0.77
Less distributions:
Dividends from net investment income (0.76) (0.45)
Distributions from net realized gain on investments sold -- --
Total distributions (0.76) (0.45)
Net asset value, end of period $7.55 $7.87
Total investment return at net asset value(5) (%) 16.06 10.54(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 52,792 97,925
Ratio of expenses to average net assets (%) 1.10 1.05(7)
Ratio of net investment income (loss) to average net assets (%) 10.31 10.19(7)
Portfolio turnover rate (%) 113 78
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.43 $8.23 $7.33
Net investment income (loss) 0.80 0.74(4) 0.67
Net realized and unrealized gain (loss) on investments 0.75 (0.83) (0.13)
Total from investment operations 1.55 (0.09) 0.54
Less distributions:
Dividends from net investment income (0.75) (0.76) (0.67)
Distributions from net realized gain on investments sold -- (0.05) --
Total distributions (0.75) (0.81) (0.67)
Net asset value, end of period $8.23 $7.33 $7.20
Total investment return at net asset value(5) (%) 21.76 (1.33) 7.97
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 154,214 160,739 180,586
Ratio of expenses to average net assets (%) 2.08 1.91 1.89
Ratio of net investment income (loss) to average net assets (%) 10.07 9.39 9.42
Ratio of adjusted net investment income (loss) to average net assets(10) (%) -- -- --
Portfolio turnover rate (%) 204 153 98
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/96 5/97(3) 5/98
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.20 $7.55
Net investment income (loss) 0.70(4) 0.42
Net realized and unrealized gain (loss) on investments 0.35 0.32
Total from investment operations 1.05 0.74
Less distributions:
Dividends from net investment income (0.70) (0.42)
Distributions from net realized gain on investments sold -- --
Total distributions (0.70) (0.42)
Net asset value, end of period $7.55 $7.87
Total investment return at net asset value(5) (%) 15.24 10.06(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 242,944 379,024
Ratio of expenses to average net assets (%) 1.82 1.80(7)
Ratio of net investment income (loss) to average net assets (%) 9.49 9.45(7)
Ratio of adjusted net investment income (loss) to average net assets(10) (%) -- --
Portfolio turnover rate (%) 113 78
</TABLE>
HIGH YIELD BOND FUND FUND 25
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Class C - period ended: 5/98
- -------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%) Ratio of net investment income
(loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(10) (%)
Portfolio turnover rate (%)
Average brokerage commission rate(8)($)
</TABLE>
(1) Class A shares commenced operations on June 30, 1993.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year changed from October 31 to May 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
26 HIGH YIELD BOND FUND
<PAGE>
Intermediate Maturity Government Fund
Figures audited by
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/94 3/95(1) 3/96
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.05 $9.89 $9.79
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.41 0.49 0.62
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.08)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.25 0.38 0.54
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.41) (0.48) (0.64)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.41) (0.48) (0.64)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.89 $9.79 $9.69
- -----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(4) (%) 2.51 3.98 5.60
- -----------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) 2.27 3.43 4.83
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 24,310 12,950 29,024
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.75(7) 0.80(7) 0.75(7)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(9) (%) 0.99(7) 1.35(7) 1.45(7)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 4.09 4.91 6.49
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average assets(9) (%) 3.85 4.36 5.79
- -----------------------------------------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.02 0.05 0.07
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 244 341 423(10)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/97 5/97(2) 5/98
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.69 $9.37
- -------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.67(3) 0.11(3)
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.25) 0.09
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.42 0.20
- -------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.66) (0.11)
- -------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.08) --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.74) (0.11)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.37 $9.46
- -------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(4) (%) 4.56 2.13(6)
- -------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) 4.19 1.93(6)
- -------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 22,043 22,755
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.75 0.75(8)
- -------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(9) (%) 1.12 1.92(8)
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.99 7.07(8)
- -------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average assets(9) (%) 6.62 5.90(8)
- -------------------------------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.04 0.02
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 427 77
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/94 3/95(1) 3/96
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.05 $9.89 $9.79
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.34 0.43 0.57
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.10)
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.18 0.32 0.47
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.34) (0.42) (0.57)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.34) (0.42) (0.57)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.89 $9.79 $9.69
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(4) (%) 1.85 3.33 4.92
- --------------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) 1.61 2.78 4.15
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 11,626 9,506 8,532
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.40(7) 1.45(7) 1.40(7)
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(9) (%) 1.64(7) 2.00(7) 2.10(7)
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 3.44 4.26 5.80
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 3.20 3.71 5.10
- --------------------------------------------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.02 0.05 0.07
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 244 341 423(10)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/97 5/97(2) 5/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.69 $9.37
- --------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.60(3) 0.10(3)
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.24) 0.09
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.36 0.19
- --------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.60) (0.10)
- --------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.08) --
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.68) (0.10)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.37 $9.46
- --------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(4) (%) 3.84 2.01(6)
- --------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) 3.47 1.81(6)
- --------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 6,779 6,451
- --------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.43 1.50(8)
- --------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(9) (%) 1.80 2.67(8)
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.30 6.04(8)
- --------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 5.93 4.87(8)
- --------------------------------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.04 0.02
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 427 77
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Effective May 31, 1997, the fiscal year end changed from March 31 to May
31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Not annualized.
(7) Beginning on December 31, 1991 (commencement of operations) through March
31, 1995, the expenses used in the ratios represented the expenses of the
fund plus expenses incurred indirectly from the Adjustable U.S. Government
fund (the "Portfolio"), the mutual fund in which the fund invested all of
its assets. The expenses used in the ratios for the fiscal year ended March
31, 1996 include the expenses of the Portfolio through September 22, 1995.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover rate excludes merger activity.
INTERMEDIATE MATURITY GOVERNMENT FUND 27
<PAGE>
Sovereign Bond Fund
Figures audited by
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94 12/95
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.29 $15.53 $13.90
- ---------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 1.14 1.12 1.12
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and financial futures contracts 0.62 (1.55) 1.50
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.76 (0.43) 2.62
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (1.14) (1.12) (1.12)
- ---------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments
sold and financial futures contracts (0.38) (0.08) --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (1.52) (1.20) (1.12)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.53 $13.90 $15.40
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 11.80 (2.75) 19.40
- ---------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 1,505,754 1,326,058 1,535,204
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.41 1.26 1.13
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.18 7.74 7.58
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 107 85 103(5)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/96 5/97(1) 5/98
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.40 $14.90
- -------------------------------------------------------------------------------------------------------------
Net investment income (loss) 1.09 0.44
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and financial futures contracts (0.50) (0.12)
- -------------------------------------------------------------------------------------------------------------
Total from investment operations 0.59 0.32
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
Dividends from net investment income (1.09) (0.44)
- -------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments
sold and financial futures contracts -- --
- -------------------------------------------------------------------------------------------------------------
Total distributions (1.09) (0.44)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.90 $14.78
- -------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 4.11 2.22(3)
- -------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 1,416,116 1,361,924
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.14 1.11(4)
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.32 7.38(4)
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 123 58
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/93(6) 12/94 12/95 12/96
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.90 $15.52 $13.90 $15.40
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.11 1.04 1.02 0.98
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts -- (1.54) 1.50 (0.50)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.11 (0.50) 2.52 0.48
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.11) (1.04) (1.02) (0.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on
investments sold and financial futures contracts (0.38) (0.08) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.49) (1.12) (1.02) (0.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.52 $13.90 $15.40 $14.90
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 0.90(3) (3.13) 18.66 3.38
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739 134,112
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.63(4) 1.78 1.75 1.84
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 0.57(4) 7.30 6.87 6.62
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 107 85 103(5) 123
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Class B - period ended: 5/97(1) 5/98
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------
Net asset value, beginning of period $14.90
- ------------------------------------------------------------------------------------------
Net investment income (loss) 0.40
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts (0.12)
- ------------------------------------------------------------------------------------------
Total from investment operations 0.28
- ------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------
Dividends from net investment income (0.40)
- ------------------------------------------------------------------------------------------
Distributions from net realized gain on
investments sold and financial futures contracts --
- ------------------------------------------------------------------------------------------
Total distributions (0.40)
- ------------------------------------------------------------------------------------------
Net asset value, end of period $14.78
- ------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 1.93(3)
- ------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 132,885
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.81(4)
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.68(4)
- ------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 58
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 31, 1997, the fiscal year end changed from December 31 to May
31.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Not annualized.
(4) Annualized.
(5) Portfolio turnover excludes merger activity.
(6) Class B shares commenced operations on November 23, 1993.
28 SOVEREIGN BOND FUND
<PAGE>
Sovereign U.S. Government Income Fund
Figures audited by
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/93 10/94 10/95 10/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.29 $10.89 $9.24 $10.01
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.68(2) 0.65 0.65 0.64(2)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and financial futures contracts 0.61 (1.34) 0.77 (0.26)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.29 (0.69) 1.42 0.38
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.68) (0.65) (0.65) (0.64)
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.01) (0.31) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.69) (0.96) (0.65) (0.64)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.89 $9.24 $10.01 $9.75
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 12.89 (6.66) 15.90 4.02
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 375,416 315,372 370,966 330,162
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.30 1.23 1.17 1.15
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.47 6.62 6.76 6.58
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 273 127 94 143
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Class A - period ended: 5/97(1) 5/98
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.75
- ----------------------------------------------------------------------------------------------
Net investment income (loss) 0.37(2)
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and financial futures contracts (0.19)
- ----------------------------------------------------------------------------------------------
Total from investment operations 0.18
- ----------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------
Dividends from net investment income (0.36)
- ----------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold --
- ----------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.01)
- ----------------------------------------------------------------------------------------------
Total distributions (0.37)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $9.56
- ----------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 1.92(4)
- ----------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 302,589
- ----------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.17(5)
- ----------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.69(5)
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 88
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95 10/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.28 $10.88 $9.23 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.66(2) 0.61 0.60 0.58(2)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.61 (1.34) 0.77 (0.26)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.27 (0.73) 1.37 0.32
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.66) (0.61) (0.60) (0.58)
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.01) (0.31) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.67) (0.92) (0.60) (0.58)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.88 $9.23 $10.00 $9.74
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 12.66 (7.05) 15.27 3.33
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 244,133 196,899 130,824 112,228
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.51 1.64 1.72 1.82
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.23 6.19 6.24 5.91
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 273 127 94 143
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Class B - period ended: 5/97(1) 5/98
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.74
- -------------------------------------------------------------------------------------------
Net investment income (loss) 0.33(2)
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts (0.18)
- -------------------------------------------------------------------------------------------
Total from investment operations 0.15
- -------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------
Dividends from net investment income (0.32)
- -------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold --
- -------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.01)
- -------------------------------------------------------------------------------------------
Total distributions (0.33)
- -------------------------------------------------------------------------------------------
Net asset value, end of period $9.56
- -------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 1.61(4)
- -------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 96,349
- -------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.86(5)
- -------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 5.99(5)
- -------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 88
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 31, 1997, the fiscal year end changed from October 31 to May
31.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
SOVEREIGN U.S. GOVERNMENT INCOME FUND 29
<PAGE>
Strategic Income Fund
Figures audited by
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/94 5/95 5/96 5/97 5/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.55 $7.17 $7.15 $7.27
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.68 0.64 0.66(1) 0.64(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.33) (0.02) 0.12 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.35 0.62 0.78 0.91
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.58) (0.55) (0.66) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.05) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.10) (0.09) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.73) (0.64) (0.66) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.17 $7.15 $7.27 $7.54
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 4.54 9.33 11.37 12.99
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 335,261 327,876 369,127 416,916
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.32 1.09 1.03 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 8.71 9.24 9.13 8.61
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 55 78 132
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Class B - period ended: 5/94(3) 5/95 5/96
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.58 $7.17 $7.15
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.40 0.60(1) 0.61(1)
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.41) (0.02) 0.12
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.01) 0.58 0.73
- -----------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.32) (0.52) (0.61)
- -----------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.03) -- --
- -----------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.05) (0.08) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (0.40) (0.60) (0.61)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.17 $7.15 $7.27
- -----------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) (0.22)(4) 8.58 10.61
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 77,691 134,527 206,751
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.91(5) 1.76 1.73
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 8.12(5) 8.55 8.42
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 55 78
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Class B - period ended: 5/97 5/98
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $7.27
- ---------------------------------------------------------------------------------------
Net investment income (loss) 0.59
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts 0.27
- ---------------------------------------------------------------------------------------
Total from investment operations 0.86
- ---------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------
Dividends from net investment income (0.59)
- ---------------------------------------------------------------------------------------
Distributions in excess of net investment income --
- ---------------------------------------------------------------------------------------
Distributions from capital paid-in --
- ---------------------------------------------------------------------------------------
Total distributions (0.59)
- ---------------------------------------------------------------------------------------
Net asset value, end of period $7.54
- ---------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 12.21
- ---------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 328,487
- ---------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.70
- ---------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.90
- ---------------------------------------------------------------------------------------
Portfolio turnover rate (%) 132
- ---------------------------------------------------------------------------------------
</TABLE>
30 STRATEGIC INCOME FUND
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class C - period ended: 5/98
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)
Net realized and unrealized gain (loss) on investments, foreign currency
transactions and financial futures contracts
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions in excess of net investment income
Distributions from capital paid-in
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of net investment income (loss) to average net assets (%)
Portfolio turnover rate (%)
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Class B shares commenced operations on October 4, 1993.
(4) Not annualized.
(5) Annualized.
STRATEGIC INCOME FUND 31
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
income funds:
ANNUAL/SEMIANNUAL
REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA02217-1000
By phone: 1-800-225-5291
By EASI-Line: 1-800-338-8080
By TDD: 1-800-544-6713
On the Internet:
www.jhancock.com/funds
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public
Reference Room in Washington, DC
By phone: 1-800-SEC-0330
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
On the Internet: www.sec.gov
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue,
Boston, Massachusetts
02199-7603
John Hancock(R) (C) 1998 John Hancock Funds, Inc.
INCPN 10/98
<PAGE>
JOHN HANCOCK SOVEREIGN BOND FUND
Class A, Class B and Class C Shares
Statement of Additional Information
October 1, 1998
This Statement of Additional Information provides information about John Hancock
Sovereign Bond Fund (the "Fund"), a diversified open-end investment company, in
addition to the information that is contained in the combined Income Funds'
Prospectus (the "Prospectus") dated October 1, 1998.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund ............................................... 2
Investment Objective and Policies ...................................... 2
Investment Restrictions ................................................ 14
Those Responsible for Management ....................................... 16
Investment Advisory and Other Services ................................. 25
Distribution Contracts ................................................. 27
Sales Compensation ..................................................... 28
Net Asset Value ........................................................ 30
Initial Sales Charge on Class A Shares ................................. 30
Deferred Sales Charge on Class B and Class C Shares .................... 33
Special Redemptions .................................................... 36
Additional Services and Programs ....................................... 36
Description of the Fund's Shares ....................................... 38
Tax Status ............................................................. 39
Calculation of Performance ............................................. 43
Brokerage Allocation ................................................... 45
Transfer Agent Services ............................................... 46
Custody of Portfolio ................................................... 47
Independent Auditors ................................................... 47
Appendix A- Description of Investment Risk ............................. A-1
Appendix B-Description of Bond Ratings ................................. B-1
Financial Statements ................................................... F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a diversified open-end investment management company organized as a
Massachusetts business trust under the laws of The Commonwealth of
Massachusetts. The Fund was organized in 1984.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect wholly-owned 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 following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. Appendix A contains further
information describing investment risks. There is no assurance that the Fund
will achieve its investment objective. The investment objective is fundamental
and may only be changed with shareholder approval.
The Fund's investment objective is to generate a high level of current income,
consistent with prudent investment risk, through investment in a diversified
portfolio of freely marketable debt securities. The Adviser seeks high current
income consistent with the moderate level of risk associated with a portfolio
consisting primarily of investment grade debt securities.
Under normal conditions, at least 65% of the value of the Fund's assets will be
in bonds and/or debentures. In addition, the Fund contemplates at least 75% of
the value of its total assets will be in (1) debt securities that have, at the
time of purchase, a rating within the four highest grades as determined by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or Standard &
Poor's ("S&P") (AAA, AA, A, or BBB); (2) debt securities of banks, the U.S.
Government and its agencies or instrumentalities and other issuers which,
although not rated as a matter of policy by either Moody's or S&P, are
considered by the Fund to have investment quality comparable to securities
receiving ratings within the four highest grades; and (3) cash and cash
equivalents. Debt securities rated Baa or BBB are considered medium-grade
obligations with speculative characteristics and adverse economic conditions or
changing circumstances may weaken the issuers' capacity to pay interest and
repay principal. The Fund will, when feasible, purchase debt securities which
are non-callable. It is anticipated that under normal conditions, the Fund will
not invest more than 25% of its total assets in U.S. dollar-denominated foreign
securities (excluding U.S. dollar-denominated Canadian securities). The Fund
will diversify its investments among a number of industry groups without
concentration in any particular industry. The Fund's investments, and
consequently its net asset value, will be subject to the market fluctuations and
risks inherent in all securities.
The Fund may purchase corporate debt securities bearing fixed or fixed and
contingent interest as well as those which carry certain equity features, such
as conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, or participations based on revenues, sales or
profits. The Fund will not exercise any such conversion, exchange or purchase
rights if, at the time, the value of all equity interests so owned would exceed
10% of the Fund's total assets taken at market value.
For liquidity and flexibility, the Fund may place up to 35% of total assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. 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
2
<PAGE>
expected to rise if such securities are protected against early call. Similarly,
when such yields increase, the market value of a portfolio already invested 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.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized, however, that such ratings are
relative and subjective and are not absolute standards of quality. These ratings
will be used by the Fund as initial criteria for the selection of portfolio
securities. Among the factors which will be considered are the long-term ability
of the issuer to pay principal and interest and general economic trends.
Appendix B contains further information concerning the ratings of Moody's and
S&P and their significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund, but the Adviser will consider the event in its determination of whether
the Fund should continue to hold the securities.
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests may be subject to its 15% limitation on investments
in illiquid securities.
Structured Securities. The Fund may invest in structured securities including
notes, bonds or debentures, the value of the principal of and/or interest on
which is to be determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference. The
terms of the structured securities may provide that in certain circumstances no
principal is due at maturity and, therefore, may result in the loss of the
Fund's investment. Structured securities may be positively or negatively
indexed, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference. Consequently, structured
securities entail a greater degree of market risk than other types of debt
obligations. Structured securities may also be more volatile, less liquid and
more difficult to accurately price than less complex fixed income investments.
Lower Rated High Yield Debt Obligations. The Fund may invest up to 25% of the
value of its total assets in fixed income securities rated below Baa by Moody's,
or below BBB by S&P, or in securities which are unrated. The Fund may invest in
securities rated as low as Ca by Moody's or CC by S&P, which may indicate that
the obligations are highly speculative and in default. Lower rated securities
are generally referred to as junk bonds. See the Appendix attached to this
Statement of Additional Information, for the distribution of securities in the
various ratings categories and a description of the characteristics of the
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 Fund may invest in unrated securities which, in the opinion of the
Adviser, offer comparable yields and risks to those securities which are rated.
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
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greater possibility of an adverse change in financial condition affecting the
ability of the issuer to make payments of interest and principal.
The market price and liquidity of lower rated fixed income securities generally
respond to short-term economic, corporate and market developments to a greater
extent than do higher rated securities. In the case of lower-rated securities,
these developments are perceived to have a more direct relationship to the
ability of an issuer of lower rated securities to meet its ongoing debt
obligations.
Reduced volume and liquidity in the high yield bond market, or the reduced
availability of market quotations, will make it more difficult to dispose of the
bonds and 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 the high yield bonds. To the extent that the Fund invests in
these securities, the achievement of the Fund's objective will depend more on
the Adviser's judgment and analysis than would otherwise be the case. In
addition, the Fund's investments in high yield securities may be susceptible to
adverse publicity and investor perceptions, whether or not the perceptions are
justified by fundamental factors. In the past, economic downturns and increases
in interest rates have caused a higher incidence of default by the issuers of
lower-rated securities and may do so in the future, particularly with respect to
highly leveraged issuers. The market prices of zero coupon and payment-in-kind
bonds are affected to a greater extent by interest rate changes, and thereby
tend to be more volatile than securities that pay interest periodically and in
cash. Increasing rate note securities are typically refinanced by the issuers
within a short period of time. The Fund accrues income on these securities for
tax and accounting purposes, which is required to be distributed to
shareholders. Because no cash is received while income accrues on these
securities, the Fund may be forced to liquidate other investments to make the
distributions.
The Fund may acquire individual securities of any maturity and is not subject to
any limits as to the average maturity of its overall portfolio. The longer the
Fund's average portfolio maturity, the more the value of the portfolio and the
net asset value of the Fund's shares will fluctuate in response to changes in
interest rates. An increase in interest rates will generally reduce the value of
the Fund's portfolio securities and the Fund's shares, while a decline in
interest rates will generally increase their value.
Securities of Domestic and Foreign Issuers. The Fund may invest in U.S.
dollar-denominated securities of foreign and United States issuers that are
issued in or outside of the United States. Foreign companies may not be subject
to accounting standards and government supervision comparable to U.S. companies,
and there is often less publicly available information about their operations.
Foreign markets generally provide less liquidity than U.S. markets (and thus
potentially greater price volatility) and typically provide fewer regulatory
protections for investors. Foreign securities can also be affected by political
or financial instability abroad. It is anticipated that under normal conditions,
the Fund will not invest more than 25% of its total assets in U.S.
dollar-denominated foreign securities (excluding U.S. dollar-denominated
Canadian securities).
Mortgage-backed and Derivative Securities. Mortgage-backed securities represent
participation interests in pools of adjustable and fixed rate mortgage loans
which are guaranteed by agencies or instrumentalities of the U.S. government.
Unlike conventional debt obligations, mortgage-backed securities provide monthly
payments derived from the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans. The
mortgage loans underlying mortgage-backed securities are generally subject to a
greater rate of principal prepayments in a declining interest rate environment
and to a lesser rate of principal prepayments in an increasing interest rate
environment. Under certain interest and prepayment scenarios, the Fund may fail
to recover the full amount of its investment
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in mortgage-backed securities notwithstanding any direct or indirect
governmental or agency guarantee. Since faster than expected prepayments must
usually be invested in lower yielding securities, mortgage-backed securities are
less effective than conventional bonds in "locking in" a specified interest
rate. In a rising interest rate environment, a declining prepayment rate may
extend the average life of many mortgage-backed securities. Extending the
average life of a mortgage-backed security increases the risk of depreciation
due to future increases in market interest rates.
The Fund's investments in mortgage-backed securities may include conventional
mortgage passthrough securities and certain classes of multiple class
collateralized mortgage obligations ("CMOs"). In order to reduce the risk of
prepayment for investors, CMOs are issued in multiple classes, each having
different maturities, interest rates, payment schedules and allocations of
principal and interest on the underlying mortgages. Senior CMO classes will
typically have priority over residual CMO classes as to the receipt of principal
and/or interest payments on the underlying mortgages. The CMO classes in which
the Fund may invest include but are not limited to sequential and parallel pay
CMOs, including planned amortization class ("PAC") and target amortization class
("TAC") securities.
Different types of mortgage-backed securities are subject to different
combinations of prepayment, extension, interest rate and/or other market risks.
Conventional mortgage passthrough securities and sequential pay CMOs are subject
to all of these risks, but are typically not leveraged. PACs, TACs and other
senior classes of sequential and parallel pay CMOs involve less exposure to
prepayment, extension and interest rate risk than other mortgage-backed
securities, provided that prepayment rates remain within expected prepayment
ranges or "collars."
Repurchase Agreements. In a repurchase agreement the Fund would buys a security
for a relatively short period (usually not more than 7 days) subject to the
obligation to sell it back to the issuer at a fixed time and price plus accrued
interest. The Fund will enter into repurchase agreements only with member banks
of the Federal Reserve System and with "primary dealers" in U.S. Government
securities. The Adviser will continuously monitor the creditworthiness of the
parties with whom the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
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.
Reverse Repurchase Agreements. The Fund may also enter into reverse purchase
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. To minimize various risks associated with
reverse repurchase agreements, the Fund will establish and maintain with the
Fund's custodian a separate account
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consisting of liquid securities, of any type or maturity, 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 enter into
reverse repurchase agreements or borrow money, except from banks as a temporary
measure for extraordinary emergency purposes in amounts not to exceed 33 1/3% of
the Fund's total assets (including the amount borrowed) taken at market value.
The Fund will not use leverage to attempt to increase income. The Fund will not
purchase securities while outstanding borrowings exceed 5% of the Fund's total
assets. The Fund will enter into reverse repurchase agreements only with
federally insured banks which are approved in advance as being creditworthy by
the Trustees. Under the procedures established by the of Trustees, the Adviser
will monitor the creditworthiness of the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of the 1933 Act ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act.
However, the Fund will not invest more than 15% limit on illiquid investments.
If the Trustees determine, based upon a continuing review of the trading markets
for specific Section 4(2) paper or Rule 144A securities, that they are liquid,
they will not be subject to the 15% limit in illiquid investments. The Trustees
may adopt guidelines and delegate to the Adviser the daily function of
determining the monitoring and liquidity of restricted investments. The
Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations. The Trustees will carefully monitor the
Fund's liquidity and availability of information. This investment practice could
have the effect of increasing the level of liquidity in the Fund if qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
Options on Securities and Securities Indices. 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. These options may
be listed on national domestic 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 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 written by the Fund
obligates the Fund to sell specified securities 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 written by a Fund obligates the Fund to
purchase specified securities 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 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 to
be acquired for its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account 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
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<PAGE>
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 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 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 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 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. Put options may
also be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities 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 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
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.
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
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<PAGE>
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). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, 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 markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates or securities prices, the Fund
may purchase and sell 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 and any other financial instruments
and indices. All futures contracts entered into by the Fund are traded on U.S.
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 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 will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities 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. 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, 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 that would adversely affect the
value of the Fund's portfolio securities. Such futures
8
<PAGE>
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.
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 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, to alter the
investment characteristics of portfolio securities or to gain or increase its
exposure to a particular securities market.
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.
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 that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it
9
<PAGE>
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 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.
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, require the Fund to establish 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 or securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. 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.
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.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when- issued or forward commitment basis
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also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of the Fund's borrowings and other senior securities. For financial reporting
and tax purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar roll transactions that are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset-backed securities. Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Fund's ability to
maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset- backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to
11
<PAGE>
exchange the notional principal amount as well. Swaps may also depend on other
prices or rates, such as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. The Fund will maintain in a segregated account
with its custodian, cash or liquid, high grade debt securities equal to the net
amount, if any, of the excess of the Fund's obligations over its entitlements
with respect to swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "TAX STATUS."
Brady Bonds. The Fund may invest in Brady Bonds and other sovereign debt
securities of countries that have restructured or are in the process of
restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt
securities described as part of a restructuring plan created by U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally, commercial bank
debt). In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund (the
"IMF"). The Brady Plan facilitates the exchange of commercial bank debt for
newly issued bonds (known as Brady Bonds). The World Bank and the IMF provide
funds pursuant to loan agreements or other arrangements which enable the debtor
nation to collateralize the new Brady Bonds or to repurchase outstanding bank
debt at a discount. Under these arrangements the IMF debtor nations are required
to implement domestic
12
<PAGE>
monetary and fiscal reforms. These reforms have included the liberalization of
trade and foreign investment, the privatization of state-owned enterprises and
the setting of targets for public spending and borrowing. These policies and
programs seek to promote the debtor country's ability to service its external
obligations and promote its economic growth and development. The Brady Plan only
sets forth general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case basis between
debtor nations and their creditors. The Adviser believes that economic reforms
undertaken by countries in connection with the issuance of Brady Bonds make the
debt of countries which have issued or have announced plans to issue Brady Bonds
an attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of January 1, 1997, the Fund is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have a long
payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
13
<PAGE>
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. 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 portfolio turnover rate. A high
rate of portfolio turnover (100% or greater) involves correspondingly greater
brokerage expenses. The Fund's portfolio turnover rate is set forth in the table
under the caption "Financial Highlights" in the Prospectus.
The Fund intends to use short-term trading of securities as a means of managing
its portfolio to achieve its investment objective. The Fund, in reaching a
decision to sell one security and purchase another security at approximately the
same time, will take into account a number of factors, including the quality
ratings, interest rates, yields, maturity dates, call prices, and refunding and
sinking fund provisions of the securities under consideration, as well as
historical yield spreads and current economic information. The success of
short-term trading will depend upon the ability of the Fund to evaluate
particular securities, to anticipate relevant market factors, including trends
of interest rates and earnings and variations from such trends, to obtain
relevant information, to evaluate it promptly, and to take advantage of its
evaluations by completing transactions on a favorable basis. It is expected that
the expenses involved in short-term trading, which would not be incurred by an
investment company which does not use this portfolio technique, will be
significantly less than the profits and other benefits which will accrue to
shareholders.
The portfolio turnover rate will depend on a number of factors, including the
fact that the Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, the Fund intends to limit its short-term trading so that less than
30% of the Fund's gross annual income (including all dividend and interest
income and gross realized capital gains, both short and long-term, without being
offset for realized capital losses) will be derived from gross realized gains on
the sale or other disposition of securities held for less than three months.
This limitation, which must be met by all mutual funds in order to obtain such
Federal tax treatment, at certain times may prevent the Fund from realizing
capital gains on some securities held for less than three months.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of a majority of the Fund's outstanding voting
securities which, as used in the Prospectus and this Statement of Additional
Information, means approval by the lesser of (1) the holders of 67% or more of
the Fund's shares represented at a meeting if more than 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) Issue senior securities, except as permitted by paragraphs (2), (6)
and (7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts and repurchase agreements
entered into in accordance with the Fund's investment policy, and the pledge,
mortgage or hypothecation of the Fund's assets within the meaning of paragraph
(3) below are not deemed to be senior securities.
14
<PAGE>
(2) Borrow money, except from banks as a temporary measure for
extraordinary emergency purposes in amounts not to exceed 33 1/3% of the Fund's
total assets (including the amount borrowed) taken at market value. The Fund
will not use leverage to attempt to increase income. The Fund will not purchase
securities while outstanding borrowings exceed 5% of the Fund's total assets.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if such pledging,
mortgaging or hypothecating does not exceed 33 1/3% of the Fund's total assets
taken at market value.
(4) Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the 1933 Act.
(5) Purchase or sell real estate or any interest therein, except that the
Fund may invest in securities of corporate or governmental entities secured by
real estate or marketable interests therein or issued by companies that invest
in real estate or interests therein.
(6) Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's total
assets taken at market value, (2) enter into repurchase agreements, and (3)
purchase all or a portion of an issue of publicly distributed debt securities,
bank loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase is made
upon the original issuance of the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments and
options on such futures contracts, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
(8) Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets taken at
market value at the time of each investment. This limitation does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
(9) Purchase securities of an issuer, (other than the U.S. Government, its
agencies or instrumentalities) if
(a) Such purchase would cause more than 5% of the Fund's total
assets taken at market value to be invested in the securities of such issuer, or
(b) Such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund.
In connection with the lending of portfolio securities under item (6) above,
such loans must at all times be fully collateralized by cash or securities of
the U.S. Government or its agencies or instrumentalities and the Fund's
custodian must take possession of the collateral either physically or in book
entry form. Any cash collateral will consist of short-term high quality debt
instruments. Securities used as collateral must be marked to market daily.
Non-fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval: The Fund may not:
15
<PAGE>
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under the management of the Adviser to
save commissions or to average prices among them is not deemed to result in a
securities trading account.
(b) Purchase securities on margin or make short sales, except margin
deposits in connection with transactions in options, futures contracts, options
on futures contracts and other arbitrage transactions or unless by virtue of its
ownership of other securities, the Fund has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except that the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities and in connection with transactions involving
forward foreign currency exchange transactions.
(c) Invest for the purpose of exercising control over or management of any
company.
(d) Invest more than 15% of its net assets in illiquid securities.
(e) 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.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees of the Trust, who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Fund are also Officers and Directors of the Adviser or Officers
and Directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
16
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Edward J. Boudreau, Jr. * Trustee, Chairman and Chairman, Director and
101 Huntington Avenue Chief Executive Officer Chief Executive Officer,
Boston, MA 02199 (1, 2) the Adviser; Chairman,
October 1944 Trustee and Chief
Executive Officer, The
Berkeley Financial Group
("The Berkeley Group");
Chairman and Director, NM
Capital Management, Inc.
("NM Capital"), John
Hancock Advisers
International Limited
("Advisers International")
and Sovereign Asset
Management Corporation
("SAMCorp"); Chairman,
Chief Executive Officer
and President, John
Hancock Funds, Inc. ("John
Hancock Funds"); Chairman,
First Signature Bank and
Trust Company; Director,
John Hancock Insurance
Agency, Inc. ("Insurance
Agency, Inc."), John
Hancock Advisers
International (Ireland)
Limited ("International
Ireland"), 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; 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.
17
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dennis S. Aronowitz Trustee Professor of Law,
1216 Falls Boulevard Emeritus, Boston
Fort Lauderdale, FL 33327 University School of Law
June 1931 (as of 1997); Trustee,
Brookline Savings Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline
160 Washington Street Savings Bank; Director,
Brookline, MA 02147 Federal Home Loan Bank
February 1935 of Boston (lending);
Director, Lumber
Insurance Companies
(fire and casualty
insurance); Trustee,
Northeastern University
(education); Director,
Depositors Insurance
Fund, Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior
20 Buttonwood Place Banker and Senior Credit
Saddle River, NJ 07458 Officer, Citibank, N.A.
January 1933 (retired September
1991); Executive Vice
President, Citadel Group
Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until
October 1993); Trustee,
the Hudson City Savings
Bank (since 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.
18
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Douglas M. Costle Trustee (1) Director, Chairman of
RR2 Box 480 the Board and
Woodstock, VT 05091 Distinguished Senior
July 1939 Fellow, Institute for
Sustainable Communities,
Montpelier, Vermont (since
1991); Dean Vermont Law
School (until 1991);
Director, Air and Water
Technologies Corporation
(environmental services
and equipment), Niagara
Mohawk Power Company
(electric services) and
Mitretek Systems
(governmental consulting
services).
Leland O. Erdahl Trustee Director, Santa Fe
8046 Mackenzie Court Ingredients Company of
Las Vegas, NV 89129 California, Inc. and
December 1928 Santa Fe Ingredients
Company, Inc. (private
food processing
companies), Uranium
Resources, Inc.;
President, Stolar, Inc.
(1987-1991); President,
Albuquerque Uranium
Corporation (1985-1992);
Director,
Freeport-McMoRan Copper
& Gold Company, Inc.,
Hecla Mining Company,
Canyon Resources
Corporation and Original
Sixteen to One Mines,
Inc. (1984-1987 and
1991-1995) (management
consultant).
- -------------------
* 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.
19
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard A. Farrell Trustee President of Farrell,
Venture Capital Partners Healer & Co., (venture
160 Federal Street capital management firm)
23rd Floor (since 1980); Prior to
Boston, MA 02110 1980, headed the venture
November 1932 capital group at Bank of
Boston Corporation.
Gail D. Fosler Trustee Vice President and Chief
3054 So. Abingdon Street Economist, The
Arlington, VA 22206 Conference Board
December 1947 (non-profit economic and
business research);
Director, Unisys Corp.;
and H.B. Fuller Company.
William F. Glavin Trustee President Emeritus,
120 Paget Court - John's Babson College (as of
Island 1997); Vice Chairman,
Vero Beach, FL 32963 Xerox Corporation (until
March 1932 June 1989); Director,
Caldor Inc., Reebok,
Ltd. (since 1994) and
Inco Ltd.
Anne C. Hodsdon * Trustee and President President, Chief
101 Huntington Avenue (1,2) Operating Officer and
Boston, MA 02199 Director, the Adviser;
April 1953 Trustee, The Berkeley
Group; Director, John
Hancock Funds, Advisers
International, Insurance
Agency, Inc. and
International Ireland;
President and Director,
SAMCorp. and NM Capital;
Executive Vice
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.
20
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dr. John A. Moore Trustee President and Chief
Institute for Evaluating Executive Officer,
Health Risks Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since
Washington, DC 20006-1602 September 1989).
February 1939
Patti McGill Peterson Trustee Executive Director,
Council for International Council for
Exchange of Scholars International Exchange
3007 Tilden Street, N.W., of Scholars (since
Suite 5L January 1998), Vice
Washington, DC 20008-3009 President, Institute of
May 1943 International Education
(since January 1998);
Cornell Institute of
Public Affairs, Cornell
University (until December
1997); President Emeritus
of Wells College and St.
Lawrence University;
Director, Niagara Mohawk
Power Corporation
(electric utility) and
Security Mutual Life
(insurance).
John W. Pratt Trustee Professor of Business
2 Gray Gardens East Administration at
Cambridge, MA 02138 Harvard University
September 1931 Graduate School of
Business Administration
(since 1961).
- -------------------
* 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.
21
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard S. Scipione * Trustee (1) General Counsel, John
John Hancock Place Hancock Life Company;
P.O. Box 111 Director, the Adviser,
Boston, MA 02117 Advisers International,
August 1937 John Hancock Funds, John
Hancock Distributors,
Inc., Insurance Agency,
Inc., John Hancock
Subsidiaries, Inc.,
SAMCorp. and NM Capital;
Trustee, The Berkeley
Group; Director, JH
Networking Insurance
Agency, Inc.; Director,
Signature Services
(until January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat
259C Commercial Bld. Marwick LLP (retired
Lauderdale, FL 33308 June 1990).
November 1932
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief
101 Huntington Avenue Investment Officer (2) Investment Officer, the
Boston, MA 02199 Adviser; Director, the
July 1938 Adviser, Advisers
International, 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.
22
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Senior Vice President,
101 Huntington Avenue Chief Financial Officer the Adviser, The
Boston, MA 02199 Berkeley Group, John
February 1935 Hancock Funds.
John A. Morin Vice President Vice President and
101 Huntington Avenue Secretary, the Adviser,
Boston, MA 02199 The Berkeley Group,
July 1950 Signature Services and
John Hancock Funds;
Secretary, NM Capital and
SAMCorp.; Clerk, Insurance
Agency, Inc.; Counsel,
John Hancock Mutual Life
Insurance Company (until
February 1996), and Vice
President of John Hancock
Distributors, Inc. (until
April 1994).
Susan S. Newton Vice President and Vice President, the
101 Huntington Avenue Secretary Adviser; John Hancock
Boston, MA 02199 Funds, Signature
March 1950 Services and The
Berkeley Group; Vice
President, John Hancock
Distributors, Inc.
(until April 1994).
James J. Stokowski Vice President and Vice President, the
101 Huntington Avenue Treasurer Adviser.
Boston, MA 02199
November 1946
- -------------------
* 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.
23
<PAGE>
The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Boudreau and Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and/or its
affiliates and receive no compensation from the Fund for their services.
Aggregate Total Compensation From
Compensation the Fund and John Hancock
Independent Trustees From the Fund(1) Fund Complex to Trustees*
- -------------------- ---------------- -------------------------
Dennis S. Aronowitz $ $ 72,000
Richard P. Chapman, Jr.+ $ $ 75,000
William J. Cosgrove + $ $ 72,000
Douglas M. Costle $ $ 75,000
Leland O. Erdahl $ $ 72,000
Richard A. Farrell $ $ 75,000
Gail D. Fosler $ $ 72,000
William F. Glavin + $ $ 72,000
Dr. John A. Moore+ $ $ 72,000
Patti McGill Peterson $ $ 72,000
John W. Pratt $ $ 72,000
Edward J. Spellman $ $ 75,000
---- --------
Total $ $876,000
(1) Compensation for the fiscal year ended May 31, 1998.
* Compensation for the calendar year ended December 31, 1997.
The total compensation paid by the John Hancock Fund Complex to the Independent
Trustees is for the calendar year ended December 31, 1997. On this date, there
were sixty-seven funds in the John Hancock Complex of which each of these
independent trustees served on thirty-two of the funds.
+ On December 31, 1997 the value of the aggregate deferred compensation from all
funds in the John Hancock Fund Complex for Mr. Chapman was $69,148 and for Mr.
Cosgrove was $167,829 and for Mr. Glavin was $193,514 and for Dr. Moore was
$84,315 under the John Hancock Deferred Compensation Plan for Independent
Trustees.
As of July 13, 1998, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
that date, the following shareholders beneficially owned 5% of or more of the
outstanding shares of the Funds listed below:
Percentage of Total
Name and Address of Class of Outstanding Shares of the
Shareholders Shares Class of the Fund
- ------------ ------ -----------------
MLPF&S For The Sole B 16.43%
Benefit of Its Customers
Attn Fund Administration
4800 Deer Lake Drive East
Jacksonville FL 32246-6484
24
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 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 1,400,000 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 $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries a high rating 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 (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
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 custodians
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
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average of the daily
net assets of the Fund as follows:
Net Asset Value Annual Rate
--------------- -----------
First $1,500,000,000 0.50%
Next $500,000,000 0.45%
Next $500,000,000 0.40%
Amount Over $2,500,000,000 0.35%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to re-impose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
For the fiscal years ended December 31, 1996, the Adviser received fees of
$7,799,825. For the period from January 1, 1997 to May 31, 1997, the Adviser
received fees of $3,116,997 and for the fiscal year ended May 31, 1998, the
Adviser received fees of $_________.
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<PAGE>
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provides investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for the purchase or sale of
securities by the Adviser for the Fund 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 Advisory Agreement, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which its Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its duties or from reckless disregard of the
obligations and duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement was approved by all of the Trustees.
The Advisory Agreement, and the Distribution Agreement discussed below, will
continue in effect from year to year, provided that its continuance is approved
annually both (i) by the holders of a majority of the outstanding voting
securities of the Trust or by the Trustees, and (ii) by a majority of the
Trustees who are not parties to the Agreement or "interested persons" of any
such parties. Both agreements may be terminated on 60 days written notice by any
party or by a vote of a majority of the outstanding voting securities of the
Fund and will terminate automatically if assigned.
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. For the fiscal year ended December 31, 1996, the Fund paid
the Adviser $291,977 for services under this agreement. For the period from
January 1, 1997 to May 31, 1997, the Fund paid the Adviser $116,998 for services
under this agreement. For the fiscal year ended May 31, 1998, the Fund paid the
Adviser $_________ for services under this agreement.
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.
26
<PAGE>
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 any applicable sales charge, if any. In connection
with the sale of of Fund shares, John Hancock Funds and Selling Brokers receive
compensation from a sales charge imposed, in the case of Class A shares, at the
time of sale. In the case of Class B or Class C shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended December 31, 1996 was $2,391,266, for the period from January
1, 1997 to May 31, 1997 was $695,419 and for the fiscal year ended May 31, 1998
was $______. Of such amounts $215,658, $80,489 and $_______, were retained by
John Hancock Funds in 1996, for the period from January 1, 1997 to May 31, 1997
and 1998. The remainder of the underwriting commissions were reallowed to
selling brokers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "Investment Company Act"). Under the Plans, the Fund will pay
distribution and service fees at an aggregate annual rate of up to 0.30% for
Class A shares and 1.00% for Class B and Class C shares of the Fund's average
daily net assets attributable to shares of that class. However, the service fee
will not exceed 0.25% of the Fund's average daily net assets attributable to
each class of shares. The distribution fees will be used to reimburse the John
Hancock Funds for its distribution expenses, including but not limited to: (i)
initial and ongoing sales compensation to Selling Brokers and others (including
affiliates of the 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 and Class C
shares only, interest expenses on unreimbursed distribution expenses. The
service fees will be used to compensate Selling Brokers and others for providing
personal and account maintenance services to shareholders. In the event that
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 and
Class C Plans will be carried forward together with interest on the balance of
these unreimbursed expenses. The Fund does not treat the unreimbursed expenses
under the Class B/or Class C Plans as a liability of the Fund because the
Trustees may terminate the Class B Plan at any time. For the fiscal year ended
May 31, 1998, an aggregate of $______ of distribution expenses or __% 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. Class C shares of the Fund did not commence
operations until October 1, 1998; therefore, there are no unreimbursed expenses
to report.
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 these Plans.
27
<PAGE>
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.
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
the 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 in each case
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 the Plan. Each Plan provides that
no material amendment to the Plans will be effective unless it is approved by a
vote of a majority of the Trustees and the Independent Trustees of the Fund. The
holders of Class A, Class B and Class C shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans the Trustees concluded that, in their judgment, there is a reasonable
likelihood that 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 the
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 May 31, 1998, the Fund paid John Hancock Funds the
following amounts of expenses in connection with their services for the Fund.
Class C shares did not commence operations until October 1, 1998; therefore,
there are no expenses to report.
Expense Items
-------------
Printing and Interest
Mailing of Compensa- Expenses of Carrying or
Prospectus tion to John Other
to New Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
Class A Shares $ $ $ $ $ 0
Class B Shares $ $ $ $ $
SALES COMPENSATION
As part of their business strategies, each of the John Hancock funds, along with
John Hancock Funds, pay compensation to financial services firms that sell the
funds' shares. These firms typically pass along a portion of this compensation
to your financial representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation that
28
<PAGE>
authorizes annual fees of this type). The 12b-1 fee rates vary by share class,
according to Rule 12b-1 plans adopted by each class. The sales charges and 12b-1
fees paid by investors are detailed in the prospectus. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
Whenever you make an investment in the fund, the financial services firm
receives either a reallowance from the initial sales charge or a commission, as
described below. The firm also receives the first year's service fee at this
time. Beginning with the second year after an investment is made, the financial
services firm receives an annual service fee of 0.25% of its total eligible net
assets. This fee is paid quarterly in arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
<TABLE>
<CAPTION>
Maximum First year
Sales charge reallowance service fee Maximum
paid by investors or commission (% of net total compensation (1)
Class A Investments (% of offering price) (% of offering price) investment) (% of offering price)
- ------------------- --------------------- --------------------- ----------- ---------------------
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 4.00%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of $1 million
or more
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1M - $5M above that -- 0.25% 0.25% 0.50%
Next $1 or more above that -- 0.00% 0.25% 0.25%
<CAPTION>
Maximum First year
reallowance service fee Maximum
or commission (% of net total compensation (1)
Class B investments (% of offering price) investment) (% of offering price)
- ------------------- --------------------- ----------- ---------------------
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
29
<PAGE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
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 a 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 believe accurately reflects fair value.
The NAV of 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 and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, a 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 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 of the Fund, the
investor is entitled to accumulate 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.
30
<PAGE>
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
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,
grandchildren, mother, father, sister, brother, mother-in-law,
father-in-law, daughter-in-law, son-in-law, niece, nephew and same-sex
domestic partner) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into a signed agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if the
Plan has more than 3 million in assets or 500 eligible employees at the
date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement. See your Merrill Lynch financial consultant for further
information.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
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 $4,999,000 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.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
31
<PAGE>
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the investor's purchase price or current value of the Class A shares of all
John Hancock funds which carry a sales charge already held by such person. Class
A shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "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 specified 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 Traditional, Roth and Education IRAs, SEP, SARSEP,
401(k), 403(b) (including TSAs) and Section 457 plans. Non-qualified and
retirement plans investments cannot be combined to satisfy an LOI of 48 months.
Such an investment (including accumulations and combinations but not including
reinvested dividends) must aggregate $100,000 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
(either 13 or 48 months) the sales charge applicable will not be higher than
that which would have 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 escrow Class A shares will be released. If the total investment specified in
the LOI is not completed, the Class A shares held in escrow may be redeemed and
the proceeds used as required to pay such sales charge as may be due. By signing
the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
32
<PAGE>
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so the Fund will receive
the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, 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 or Class C shares being redeemed. No
CDSC will be imposed on increases in account value above the initial purchase
prices, including all 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 from the time of any payment for the purchases of both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C, 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 Class B shares. 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.
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 (50 x 12) $ 600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) (120.00)
-------
o Amount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
33
<PAGE>
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 Funds in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Funds
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C 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 Funds' right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to trust accounts
unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions where the proceeds are used to purchase a John Hancock
Declaration Variable Annuity.
* Redemptions of Class B and Class C shares made under a periodic withdrawal
plan, or redemptions for fees charged by planners or advisors for advisory
services, 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, this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has less than $3 million in assets or 500 eligible
employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A shares by retirement plans that invested through
the PruArray Program sponsored by Prudential Securities.
For retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other 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.
34
<PAGE>
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement under Section 401(a) of the Code (such
as 401(k), Money Purchase Plan or Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
Please see matrix for reference.
CDSC Waiver Matrix for Class B and Class C.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Type of Distribution 401(a) Plan 403(b) 457 IRA, IRA Rollover Non-Retirement
(401(k), MPP, PSP)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Disability Waived Waived Waived Waived Waived
- ------------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually in
distributions or periodic payments
12% of account
value annually in
periodic payments.
- ------------------------------------------------------------------------------------------------------------------------
Between 59 1/2 and Waived Waived Waived Waived for Life 12% of account
70 1/2 Expectancy or 12% value annually in
of account value periodic payments
annually in
periodic payments.
- ------------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived for annuity Waived for Waived for Waived for 12% of account
(Class B only) payments (72t) or annuity annuity annuity payments value annually in
12% of account payments (72t) payments (72t) (72t) or 12% of periodic payments
value annually in or 12% of or 12% of account value
periodic payments. account value account value annually in
annually in annually in periodic payments.
periodic periodic
payments. payments.
- ------------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- ------------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
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.
35
<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder 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,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares. Since the redemption price of the Fund shares may be
more or less than the shareholder's cost, which may result in realization of
gain or loss for purposes of Federal, state and local income taxes. The
maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund could be disadvantageous to a shareholder because
of the initial sales charge payable on such purchases of Class A shares and the
CDSC imposed on redemptions of Class B and Class C shares and because
redemptions are taxable events. Therefore, a shareholder should not purchase
shares at the same time a Systematic Withdrawal
36
<PAGE>
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"). The 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 MAAP may be revoked by 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 Signature Services which is received at least
five (5) business days prior to the processing date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, 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 fund, subject to the minimum investment limit of 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 any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this 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.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies 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."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
37
<PAGE>
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 not authorized any additional series of the Fund,
other than the Fund, although they may do so in the future. 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 three classes of shares of the Fund, designated as Class A, Class B
and Class C.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
each class of shares have certain exclusive voting rights on matters relating to
their respective distribution plans. The different classes of the Fund may bear
different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class shares will be borne
exclusively by that class, (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares and (iii) each class of 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 the
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the 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
38
<PAGE>
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.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. Information
provided on the account application may be used by the Fund to verify the
accuracy of the information or for background or financial history purposes. A
joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
TAX STATUS
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 for each taxable year. 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 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 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.) As a result of federal tax legislation enacted on August 5, 1997,
gain recognized after May 6, 1997 from the sale of a capital asset is taxable to
individual (noncorporate) investors at different maximum federal income tax
rates, depending generally upon the tax holding period for the asset, the
federal income tax bracket of the taxpayer, and the dates the asset was acquired
and/or sold. The Treasury Department may issue regulations to apply this
legislation to the Fund's distributions from its realized net capital gain, the
treatment of which is uncertain prior to the issuance of these regulations.
Shareholders should contact their own tax advisers on the correct application of
these new rules. 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.
39
<PAGE>
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
The amount of net realized capital gains, if any, in any given year will 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 that will generate capital gains or to enter into options or futures
transactions. 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. Consequently, subsequent distributions on these shares
from such appreciation 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 or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. 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
ninety (90) days after their purchase to the extent Class A shares of the Fund
or another John Hancock fund are subsequently acquired without payment of a
sales charge pursuant to the reinvestment or exchange privilege. This
disregarded charge will result in an increase in the shareholder's tax basis in
the shares subsequently acquired. Also, any loss realized on a redemption or
exchange may be disallowed to the extent the shares disposed of are replaced
with other shares of the Fund within a period of sixty- one (61) days beginning
thirty (30) days before and ending thirty (30) days after the shares are
disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department regulations that affect
the taxation of capital gains may contain rules for determining different tax
rates applicable to sales of Fund shares held for more than one year, more than
18 months, and (for certain sales after the year 2000 or the year 2005) more
than five years. These regulations may also contain other rules coordinating the
provisions affecting the taxation of gains recognized by funds on the sales of
their portfolio assets and the gains recognized by the funds' shareholders who
receive distributions attributable to these gains and who redeem or otherwise
dispose of their shares in funds. These new regulations could modify some of the
provisions described above.
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
40
<PAGE>
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 capital gain in his
return for his taxable year in which the last day of the Fund's taxable year
falls, (b) be entitled either to a tax credit on his return for, or to a refund
of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to
increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of this excess and his pro rata share of these taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset net capital gains, if any, during the eight
years following the year of the loss. To the extent subsequent net capital gains
are offset by such losses, they would not result in Federal income tax liability
to the Fund and, as noted above, would not be distributed to shareholders. The
Fund has $29,796,705 of capital loss carryforwards available, to the extent
provided by regulations, to offset future net realized capital gains. These
carryforwards expire at various amounts and times from 1999 through 2005.
Dividends and capital gain distributions from the Fund will not qualify for the
dividends-received deduction for corporations.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to the Fund's investments in certain foreign securities,
if any. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes in some cases. Because more than 50% of the Fund's assets
at the close of any taxable year will generally not consist of stocks or
securities of foreign corporations, the Fund will generally be unable to pass
through such taxes to its shareholders, who will therefore generally not be
entitled to any foreign tax credit or deduction with respect to their investment
in the Fund. The Fund will deduct such taxes in determining the amount it has
available for distribution to shareholders.
The Fund is required to accrue income on any debt securities that have more than
a de minimus amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and futures contracts may also
require the Fund to recognize gain within a concurrent receipt of cash. However,
the Fund must distribute to shareholders for each taxable year substantially all
of its net income and net capital gains, including such income or 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 borrow 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 the Fund's distributions are
derived from interest on (or, in the case of intangibles property 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.
41
<PAGE>
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 the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
The Fund may be required to account for its transactions in forward rolls or
swaps, caps, floors and collars in a manner that, under certain circumstances,
may limit the extent of its participation in such transactions. Additionally,
the Fund may be required to recognize gain, but not loss, if a swap or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. The Fund may have to sell portfolio securities
under disadvantageous circumstances to generate cash, or borrow cash, to satisfy
these distribution requirements.
The Fund may invest in debt obligations that are in the lower rating categories
or are unrated, including debt obligations of issuers not currently paying
interest as well as issuers who are in default. Investments in debt obligations
that are at risk of or in default present special tax issues for the Fund. Tax
rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount, or market discount, when and to what
extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to reduce the risk of
distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal income or
excise tax.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into futures and options transactions.
Certain options and futures 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 and timing of some capital gains and losses realized by the Fund.
Also, some of the Fund's losses on its transactions involving options and
futures contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gain. Certain of such transactions may also cause the
Fund to dispose of investments sooner than would otherwise have occurred. These
transactions may thereafter affect the amount, timing and character of the
Fund's distributions to shareholders. Some of the applicable tax rules may be
modified if the Fund is eligible and chooses to make one or more of certain tax
elections that may be available. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options and
futures transactions in order to seek to minimize any potential adverse tax
consequences.
42
<PAGE>
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Dividends, capital gain distributions and ownership of or gains
realized on the redemption (including an exchange) of shares of the Fund may
also be subject to state and local taxes. Shareholders should consult their own
tax advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their Fund
investment is effectively connected will be subject to U.S. Federal income tax
treatment that is different from that described above. These investors may be
subject to nonresident alien withholding tax at the rate of 30% (or a lower rate
under an applicable tax treaty), on amounts treated as ordinary dividends from
the Fund and, unless an effective IRS Form W-8 or authorized substitute for Form
W-8 is on file, to 31% backup withholding on certain other payments from the
Fund. Non-U.S. investors should consult their tax advisors 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 ending May 31, 1998, the yield on Class A and Class B
shares of the Fund was ___% and ___%, respectively. The average annual total
return of the Class A shares of the Fund for the 1 year, 5 year and 10 year
periods ended May 31, 1998 was ___%, ___% and ___%, respectively. Class C shares
of the Fund commenced operations on October 1, 1998; therefore, there is no
average annual total return to report.
The average total return of Class B shares of the Fund for the period from
January 1, 1997 to May 31, 1998 and since inception on November 23, 1993 was
___% and ___%, respectively.
The Fund may advertise yield, where appropriate. 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, where
applicable) on the last day of the period, according to the following standard
formula:
Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1)
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).
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<PAGE>
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:
T = ((ERV/P)^(1/n)) - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of hypothetical $1,000 investment made at
the beginning of the 1 year, 5 year and 10 year periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of Class A or Class B shares, this
calculation assumes the maximum sales charge is included in the initial
investment or the CDSC applied at the end of the period, respectively. This
calculation assumes that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the period. The "distribution rate"
is determined by annualizing the result of dividing the declared dividends of
the Fund during the period stated by the maximum offering price or net asset
value at the end of the period. Excluding the Fund's sales charge from the
distribution rate produces a higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding the Fund's sales charge on
Class A 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 total
return and/or yield will be compared to indices of mutual funds such as Lipper
Analytical Services, Inc.'s "Lipper"-Mutual Performance Analysis," a monthly
publication which tracks net assets, total return, and yield on equity 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, MORNINGSTAR, and BARRON'S may also be utilized.
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.
44
<PAGE>
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates, 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." 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. Ion other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and other policies as the 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 in the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and, conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitment to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of the Fund's brokerage business, the policies in this regard
must be consistent with the foregoing and will at all times be subject to review
by the Trustees. For the fiscal years ended December 31, 1996 and 1995,
negotiated brokerage commission were $65,835 and $0, respectively, on portfolio
transactions. For the fiscal period from January 1, 1997 to May 31, 1997,
negotiated brokerage commissions were $26,486.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may
45
<PAGE>
adopt from time to time. During the fiscal year ended December 31, 1996, the
Fund paid commissions of $43,425 to compensate brokers for research services
such as industry, economic and company reviews and evaluations of securities.
During the fiscal period from January 1, 1997 to May 31, 1997 and for the fiscal
year ended May 31, 1998, the Fund did not pay commissions to compensate 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., a broker-dealer ("Distributors"
or "Affiliated Broker"). 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
fiscal years ended December 31, 1996, the Fund did not execute any portfolio
transactions with Affiliated Brokers. For the fiscal period from January 1, 1997
to May 31, 1997 and for the fiscal year ended May 31, 1998, the Fund did not
execute any portfolio transactions with Affiliated Brokers.
Distributors 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 Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
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 Investment Company
Act) of the Fund, the Adviser or the Affiliated Broker. 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 or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for the Fund with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent of the Fund. The Fund pays Signature Services
an annual fee of $20.00 for each Class A shareholder and $22.50 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.
46
<PAGE>
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &
Trust Company 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, appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
47
<PAGE>
APPENDIX-A
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of the fund's
risk profile in the prospectus.
A fund is permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them, with examples of related securities and
investment practices included in brackets. See the "Investment Objectives and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the fund will earn income or
show a positive total return over any period of time -- days, months or years.
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks. (e.g., currency contracts, futures and related options,
options on securities and indices, swaps, caps, floors and collars).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. (e.g., non- investment-grade debt securities, borrowing; reverse
repurchase agreements, covered mortgage dollar roll transactions, repurchase
agreements, securities lending, brady bonds, foreign debt securities, in-kind,
delayed and zero coupon debt securities, asset-backed securities,
mortgage-backed securities, participation interest, options on securities,
structured securities and swaps, caps floors and collars).
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.(e.g., foreign debt
securities, currency contracts, swaps, caps, floors and collars).
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.(e.g. mortgage-backed securities and
structured securities).
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values. (e.g.,
non-investment-grade debt securities, covered mortgage dollar roll transactions,
brady bonds, foreign debt securities, in-kind, delayed and zero coupon debt
securities, asset-backed securities, mortgage-backed securities, participation
interest, swaps, caps, floors and collars).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements, covered mortgage dollar roll
transactions, when-issued securities and forward
A-1
<PAGE>
commitments, currency contracts, financial futures and options; securities and
index options, structured securities, swaps, caps, floors and collars).
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that
the fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance. (e.g. non-investment-grade debt securities, restricted and illiquid
securities, mortgage-backed securities, participation interest, currency
contracts, futures and related options; securities and index options, structured
securities, swaps, caps, floors and collars).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them. (e.g. covered
mortgage dollar roll transactions, short-term trading, when-issued securities
and forward commitments, brady bonds, foreign debt securities, in-kind, delayed
and zero coupon debt securities, restricted and illiquid securities, rights and
warrants, financial futures and options; and securities and index options,
structured securities).
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.(e.g. covered mortgage dollar roll transactions, when-issued
securities and forward commitments, currency contracts, financial futures and
options; securities and securities and index options).
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
(e.g., brady bonds and foreign debt securities).
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, reducing the value of mortgage-backed securities.
(e.g., mortgage backed securities).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for. (e.g., non-investment-grade debt
securities, participation interest, structured securities, swaps, caps, floors
and collars).
A-2
<PAGE>
APPENDIX-B
Moody's describes its lower ratings for corporate bonds as follows:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterized
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represented obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Standard & Poor's describes its lower ratings for corporate bonds as follows:
Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Debt rated 'BB,' 'B,' 'CCC,' or 'CC' is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. 'BB' indicates the
lowest degree of speculation and 'CC' the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Moody's describes its three highest ratings for commercial paper as
follows:
Issuers rated P-1 (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics: (1) leading market
positions in well- established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate reliance on
debt and ample asset protections; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity.
B-1
<PAGE>
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Standard & Poor's describes its lower ratings for corporate bonds as follows:
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C Debt rated 'BB', 'B', 'CCC', 'CC" and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
B-2
<PAGE>
Standard & Poor's describes its three highest ratings for commercial paper as
follows:
A-1. This designation indicated that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
B-3
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK SOVEREIGN BOND TRUST
PART C.
OTHER INFORMATION
Item. 23. Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 24. Persons Controlled by or under Common Control with Registrant.
No person is directly or indirectly controlled by or under common control with
Registrant.
Item. 25. Indemnification.
Indemnification provisions relating to the Registrant's Trustees, officers,
employees and agents is set forth in Article VII of the Registrant's By Laws
included as Exhibit 2 herein.
Under Section 12 of the Distribution Agreement, John Hancock Funds, Inc. ("John
Hancock Funds") has agreed to indemnify the Registrant and its Trustees,
officers and controlling persons against claims arising out of certain acts and
statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company ("the
Insurance Company") provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the Insurance Company who serves as a Trustee or officer
of the Registrant at the direction or request of the Insurance Company against
litigation expenses and liabilities incurred while acting as such, except that
such indemnification does not cover any expense or liability incurred or imposed
in connection with any matter as to which such person shall be finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interests of the Insurance Company. In addition, no such
person will be indemnified by the Insurance Company in respect of any final
adjudication unless such settlement shall have been approved as in the best
interests of the Insurance Company either by vote of the Board of Directors at a
meeting composed of directors who have no interest in the outcome of such vote,
or by vote of the policyholders. The Insurance Company may pay expenses incurred
in defending an action or claim in advance of its final disposition, but only
upon receipt of an undertaking by the person indemnified to repay such payment
if he should be determined not to be entitled to indemnification.
<PAGE>
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc. ("the Adviser") provide as follows:
"Section 9.01. Indemnity. Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
Corporation or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
Insofar as indemnification for liabilities under the Securities
Act of 1933 (the "Act") may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the Registrant's Declaration of Trust and
By-Laws of John Hancock Funds, the Adviser, or the Insurance Company or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of Investment Advisers.
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
<PAGE>
Item 27. Principal Underwriters.
(a) John Hancock Funds acts as principal underwriter for the Registrant and also
serves as principal underwriter or distributor of shares for John Hancock Cash
Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series Trust, John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Special Equities
Fund, John Hancock Sovereign Bond Fund, John Hancock Tax-Exempt Series, John
Hancock Strategic Series, John Hancock World Fund, John Hancock Investment
Trust, John Hancock Institutional Series Trust, John Hancock Investment Trust II
and John Hancock Investment Trust III.
(b) The following table lists, for each director and officer of John Hancock
Funds, the information indicated.
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. Director, Chairman, Trustee, Chairman, and
101 Huntington Avenue President and Chief Chief Executive Officer
Boston, Massachusetts Executive Officer
Anne C. Hodsdon Director, Executive Vice President
101 Huntington Avenue President
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief
P.O. Box 111 Compliance Officer
Boston, Massachusetts
Robert G. Freedman Director Vice Chairman and Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
Osbert M. Hood Senior Vice President and Chief None
101 Huntington Avenue Financial Officer
Boston, Massachusetts
David A. King Director None
380 Stuart Street
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
Richard O. Hansen Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
John A. Morin Vice President and Vice President
101 Huntington Avenue Secretary
Boston, Massachusetts
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Susan S. Newton Vice President Vice President and
101 Huntington Avenue Secretary
Boston, Massachusetts
Christopher M. Meyer Vice President and None
101 Huntington Avenue Treasurer
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address With Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster L. Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Anthony P. Petrucci Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
Keith F. Hartstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
J. William Bennintende Vice President None
101 Huntington Avenue
Boston, Massachusetts
<PAGE>
Karen F. Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
Gary Cronin Vice President None
101 Huntington Avenue
Boston, Massachusetts
Kristine Pancare Vice President None
101 Huntington Avenue
Boston, Massachusetts
</TABLE>
(c) None.
Item 28. Location of Accounts and Records.
The Registrant maintains the records required to be maintained by it
under Rules 31a-1 (a), 31a-a(b), and 31a-2(a) under the Investment
Company Act of 1940 at its principal executive offices at 101
Huntington Avenue, Boston Massachusetts 02199-7603. Certain records,
including records relating to Registrant's shareholders and the
physical possession of its securities, may be maintained pursuant to
Rule 31a-3 at the main office of Registrant's Transfer Agent and
Custodian.
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston, and The Commonwealth of Massachusetts on the 17th day of July,
1998.
JOHN HANCOCK SOVEREIGN BOND FUND
By: ______________________
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman and Chief Executive July 17, 1998
- ------------------------------------ Officer (Principal Executive Officer)
Edward J. Boudreau, Jr.
/s/James B. Little Senior Vice President and Chief Financial
- ------------------- Officer (Principal Financial and Accounting
James B. Little Officer)
___________________ Trustee
Dennis S. Aronowitz
________________________ Trustee
Richard P. Chapman, Jr.
________________________ Trustee
William J. Cosgrove
________________________ Trustee
Douglas M. Costle
________________________ Trustee
Leland O. Erdahl
<PAGE>
________________ Trustee
Richard A. Farrell
________________________ Trustee
Gail D. Fosler
_________*______________ Trustee
William F. Glavin
________*_______________ Trustee
Anne C. Hodsdon
________*________________ Trustee
John A. Moore
_________*_______________ Trustee
Patti McGill Peterson
_________*_______________ Trustee
John W. Pratt
_________*_______________ Trustee
Richard S. Scipione
________*_______________ Trustee
Edward J. Spellman
By: /s/Susan S. Newton July 17, 1998
------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney dated
May 21, 1996 and June 27, 1996.
</TABLE>
<PAGE>
John Hancock Sovereign Bond Fund
(File no. 2-48925)
INDEX TO EXHIBITS
99.(a) Articles of Incorporation. Amended and Restated Declaration of Trust
dated February 28, 1992.*
99.(a).1 Amendment to Declaration of Trust dated May 1, 1992*
99.(a).2 Amendment to Declaration of Trust dated September 14, 1993*
99.(a).3 Amendment to Declaration of Trust -Agreement Abolition of Class C
Shares of Beneficial Interest of John Hancock Sovereign Bond Fund dated
May 1, 1995**
99.(a).4 Amendment to Declaration of Trust amending number of Trustees and
appointing individual to fill a vacancy dated March 5, 1996.**
99.(b) By-Laws. Amended and Restated By-Laws dated December 3, 1996***
99.(c) Instruments Defining Rights of Securities Holders. See exhibits 99.(a)
and 99.(b).
99.(d) Investment Advisory Contracts. Investment Advisory Agreement between
John Hancock Advisers, Inc. and the Registrant and John Hancock
Advisers, Inc. dated January 1, 1994.*
99.(e) Underwriting Contracts. Distribution Agreement between John Hancock
Broker Distribution Services, Inc. and the Registrant dated August 1,
1991.*
99.(e).1 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution Services , Inc. and Selected Dealers.*
99.(e).2 Form of Financial Institution Sales and Service Agreement between John
Hancock Funds, Inc. and the John Hancock funds.*
99.(f) Bonus or Profit Sharing Contracts. Not Applicable.
99.(g) Custodian Agreements. Master Custodian Agreement between John Hancock
Mutual Funds and Investors Bank and Trust Company dated December 15,
1992.*
99.(h) Other Material Contracts. Amended and Restated Master Transfer Agency
and Service Agreement between John Hancock funds and John Hancock
Signature Services, Inc. dated June 1, 1998.+
99.(h).1 Accounting and Legal Services Agreement between John Hancock Advisers,
Inc. and the Registrant as of January 1, 1996.**
99.(i) Legal Opinion. Not Applicable.
99.(j) Other Opinions. Not Applicable.
99.(k) Omitted Financial Statements. Not Applicable.
99.(l) Initial Capital Agreements. Not Applicable.
99.(m) Rule 12b-1 Plans. Amended and Restated Distribution as of May 1, 1995
Class A shares and Class B Shares.+
Financial Data Schedule. Not applicable
<PAGE>
* Previously filed electronically with Registration Statement and/or
post-effective amendment no. 39 file nos. 811-2402 and 2-48925 on
April 26, 1995, accession number 0000950146-95-000178.
** Previously filed electronically with Registration Statement and/or post
-effective amendment no. 40 file nos. 811-2402 and 2-48925 on April 29,
1996, accession number 0001010521-96-000046.
*** Previously filed electronically with Registration Statement and/or post
-effective amendment no. 42 file nos. 811-2402 and 2-48925 on April 29,
1997, accession number 0001010521-97-000276.
+ Filed herewith.
AMENDED AND RESTATED MASTER TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN JOHN
HANCOCK FUNDS AND JOHN HANCOCK SIGNATURE
- --------------------------------------------------------------------------------
SERVICES, INC.
- --------------------------------------------------------------------------------
Amended and Restated Master Transfer Agency and Service Agreement made as of the
1st day of June, 1998 by and between each investment company advised by John
Hancock Advisers, Inc., having its principal office and place of business at 101
Huntington Avenue, Boston, Massachusetts, 02199, and John Hancock Signature
Services, Inc., a Delaware corporation having its principal office and place of
business at 101 Huntington Avenue, Boston, Massachusetts 02199 ("JHSS").
WITNESSETH:
WHEREAS, each investment company desires to appoint JHSS as its transfer agent,
dividend disbursing agent and agent in connection with certain other activities;
and
WHEREAS, JHSS desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Definitions
Whenever used in this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
(a)"Fund" shall mean the investment company which has adopted this
agreement and is listed on Appendix A hereto. If the Fund is a
Massachusetts business trust or Maryland corporation, it may in the
future establish and designate other separate and distinct series of
shares, each of which may be called a "series" or a "portfolio"; in
such case, the term "Fund" shall also refer to each such separate
series or portfolio.
(b)"Board" shall mean the board of directors/trustees/managing general
partners/director general partners of the Fund, as the case may be.
Article 2 Terms of Appointment; Duties of JHSS
------------------------------------
2.01 Subject to the terms and conditions set forth in this Agreement, the Fund
hereby employs and appoints JHSS to act, and JHSS agrees to act, as transfer
agent and dividend dispersing agent with respect to the authorized and issued
shares of beneficial interest ("Shares") of the Fund subject to this Agreement
and to provide to the shareholders of the Fund ("Shareholders") such services in
connection therewith as may be set out in the prospectus of the Fund from time
to time.
2.02 JHSS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and JHSS, JHSS shall:
(i)Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor
to the Fund's Custodian authorized pursuant to the Fund's
1
<PAGE>
Declaration of Trust or Articles of Incorporation (the
"Custodian");
(ii)Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
(iii)Receive for acceptance, redemption requests and redemption
directions and deliver the appropriate documentation therefor to
the Custodian;
(iv)At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay over
or cause to be paid over in the appropriate manner such monies as
instructed by the redeeming Shareholders;
(v)Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi)Prepare and transmit payments for dividends and distributions
declared by the Fund, processing the reinvestment of
distributions on the Fund at the net asset value per share for
the Fund next computed after the payment (in accordance with the
Fund's then-current prospectus);
(vii)Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(viii)Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) of the rules and regulations of the
Securities Exchange Act of 1934 a record of the total number of
Shares of the Fund which are authorized, based upon data provided
to it by the Fund, and issued and outstanding. JHSS shall also
provide the Fund, on a regular basis, with the total number of
Shares which are authorized and issued and outstanding and shall
have no obligation, when recording the issuance of Shares, to
monitor the issuance of these Shares or to take cognizance of any
laws relating to the issue or sale of these Shares, which
functions shall be the sole responsibility of the Fund.
(b) In calculating the number of Shares to be issued on purchase or
reinvestment, or redeemed or repurchased, or the amount of the purchase
payment or redemption or repurchase payments owed, JHSS shall use the
net asset value per share (as described in the Fund's then-current
prospectus) computed by it or such other person as may be designated by
the Fund's Board. All issuances, redemptions or repurchases of the
Funds' shares shall be effected at net asset values per share next
computed after receipt of the orders therefore and said orders shall
become irrevocable at the time as of which said value is next computed.
(c) In addition to and not in lieu of the services set forth in the
above paragraph (a), JHSS shall: (i) perform all of the customary
services of a transfer agent and dividend disbursing agent including
but not limited to: maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, receiving and tabulating
proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing appropriate forms required with respect
to dividends and distributions by federal authorities for all
Shareholders, preparing and mailing confirmation forms and statements
of account to Shareholders for all purchases and redemptions of Shares
and other confirmable transactions in Shareholder accounts, preparing
2
<PAGE>
and mailing activity statements for Shareholders, and providing
Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of the Fund's Shares sold
in each State.
(d) In addition, the Fund shall (i) identify to JHSS in writing those
transactions and assets to be treated as exempt from the blue sky
reporting for each State and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The
responsibility of JHSS for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions
subject to blue sky compliance by the Fund and the reporting of these
transactions to the Fund as provided above.
(e) Additionally, JHSS shall:
(i) Utilize a system to identify all share transactions which
involve purchase and redemption orders that are processed at a
time other than the time of the computation of net asset value
per share next computed after receipt of such orders, and
shall compute the net effect upon the Fund of the transactions
so identified on a daily and cumulative basis.
(ii) If upon any day the cumulative net effect of such
transactions upon the Fund is negative and exceeds a dollar
amount equivalent to 1/2 of 1 cent per share, JHSS shall
promptly make a payment to the Fund in cash or through the use
of a credit in the manner described in paragraph (iv) below,
in such amount as may be necessary to reduce the negative
cumulative net effect to less than 1/2 of 1 cent per share.
(iii) If on the last business day of any month the cumulative
net effect upon the Fund of such transactions (adjusted by the
amount of all prior payments and credits by JHSS and the Fund)
is negative, the Fund shall be entitled to a reduction in the
fee next payable under the Agreement by an equivalent amount,
except as provided in paragraph (iv) below. If on the last
business day in any month the cumulative net effect upon the
Fund of such transactions (adjusted by the amount of all prior
payments and credits by JHSS and the Fund) is positive, JHSS
shall be entitled to recover certain past payments and
reductions in fees, and to a credit against all future
payments and fee reductions that may be required under the
Agreement as herein described in paragraph (iv) below.
(iv) At the end of each month, any positive cumulative net
effect upon a Fund of such transactions shall be deemed to be
a credit to JHSS which shall first be applied to permit JHSS
to recover any prior cash payments and fee reductions made by
it to the Fund under paragraphs (ii) and (iii) above during
the calendar year, by increasing the amount of the monthly fee
under the Agreement next payable in an amount equal to prior
payments and fee reductions made by JHSS during such calendar
year, but not exceeding the sum of that month's credit and
credits arising in prior months during such calendar year to
the extent such prior credits have not previously been
utilized as contemplated by this paragraph. Any portion of a
credit to JHSS not so used by it shall remain as a credit to
be used as payment against the amount of any future negative
cumulative net effects that would otherwise require a cash
payment or fee reduction to be made to the Fund pursuant to
paragraphs (ii) or (iii) above (regardless of whether or not
the credit or any portion thereof arose in the same calendar
year as that in which the negative cumulative net effects or
any portion thereof arose).
3
<PAGE>
(v) JHSS shall supply to the Fund from time to time, as
mutually agreed upon, reports summarizing the transactions
identified pursuant to paragraph (i) above, and the daily and
cumulative net effects of such transactions, and shall advise
the Fund at the end of each month of the net cumulative effect
at such time. JHSS shall promptly advise the Fund if at any
time the cumulative net effects exceeds a dollar amount
equivalent to 1/2 of 1 cent per share.
(vi) In the event that this Agreement is terminated for
whatever cause, or this provision 2.02 (d) is terminated
pursuant to paragraph (vii) below, the Fund shall promptly pay
to JHSS an amount in cash equal to the amount by which the
cumulative net effect upon the Fund is positive or, if the
cumulative net effect upon the Fund is negative, JHSS shall
promptly pay to the Fund an amount in cash equal to the amount
of such cumulative net effect.
(vii) This provision 2.02 (e) of the Agreement may be
terminated by JHSS at any time without cause, effective as of
the close of business on the date written notice (which may be
by telex) is received by the Fund.
Procedures applicable to certain of these services may be established from time
to time by agreement between the Fund and JHSS.
Article 3 Fees and Expenses
3.01 For performance by JHSS pursuant to this Agreement, the Fund agrees to pay
JHSS a fee as set out in Appendix A attached hereto. Such fees and out-of-pocket
expenses and advances identified under Section 3.02 below may be changed from
time to time subject to mutual written agreement between the Fund and JHSS.
3.02 In addition to the fee paid under Section 3.01 above, the Fund agrees to
reimburse JHSS for out-of-pocket expenses or advances incurred by JHSS for the
items set out in the fee schedule attached hereto. In addition, any other
expenses incurred by JHSS at the request or with the consent of the Fund, will
be reimbursed by the Fund.
3.03 The Fund agrees to pay all fees and reimbursable expenses promptly
following the mailing of the respective billing notice. Postage for mailing of
proxies to all shareholder accounts shall be advanced to JHSS by the Funds at
least seven (7) days prior to the mailing date of such materials.
Article 4 Representations and Warranties of JHSS
--------------------------------------
JHSS represents and warrants to the Fund that:
4.01 It is a corporation duly organized and existing and in good standing under
the laws of the State of Delaware, and is duly qualified and in good standing as
a foreign corporation under the Laws of The Commonwealth of Massachusetts.
4.02 It has corporate power and authority to enter into and perform its
obligations under this Agreement.
4
<PAGE>
4.03 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
4.04 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 5 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to JHSS that:
5.01 It is a business trust duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts or, in the case of John
Hancock Cash Reserve, Inc., a Maryland corporation duly organized and existing
and in good standing under the laws of the State of Maryland.
5.02 It has power and authority to enter into and perform this Agreement.
5.03 All proceedings required by the Fund's Declaration of Trust or Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
5.04 It is an open-end investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act").
5.05 A registration statement under the Securities Act of 1933, as amended, with
respect to the shares of the Fund subject to this Agreement has become
effective, and appropriate state securities law filings have been made and will
continue to be made.
Article 6 Indemnification
6.01 JHSS shall not be responsible for, and the Fund shall indemnify and hold
JHSS harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liabilities arising out of or attributable
to:
(a) All actions of JHSS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken
in good faith and without negligence or willful misfeasance.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's bad faith, gross negligence
or willful misfeasance or which arise out of the reckless disregard of
any representation or warranty of the Fund hereunder.
(c) The reliance on or use by JHSS or its agents or subcontractors of
information, records and documents which (i) are received by JHSS or
its agents or subcontractors and furnished to it by or on behalf of the
Fund, and (ii) have been prepared and/or maintained by the Fund or any
other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by JHSS or its agents or
subcontractors of, any instructions or requests of the Fund.
5
<PAGE>
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or
regulations of any state that Fund Shares be registered in that state
or in violation of any stop order or other determination or ruling by
any federal agency or any state with respect to the offer or sale of
Shares in that state.
(f) It is understood and agreed that the assets of the Fund may be used
to satisfy the indemnity under this Article 6 only to the extent that
the loss, damage, cost, charge, counsel fee, payment, expense and
liability arises out of or is attributable to services hereunder with
respect to the Shares of such Fund.
6.02 JHSS shall indemnify and hold harmless the Fund from and against any and
all losses, damages, costs, charges, counsel fees, payments, expenses and
liabilities arising out of or attributed to any action or failure or omission to
act by JHSS as a result of JHSS's lack of good faith, negligence or willful
misfeasance.
6.03 At any time JHSS may apply to any officer of the Fund for instructions, and
may consult with legal counsel with respect to any matter arising in connection
with the services to be performed by JHSS under this Agreement, and JHSS and its
agents or subcontractors shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such instructions or
upon the opinion of such counsel. JHSS, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction, information, data,
records or documents provided JHSS or its agents or subcontractors by machine
readable input, telex, CRT data entry or other similar means authorized by the
Fund, and shall not be held to have notice of any change of authority of any
person, until receipt of written notice thereof from the Fund. JHSS, its agents
and subcontractors shall also be protected and indemnified in recognizing share
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officer of the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
6.04 In the event either party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
6.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
6.06 In order that the indemnification provisions contained in this Article 6
shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
6
<PAGE>
Article 7 Covenants of the Fund and JHSS
------------------------------
7.01 The Fund shall promptly furnish to JHSS the following:
(a) A certified copy of the resolution(s) of the Trustees of the Trust
or the Directors of the Corporation authorizing the appointment of JHSS
and the execution and delivery of this Agreement.
(b) A copy of the Fund's Declaration of Trust or Articles of
Incorporation and By-Laws and all amendments thereto.
7.02 JHSS hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for safekeeping of share certificates and
facsimile signature imprinting devices, if any; and for the preparation or use,
and for keeping account of, such certificates and devices.
7.03 JHSS shall keep records relating to the services to be performed hereunder,
in the form and manner as it may deem advisable. To the extent required by
Section 31 of the Investment Company Act of 1940 and the rules and regulations
of the Securities and Exchange Commission thereunder, JHSS agrees that all such
records prepared or maintained by JHSS relating to the services to be performed
by JHSS hereunder are the property of the Fund and will be preserved, maintained
and made available in accordance with such Act and rules, and will be
surrendered to the Fund promptly on and in accordance with the Fund's request.
7.04 JHSS and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person without
the consent of the other party to this Agreement, except as may be required by
law.
7.05 JHSS agrees that, from time to time or at any time requested by the Fund,
JHSS will make reports to the Fund, as requested, of JHSS's performance of the
foregoing services.
7.06 JHSS will cooperate generally with the Fund to provide information
necessary for the preparation of registration statements and periodic reports to
be filed with the Securities and Exchange Commission, including registration
statements on Form N-1A, semi-annual reports on Form N-SAR, periodic statements,
shareholder communications and proxy materials furnished to holders of shares of
the Fund, filings with state "blue sky" authorities and with United States and
foreign agencies responsible for tax matters, and other reports and filings of
like nature.
7.07 In case of any requests or demands for the inspection of the Shareholder
records of the Fund, JHSS will endeavor to notify the Fund and to secure
instructions from an authorized officer of the Fund as to such inspection. JHSS
reserves the right, however, to exhibit the Shareholder records to any person
whenever it is advised by its counsel that it may be held liable for the failure
to exhibit the Shareholder records to such person.
7
<PAGE>
Article 8 No Partnership or Joint Venture
-------------------------------
8.01 The Fund and JHSS are not currently partners of or joint venturers with
each other and nothing in this Agreement shall be construed so as to make them
partners or joint venturers or impose any liability as such on them.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon one hundred twenty
(120) days' written notice to the other party.
9.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses
associated with the movement of records and material will be borne by the Fund.
Additionally, JHSS reserves the right to charge for any other reasonable
expenses associated with such termination.
Article 10 Assignment
10.01 Except as provided in Section 10.03 below, neither this Agreement nor any
rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
10.03 JHSS may, without further consent on the part of the Fund, subcontract for
the performance hereof with (i) Boston Finanacial Data Services, Inc., a
Massachusetts corporation ("BE") which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934 ("Section
17A(c)(1)") or any other entity registered as a transfer agent under Section
17A(c)(1) JHSS deems appropriate in order to comply with the terms and
conditions of this Agreement; provided, however, that JHSS shall be as fully
responsible to the Fund for the acts and omissions of any subcontractor as it is
for its own acts and omissions.
Article 11 Amendment
11.01 This Agreement may be amended or modified by a written agreement executed
by both parties and authorized or approved by a resolution of the Trustees of
the Trust or Directors of the Corporation.
Article 12 Massachusetts Law to Apply
12.01 This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the internal substantive laws of The Commonwealth
of Massachusetts.
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
8
<PAGE>
Article 14 Limitation on Liability
14.01 If the Fund is a Massachusetts business trust, JHSS expressly acknowledges
the provision in the Fund's Declaration of Trust limiting the personal liability
of the trustees and shareholders of the Fund; and JHSS agrees that it shall have
recourse only to the assets of the Fund for the payment of claims or obligations
as between JHSS and the Fund arising out of this Agreement, and JHSS shall not
seek satisfaction of any such claim or obligation from the trustees or
shareholders of the Fund. In any case, each Fund, and each series or portfolio
of each Fund, shall be liable only for its own obligations to JHSS under this
Agreement and shall not be jointly or severally liable for the obligations of
any other Fund, series or portfolio hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf under their seals by and through their duly
authorized officers, as of the day and year first above written.
JOHN HANCOCK FUNDS Listed on Appendix A
By: /s/Anne C Hodsdon
------------------
Anne C. Hodsdon
President
JOHN HANCOCK SIGNATURE SERVICES, INC.
By: /s/Charles J. McKenney, Jr.
---------------------------
Charles J. McKenney, Jr.
Vice President
9
<PAGE>
EXHIBIT A
TRANSFER AGENT FEE SCHEDULE, EFFECTIVE JUNE 1, 1998
Effective June 1, 1998, the transfer agent fees payable monthly under
the transfer agent agreement between each fund and John Hancock Signature
Services, Inc. shall be the following rates plus certain out-of-pocket expenses
as described to the Board:
<TABLE>
<CAPTION>
Annual Rate Per Account
Class A Shares Class B Shares Class C Shares*
<S> <C> <C> <C>
Equity Fund $19.00 $21.50 $20.50
- -----------
</TABLE>
John Hancock Capital Series
- -JH Independence Equity Fund*
- -JH Special Value Fund*
John Hancock Special Equities Fund
John Hancock World Fund
- -JH Pacific Basin Fund
- -JH Global Rx Fund
- -JH European Equity Fund
John Hancock Investment Trust
- -JH Growth and Income Fund*
- -JH Sovereign Balanced Fund
- -JH Sovereign Investors Fund*
John Hancock Investment Trust II
- -JH Financial Industries Fund
- -JH Regional Bank Fund
John Hancock Investment Trust III
- -John Hancock Global Fund
- -John Hancock Growth Fund*
- -John Hancock International Fund*
- -John Hancock Special Opportunities Fund*
John Hancock Series Trust
- -JH Emerging Growth Fund*
- -JH Global Technology Fund
10
<PAGE>
<TABLE>
<CAPTION>
Annual Rate Per Account
Class A Shares Class B Shares Class C Shares*
<S> <C> <C> <C>
Money Market Funds $20.00 $22.50 $21.50
- ------------------
</TABLE>
John Hancock Current
Interest
- -JH Money Market Fund*
- -JH US Government Cash
Reserve (Class A Shares only)
John Hancock Cash Reserve, Inc. (
Class A Shares only)
<TABLE>
<CAPTION>
Annual Rate Per Account
Class A Shares Class B Shares
<S> <C> <C>
Tax Free Funds $20.00 $22.50
- --------------
John Hancock Tax-Exempt
Series Fund
- -JH Massachusetts Tax-Free
Income Fund
- -JH New York Tax-Free Income Fund
John Hancock California Tax-Free
Income Fund
John Hancock Tax-Free Bond Trust
- -JH High Yield Tax-Free Fund
- -JH Tax Free Bond Fund
</TABLE>
<TABLE>
<CAPTION>
Annual Rate Per Account
Class A Shares Class B Shares Class C Shares*
<S> <C> <C> <C>
Income Funds $20.00 $22.50 $21.50
------------
</TABLE>
John Hancock Sovereign Bond Fund
John Hancock Strategic Series
- -JH Strategic Income Fund*
- -JH Sovereign US Government
Income Fund
John Hancock Investment
Trust III
- -JH Short-Term Strategic
Income Fund
- -JH World Bond Fund J
John Hancock Bond Trust
- -JH Government Income Fund
- -JH HighYield Bond Fund*
11
<PAGE>
- -JH Intermediate Maturity
Government Fund
The following funds are at a % of daily net assets of the Fund.
Out-of-pocket expenses are paid by John Hancock Signature Services, Inc.
% of Daily Net Assets of the Class
Class Y Shares 0.10%
John Hancock Special Equities Fund
John Hancock Sovereign Investors Fund
% of Daily Net Assets of the Fund
John Hancock Institutional Series Trust 0.05%
- -JH Active Bond Fund
- -JH Dividend Performers Fund
- -JH Small Capitalization Value Fund
- -JH Global Bond Fund
- -JH Independence Balanced Fund
- -JH Independence Diversified Core Equity Fund II
- -JH Independence Growth Fund
- -JH Independence Medium Capitalization Fund
- -JH Independence Value Fund
- -JH International Equity Fund
- -JH Multi-Sector Growth Fund
- -JH Small Capitalization Growth Fund
These fees are agreed to by the undersigned as of June 1, 1998.
/s/Anne C. Hodsdon
Anne C. Hodsdon
President of Each Fund
/s/Charles McKenney, Jr.
Charles McKenney, Jr.
Vice President of John Hancock
Signature Services, Inc.
12
JOHN HANCOCK SOVEREIGN BOND FUND
January 3, 1994
Amended and Restated Distribution Plan
as of May 1, 1995
Class A Shares
Article I. This Plan
This amended and restated Distribution Plan (the "Plan") sets forth the
terms and conditions on which John Hancock Sovereign Bond Fund (the "Fund"), on
behalf of its Class A shares, will, after the effective date hereof, pay certain
amounts to John Hancock Funds, Inc. ("JH Funds") in connection with the
provision by JH Funds of certain services to the Fund and its Class A
shareholders, as set forth herein. Certain of such payments by the Fund may,
under Rule 12b-1 of the Securities and Exchange Commission, as from time to time
amended (the "Rule"), under the Investment Company Act of 1940, as amended (the
"Act"), be deemed to constitute the financing of distribution by the Fund of its
shares. This Plan describes all material aspects of such financing as
contemplated by the Rule and shall be administered and interpreted, and
implemented and continued, in a manner consistent with the Rule. The Fund and JH
Funds heretofore entered into a Distribution Agreement, dated August 1, 1991
(the "Agreement"), the terms of which, as heretofore and from time to time
continued, are incorporated herein by reference.
Article II. Distribution and Service Expenses
The Fund shall pay to JH Funds a fee in the amount specified in Article
III hereof. Such fee may be spent by JH Funds on any activities or expenses
primarily intended to result in the sale of Class A shares of the Fund,
including, but not limited to the payment of Distribution Expenses (as defined
below) and Service Expenses (as defined below). Distribution Expenses include
but are not limited to, (a) initial and ongoing sales compensation out of such
fee as it is received by JH Funds of the Fund or other broker-dealers ("Selling
Brokers") that have entered into an agreement with JH Funds for the sale of
Class A shares of the Fund, (b) direct out-of-pocket expenses incurred in
connection with the distribution of Class A shares of the Fund, including
expenses related to printing of prospectuses and reports to other than existing
Class A shareholders of the Fund, and preparation, printing and distribution of
sales literature and advertising materials, (c) an allocation of overhead and
other branch office expenses of JH Funds related to the distribution of Class A
shares of the Fund and (d) distribution expenses incurred in connection with the
distribution of a corresponding class of any open-end, registered investment
company which sells all or substantially all of its assets to the Fund or which
merges or otherwise combines with the Fund.
1
<PAGE>
Service Expenses include payments made to, or on account of, account
executives of selected broker-dealers (including affiliates of JH Funds) and
others who furnish personal and shareholder account maintenance services to
Class A shareholders of the Fund.
Article III. Maximum Expenditures
The expenditures to be made by the Fund pursuant to this Plan, and the
basis upon which such expenditures will be made, shall be determined by the
Fund, and in no event shall such expenditures exceed 0.30% of the average daily
net asset value of the Class A shares of the Fund (determined in accordance with
the Fund's prospectus as from time to time in effect) on an annual basis to
cover Distribution Expenses and Service Expenses, provided that the portion of
such fee used to cover service expenses shall not exceed an annual rate of up to
0.25% of the average daily net asset value of the Class A shares of the Fund.
Such expenditures shall be calculated and accrued daily and paid monthly or at
such other intervals as the Trustees shall determine. In the event JH Funds is
not fully reimbursed for payments made or other expenses incurred by it under
this Plan, such expenses will not be carried beyond one year from the date such
expenses were incurred. Any fees paid to JH Funds under this Plan during any
fiscal year of the Fund and not expended or allocated by JH Funds for actual or
budgeted Distribution Expenses and Service Expenses during such fiscal year will
be promptly returned to the Fund.
Article IV. Expenses Borne by the Fund
Notwithstanding any other provision of this Plan, the Fund and its
investment adviser, John Hancock Advisers, Inc. (the "Adviser"), shall bear the
respective expenses to be borne by them under the Investment Management
Contract, as amended, dated January 1, 1994, as from time to time continued and
amended (the "Management Contract"), and under the Fund's current prospectus as
it is from time to time in effect. Except as otherwise contemplated by this
Plan, the Fund shall not, directly or indirectly, engage in financing any
activity which is primarily intended to or should reasonably result in the sale
of shares of the Fund.
Article V. Approval by Trustees, etc.
This Plan shall not take effect until it has been approved, together
with any related agreements, by votes, cast in person at a meeting called for
the purpose of voting on this Plan or such agreements, of a majority (or
whatever greater percentage may, from time to time, be required by Section 12(b)
of the Act or the rules and regulations thereunder) of (a) all of the Trustees
of the Fund and (b) those Trustees of the Fund who are not "interested persons"
of the Fund, as such term may be from time to time defined under the Act, and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it (the "Independent Trustees").
2
<PAGE>
Article VI. Continuance
This Plan and any related agreements shall continue in effect for so
long as such continuance is specifically approved at least annually in advance
in the manner provided for the approval of this Plan in Article V.
Article VII. Information
JH Funds shall furnish the Fund and its Trustees quarterly, or at such
other intervals as the Fund shall specify, a written report of amounts expended
or incurred for Distribution Expenses and Service Expenses pursuant to this Plan
and the purposes for which such expenditures were made and such other
information as the Trustees may request.
Article VIII. Termination
This Plan 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 Class A shares, or (b) by JH Funds on 60 days' notice
in writing to the Fund.
Article IX. Agreements
Each agreement with any person relating to implementation of this Plan
shall be in writing, and each agreement related to this Plan shall provide:
(a) That, with respect to the Fund, such agreement may be terminated at any
time, without payment of any penalty, by vote of a majority of the Independent
Trustees or by vote of a majority of the Fund's then outstanding voting Class A
shares.
(b) That such agreement shall terminate automatically in the event of its
assignment.
Article X. Amendments
This Plan may not be amended to increase the maximum amount of the fees
payable by the Fund hereunder without the approval of a majority of the
outstanding voting Class A shares of the Fund. No material amendment to the Plan
shall, in any event, be effective unless it is approved in the same manner as is
provided for approval of this Plan in Article V.
3
<PAGE>
Article XI. Limitation of Liability
The name "John Hancock Sovereign Bond Fund" is the designation of the
Trustees under the Declaration of Trust, dated February 28, 1992, as amended
from time to time. The Declaration of Trust has been filed with the Secretary of
State of the Commonwealth of Massachusetts. The obligations of the Fund are not
personally binding upon, nor shall resort be had to the private property of, any
of the Trustees, shareholders, officers, employees or agents of the Fund, but
only the Fund's property shall be bound. No series of the Fund shall be
responsible for the obligations of any other series of the Fund.
IN WITNESS WHEREOF, the Fund has executed this amended and restated
Distribution Plan effective as of the 1st day of May, 1995 in Boston,
Massachusetts.
JOHN HANCOCK SOVEREIGN BOND FUND
By_/s/Anne C. Hodsdon_
_______________________
President
JOHN HANCOCK FUNDS, INC.
By:_/s/ C. Troy Shaver, Jr.______
_________________________________
President
4
<PAGE>
JOHN HANCOCK SOVEREIGN BOND FUND
November 19, 1993
Amended and Restated Distribution Plan
as of May 1, 1995
Class B Shares
Article I. This Plan
This amended and restated Distribution Plan (the "Plan") sets forth the
terms and conditions under which John Hancock Sovereign Bond Fund (the "Fund"),
will, after the effective date hereof, pay certain amounts to John Hancock
Funds, Inc. ("JH Funds") in connection with the provision by JH Funds of certain
services to the Fund and its Class B shareholders, as set forth herein. Certain
of such payments by the Fund may, under Rule 12b-1 of the Securities and
Exchange Commission, as from time to time amended (the "Rule"), under the
Investment Company Act of 1940, as amended (the "Act"), be deemed to constitute
the financing of distribution by the Fund of its shares. This Plan describes all
material aspects of such financing as contemplated by the Rule and shall be
administered and interpreted, and implemented and continued, in a manner
consistent with the Rule. The Fund and JH Funds heretofore entered into a
Distribution Agreement, dated August 1, 1991 (the "Agreement"), the terms of
which, as heretofore and from time to time continued, are incorporated herein by
reference.
Article II. Distribution and Service Expenses
The Fund shall pay to JH Funds a fee in the amount specified in Article
III hereof. Such fee may be spent by JH Funds on any activities or expenses
primarily intended to result in the sale of Class B shares of the Fund,
including, but not limited to the payment of Distribution Expenses (as defined
below) and Service Expenses (as defined below). Distribution Expenses include
but are not limited to, (a) initial and ongoing sales compensation out of such
fee as it is received by JH Funds or other broker-dealers ("Selling Brokers")
that have entered into an agreement with JH Funds for the sale of Class B shares
of the Fund, (b) direct out-of pocket expenses incurred in connection with the
distribution of Class B shares of the Fund, including expenses related to
printing of prospectuses and reports to other than existing Class B shareholders
of the Fund, and preparation, printing and distribution of sales literature and
advertising materials, (c) an allocation of overhead and other branch office
expenses of JH Funds related to the distribution of Class B shares of the Fund,
(d) interest expenses on unreimbursed distribution expenses related to Class B
shares, as described in Article IV and (e) distribution expenses incurred in
connection with the distribution of a corresponding class of any open-end,
registered investment company which sells all or substantially all of its assets
to the Fund or which merges or otherwise combines with the Fund.
Service Expenses include payments made to, or on account of account
executives of selected broker-dealers (including affiliates of JH Funds) and
others who furnish personal and shareholder account maintenance services to
Class B shareholders of the Fund.
Article III. Maximum Expenditures
1
<PAGE>
The expenditures to be made by the Fund pursuant to this Plan, and the
basis upon which such expenditures will be made, shall be determined by the
Fund, and in no event shall such expenditures exceed 1.00% of the average daily
net asset value of the Class B shares of the Fund (determined in accordance with
the Fund's prospectus as from time to time in effect) on an annual basis to
cover Distribution Expenses and Service Expenses, provided that the portion of
such fee used to cover Service Expenses, shall not exceed an annual rate of up
to 0.25% of the average daily net asset value of the Class B shares of the Fund.
Such expenditures shall be calculated and accrued daily and paid monthly or at
such other intervals as the Trustees shall determine.
Article IV. Unreimbursed Distribution Expenses
In the event that JH Funds is not fully reimbursed for payments made or
expenses incurred by it as contemplated hereunder, in any fiscal year, JH Funds
shall be entitled to carry forward such expenses to subsequent fiscal years for
submission to the Class B shares of the Fund for payment, subject always to the
annual maximum expenditures set forth in Article III hereof; provided, however,
that nothing herein shall prohibit or limit the Trustees from terminating this
Plan and all payments hereunder at any time pursuant to Article IX hereof.
Article V. Expenses Borne by the Fund
Notwithstanding any other provision of this Plan, the Trust, the Fund
and its investment adviser, John Hancock Advisers, Inc. (the "Adviser"), shall
bear the respective expenses to be borne by them under the Investment Management
Contract between them, dated March 24, 1987 as from time to time continued and
amended (the "Management Contract"), and under the Fund's current prospectus as
it is from time to time in effect. Except as otherwise contemplated by this
Plan, the Trust and the Fund shall not, directly or indirectly, engage in
financing any activity which is primarily intended to or should reasonably
result in the sale of shares of the Fund.
Article VI. Approval by Trustees, etc.
This Plan shall not take effect until it has been approved, together
with any related agreements, by votes, cast in person at a meeting called for
the purpose of voting on this Plan or such agreements, of a majority (or
whatever greater percentage may, from time to time, be required by Section 12(b)
of the Act or the rules and regulations thereunder) of (a) all of the Trustees
of the Fund and (b) those Trustees of the Fund who are not "interested persons"
of the Fund, as such term may be from time to time defined under the Act, and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it (the "Independent Trustees").
Article VII. Continuance
This Plan and any related agreements shall continue in effect for so
long as such continuance is specifically approved at least annually in advance
in the manner provided for the approval of this Plan in Article VI.
Article VIII. Information
JH Funds shall furnish the Fund and its Trustees quarterly, or at such
other intervals as the Fund shall specify, a written report of amounts expended
or incurred for Distribution Expenses and Services Expenses pursuant to this
Plan and the purposes for which such expenditures were made and such other
information as the Trustees may request.
2
<PAGE>
Article IX. Termination
This Plan 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 Class B shares, or (b) by Broker Services on 60 days'
notice in writing to the Fund.
Article X. Agreements
Each Agreement with any person relating to implementation of this Plan
shall be in writing, and each agreement related to this Plan shall provide:
(a) That, with respect to the Fund, such agreement may be
terminated at any time, without payment of any penalty, by
vote of a majority of the Independent Trustees or by vote of a
majority of the Fund's then outstanding Class B shares.
(b) That such agreement shall terminate automatically in the event
of its assignment.
Article XI. Amendments
This Plan may not be amended to increase the maximum amount of the fees
payable by the Fund hereunder without the approval of a majority of the
outstanding voting Class B shares of the Fund. No material amendment to the Plan
shall, in any event, be effective unless it is approved in the same manner as is
provided for approval of this Plan in Article VII.
Article XII. Limitation of Liability
The name "John Hancock Sovereign Bond Fund" is the designation of the
Trustees under the Declaration of Trust, dated February 28, 1992, as restated
and amended from time to time. The Declaration of Trust has been filed with the
Secretary of State of the Commonwealth of Massachusetts. The obligations of the
Fund are not personally binding upon, nor shall resort be had to the private
property of, any of the Trustees, shareholders, officers, employees or agents of
the Fund, but only the Fund's property shall be bound. No series of the Trust
shall be responsible for the obligations of any other series of the Trust.
IN WITNESS WHEREOF, the Fund has executed this amended and restated
Distribution Plan effective as of the 1st day of May, 1995 in Boston,
Massachusetts.
JOHN HANCOCK SOVEREIGN BOND FUND
By:_/s/ Anne C. Hodsdon
_______________________
President
JOHN HANCOCK FUNDS, INC.
By:/s/ C. Troy Shaver, Jr.____
______________________________
President
