JOHN HANCOCK SPECIAL VALUE FUND
Supplement to Prospectus dated August 30, 1996
The Portfolio Securities section on page 12 of the Prospectus is deleted and
replaced with the following:
The fund invests primarily in the common stocks of U.S. companies. It
may also invest in warrants, preferred stocks and convertible
securities.
The fund may invest up to 50% of assets in foreign securities
(including American Depository Receipts), and under normal
circumstances may invest up to 15% of net assets in debt securities,
including convertible securities, that may be rated as low as CC/Ca and
their unrated equivalents (junk bonds). To a limited extent the fund
also may invest in certain higher-risk securities and may engage in
other investment practices.
For temporary defensive purposes, the fund may invest some or all of
its assets in investment-grade short term securities.
The Higher-Risk Securities and Practices table on page 27 of the Prospectus is
amended as follows:
The fund may invest up to 15% of net assets in non-investment-grade
debt securities.
December 3, 1996
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JOHN HANCOCK SPECIAL VALUE FUND
Class A and B Shares
Statement of Additional Information
August 30, 1996
as revised December 3, 1996
This Statement of Additional Information provides information about
John Hancock Special Value Fund (the "Fund") in addition to the information that
is contained in the combined Growth and Income Funds' Prospectus (the
"Prospectus"), dated August 30, 1996.
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 Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund ................................................. 2
Investment Objective and Policies ........................................ 2
Investment Restrictions .................................................. 13
Those Responsible for Management ......................................... 16
Investment Advisory, Sub-Advisory and Other Services...................... 25
Distribution Contract .................................................... 27
Net Asset Value .......................................................... 29
Initial Sales Charge on Class A Shares ................................... 29
Deferred Sales Charge on Class B Shares .................................. 32
Special Redemptions ...................................................... 34
Additional Services and Programs ......................................... 35
Description of the Fund's Shares ......................................... 36
Tax Status ............................................................... 37
Calculation of Performance ............................................... 42
Brokerage Allocation ..................................................... 43
Transfer Agent Services .................................................. 44
Custody of Portfolio ..................................................... 44
Independent Auditors ..................................................... 45
Appendix.................................................................. A-1
Financial Statements ..................................................... F-1
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ORGANIZATION OF THE FUND
John Hancock Special Value Fund (the "Fund") is organized as a
separate, diversified series of John Hancock Capital Series (the "Trust"), an
open-end management investment company which is organized as a Massachusetts
business trust under the laws of The Commonwealth of Massachusetts. The Trust
was organized in 1984 by John Hancock Advisers, Inc. (the "Adviser") as the
successor to John Hancock Growth Fund, Inc., a Delaware corporation organized in
1968 by the 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. Prior to October 1,
1993 the Trust was known as "John Hancock Growth Fund."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation
with income a secondary consideration. The Fund will seek to achieve its
objective by investing primarily in equity securities that are undervalued when
compared to alternative equity investments. There can be no assurance that the
objective of the Fund will be realized. See the discussion of the Fund's goals,
strategies and risks in the Prospectus.
The equity securities in which the Fund will invest include common
stocks, preferred stocks, convertible debt securities and warrants of U.S. and
foreign issuers. In selecting equity securities for the Fund, the Adviser
emphasizes issuers whose equity securities trade at valuation ratios lower than
comparable issuers or the Standard and Poor's Composite Index. Some of the
valuation tools used include price to earnings, price to cash flow and price to
sales ratios and earnings discount models. The Fund's portfolio will also
include securities that the Adviser considers to have the potential for capital
appreciation, due to potential recognition of earnings power or asset value
which is not fully reflected in the securities' current market value. The
Adviser attempts to identify investments which possess characteristics, such as
high relative value, intrinsic value, going concern value, net asset value and
replacement book value, which are as high relative value, intrinsic value, going
concern value, net asset value and replacement book value, which are believed to
limit sustained downside price risk, generally referred to as the "margin of
safety" concept. The believed to limit sustained downside price risk, generally
referred to as the "margin of safety" concept. The Adviser also considers an
issuer's financial strength, competitive position, projected future earnings and
dividends and other investment criteria. These securities are collectively
referred to as "special value" securities.
The Fund's investment policy reflects the Adviser's belief that while
the securities markets tend to be efficient, sufficiently persistent price
anomalies exist which the strategically disciplined active equity manager can
exploit in seeking to achieve an above-average rate of return.
The Fund's investments may include securities of both large, widely
traded companies and smaller, less well known issuers. Higher risks are often
associated with investments in companies with smaller market capitalizations.
These companies may have limited product lines, markets and financial resources,
or they may be dependent upon smaller or inexperienced management groups. In
addition, trading volume of such securities may be limited, and historically the
market price for such securities has been more volatile than securities of
companies with greater capitalization. However, securities of companies with
smaller capitalization may offer greater potential for capital appreciation
since they may be overlooked and thus undervalued by investors.
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The Fund's investments in fixed-income securities may include U.S.
Government securities and convertible and non-convertible corporate preferred
stocks and debt securities of U.S. and foreign issuers. Under normal market
conditions, the Fund's investments in fixed-income securities are not expected
to exceed 15% of the Fund's net assets. The market value of fixed-income
securities varies inversely with changes in the prevailing levels of interest
rates. The market value of convertible securities, while influenced by the
prevailing level of interest rates, is also affected by the changing value of
the equity securities into which they are convertible. The Fund may purchase
fixed-income debt securities with stated maturities of up to thirty years.
Lower Rated High Yield "High Risk" Debt Obligations. The fixed-income securities
in which the Fund may invest, may be rated as low as CC by S&P or CA by Moody's
and unrated securities of comparable credit quality as determined by the
Adviser. Fixed-income securities that are rated below BBB by S&P or Baa by
Moody's indicate obligations that are speculative to a high degree and are often
in default.
Securities rated lower than Baa by Moody's or BBB by Standard & Poor's
are sometimes referred to as junk bonds. See the Appendix attached to this
Statement of Additional Information which describes the characteristics of the
securities in the various ratings categories. The Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the above-stated ratings. The credit ratings of Moody's and
Standard & Poor's, such as those ratings described here, may not be changed by
Moody's and Standard & Poor's in a timely fashion to reflect subsequent economic
events. The credit ratings or securities do not reflect an evaluation of market
risk. Debt obligations rated in the lower ratings categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income. In addition, lower ratings reflect a greater possibility of an adverse
change in financial condition affecting the issuer's ability to make payments of
interest and principal. The market price and liquidity of lower rated fixed
income securities generally respond more to short-term corporate and market
developments than do those of higher rated securities, because these
developments are perceived to have a more direct relationship to the ability of
an issuer of lower rated securities to meet its on going debt obligations. The
Adviser seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions.
Reduced volume and liquidity in the high yield high risk bond market,
or the reduced availability of market quotations, will make it more difficult to
dispose of the bonds and to value accurately the Fund's assets. The reduced
availability of reliable, objective data may increase the Fund's reliance on
management's judgment in valuing high yield high risk bonds. In addition, the
Fund's investment in high yield high risk securities may be susceptible to
adverse publicity and investor perceptions, whether or not justified by
fundamental factors. The Fund's investments, and consequently its net asset
value, will be subject to the market fluctuations and risk inherent in all
securities. Increasing rate note securities are typically refinanced by the
issuers within a short period of time. The Fund may invest in pay-in-kind (PIK)
securities, which pay interest in either cash or additional securities, at the
issuer's option, for a specified period. The Fund also may invest in zero coupon
bonds, which have a determined interest rate, but payment of the interest is
deferred until maturity of the bonds. Both types of bonds may be more
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speculative and subject to greater fluctuations in value than securities which
pay interest periodically and in cash, due to changes in interest rates.
The market value of debt securities which carry no equity participation
usually reflects yields generally available on securities of similar quality and
type. When such yields decline, the market value of a portfolio already invested
at higher yields can be expected to rise if such securities are protected
against early call. In general, in selecting securities for its portfolio, the
Fund intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued
transactions, it relies on the seller to consummate the transaction. The failure
of the issuer or seller to consummate the transaction may result in the Fund's
losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued or forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
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 equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets in the account declines below the amount of the when-issued commitments.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
Repurchase Agreements. The Fund may invest in repurchase agreements. A
repurchase agreement is a contract under which the Fund acquires a security for
a relatively short period (usually not more than 7 days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). The Fund will
enter into repurchase agreements only with member banks of the Federal Reserve
System and with "primary dealers" in U.S. Government securities. The Advisers
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
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liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income and lack of
access to income during this period and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. The Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting their repurchase. The Fund will not enter into reverse repurchase
agreements and other borrowings exceeding in the aggregate 33_% of the market
value of its total assets. The Fund will enter into reverse repurchase
agreements only with federally insured banks or savings and loan associations
which are approved in advance as being creditworthy by the Board of Trustees.
Under procedures established by the Board of Trustees, the Advisers 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 1933 ("1933 Act"),
including securities offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act. However, the Fund will not invest more than 15% of
its net assets in illiquid investments, which include repurchase agreements
maturing in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Board of Trustees determines, based upon
a continuing review of the trading markets for specific Rule 144A securities,
that they are liquid, then such securities may be purchased without regard to
the 15% limit. The Trustees may adopt guidelines and delegate to the Advisers
the daily function of determining the monitoring and liquidity of restricted
securities. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Trustees will carefully
monitor the Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in the Fund if qualified institutional buyers become for a time
uninterested in purchasing these restricted securities.
The Fund may acquire other restricted securities including securities
for which market quotations are not readily available. These securities may be
sold only in privately negotiated transactions or in public offerings with
respect to which a registration statement is in effect under the 1933 Act. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be priced at
fair market value as determined in good faith by the Fund's Trustees.
Financial Futures Contracts. The Fund may buy and sell stock index and other
financial futures contracts and options on futures contracts to hedge against
changes in securities prices, interest rates and currency exchange rates and
other market conditions or for speculative purposes. The Fund may hedge its
portfolio by selling or purchasing financial futures contracts as an offset
against the effects of changes in interest rates or in security or foreign
currency values or in other market conditions. Although other techniques could
be used to reduce the Fund's exposure to market fluctuations, the Fund may be
able to hedge its exposure more effectively and perhaps at a lower cost by using
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financial futures contracts. The Fund may enter into financial futures contracts
for hedging purposes and for speculative purposes to the extent permitted by
regulations of the Commodity Futures Trading Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the CFTC. Futures contracts are
traded on these markets in a manner that is similar to the way a stock is traded
on a stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA")
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills, 90-day commercial paper, bank certificates of deposit and Eurodollar
certificates of deposit. It is expected that if other financial futures
contracts are developed and traded the Fund may engage in transactions in such
contracts.
Although some financial futures contracts by their terms call for
actual delivery or acceptance of financial instruments, in most cases the
contracts are closed out prior to delivery by offsetting purchases or sales of
matching financial futures contracts (same exchange, underlying security or
currency and delivery month). Other financial futures contracts, such as futures
contracts on securities indices, by their terms call for cash settlements. If
the offsetting purchase price is less than the Fund's original sale price, the
Fund realizes a gain, or if it is more, the Fund realizes a loss. Conversely, if
the offsetting sale price is more than the Fund's original purchase price, the
Fund realizes a gain, or if it is less, the Fund realizes a loss. The Fund's
transaction costs must also be included in these calculations. The Fund will pay
a commission in connection with each purchase or sale of financial futures
contracts, including a closing transaction. For a discussion of the Federal
income tax considerations of transactions in financial futures contracts, see
the information under the caption "Tax Status" below.
At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
Government securities, known as "initial margin," ranging upward from 1.1% of
the value of the financial futures contract being traded. The margin required
for a financial futures contract is set by the board of trade or exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the financial futures contract which is returned to the Fund
upon termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. Each day, the futures contract is valued at the official settlement
price of the board of trade or exchange on which it is traded. Subsequent
payments, known as "variation margin," to and from the broker are made on a
daily basis as the market price of the financial futures contract fluctuates.
This process is known as "mark to market." Variation margin does not represent a
borrowing or lending by the Fund but is instead a settlement between the Fund
and the broker of the amount one would owe the other if the financial futures
contract expired. In computing net asset value, the Fund will mark to market its
open financial futures positions.
Successful hedging depends on a strong correlation between the market
for the underlying securities and the futures contract market for those
securities. There are several factors that will probably prevent this
correlation from being perfect, and even a correct forecast of general interest
rate trends may not result in a successful hedging transaction. There are
significant differences between the securities or currency markets and the
futures markets which could create an imperfect correlation between the markets
and which could affect the success of a given hedge. The degree of imperfection
of correlation depends on circumstances such as variations in speculative market
demand for financial futures and debt securities, including technical influences
in futures trading and differences between the financial instruments being
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hedged and the instruments underlying the standard financial futures contracts
available for trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower-rated, and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise
of skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of unexpected market, interest rate or currency trends. The
Fund will bear the risk that the price of the securities being hedged will not
move in complete correlation with the price of the futures contracts used as a
hedging instrument. Although the Advisers believe that the use of financial
futures contracts will benefit the Fund, an incorrect prediction could result in
a loss on both the hedged securities or currency in the Fund's portfolio and the
hedging vehicle so that the Fund's return might have been better had hedging not
been attempted. However, in the absence of the ability to hedge, the Advisers
might have taken portfolio actions in anticipation of the same market movements
with similar investment results but, presumably, at greater transaction costs.
The low margin deposits required for futures transactions permit an extremely
high degree of leverage. A relatively small movement in a futures contract may
result in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount the price of a futures contract may vary either
up or down from the previous day's settlement price, at the end of the current
trading session. Once the daily limit has been reached in a futures contract
subject to the limit, no more trades may be made on that day at a price beyond
that limit. The daily limit governs only price movements during a particular
trading day and, therefore, does not limit potential losses because the limit
may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
Finally, although the Fund engages in financial futures transactions
only on boards of trade or exchanges where there appears to be an adequate
secondary market, there is no assurance that a liquid market will exist for a
particular futures contract at any given time. The liquidity of the market
depends on participants closing out contracts rather than making or taking
delivery. In the event participants decide to make or take delivery, liquidity
in the market could be reduced. In addition, the Fund could be prevented from
executing a buy or sell order at a specified price or closing out a position due
to limits on open positions or daily price fluctuation limits imposed by the
exchanges or boards of trade. If the Fund cannot close out a position, it will
be required to continue to meet margin requirements until the position is
closed.
Options on Financial Futures Contracts. The Fund may buy and sell call and put
options on futures contracts to hedge against changes in securities prices,
interest rates and currency exchange rates and other market conditions or for
speculative purposes. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers the futures contract to
the holder at the exercise price. The Fund would be required to deposit with its
custodian initial and variation margin with respect to put and call options on
futures contracts written by it. The Fund's options on futures will be traded on
a U.S. or foreign commodity exchange or board of trade. Options on futures
contracts involve risks similar to the risks of transactions in financial
futures contracts. Also, an option purchased by the Fund may expire worthless,
in which case the Fund would lose the premium it paid for the option.
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Other Considerations. The Fund will engage in futures and options transactions
for bona fide hedging or speculative purposes to the extent permitted by CFTC
regulations. 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 which it expects
to purchase. Except as stated below, the Fund's futures transactions will be
entered into for traditional hedging purposes --i.e., 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, or the currency in which they are denominated, the
Fund intends to purchase. As evidence of this hedging intent, the Fund expects
that on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities or assets denominated in the related currency in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for a 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.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Fund to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish speculative positions in futures contracts and options on futures
will not exceed 5% of the net asset value of the Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Fund will engage in transactions in futures contracts only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code") for maintaining its qualification as a
regulated investment company for Federal income tax purposes.
When the Fund purchases financial futures contracts, writes put options
thereon or purchases call options thereon, cash or liquid securities will be
deposited in a segregated account with the Fund's custodian in an amount that,
together with the amount of initial and variation margin held in the account of
its broker, equals the market value of the futures contracts.
Options Transactions. The Fund may write listed and over-the-counter covered
call options and covered put options on securities in which it may invest and on
indices composed of securities in which it may invest on up to 100% of its net
assets in order to earn additional income from the premiums received. In
addition, the Fund may purchase listed and over-the-counter call and put options
on these securities and indices. The extent to which covered options will be
used by the Fund will depend upon market conditions and the availability of
alternative strategies.
The Fund will write listed and over-the-counter call options only if
they are "covered", which means that the Fund owns or has the immediate right to
acquire the securities underlying the options without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio. A call option written by the Fund may also be "covered" if the Fund
holds on a share-for-share basis a covering call on the same securities where
(i) the exercise price of the covering call held is equal to or less than the
exercise price of the call written or the exercise price of the covering call is
greater than the exercise price of the call written, in the latter case only if
the difference is maintained by the Fund in cash or liquid securities in a
segregated account with the Fund's custodian, and (ii) the covering call expires
at the same time as the call written. If a covered call option is not exercised,
the Fund would keep both the option premium and the underlying security. If the
covered call option written by the Fund is exercised and the exercise price,
less the transaction costs, exceeds the cost of the underlying security, the
Fund would realize a gain in addition to the amount of the option premium it
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received. If the exercise price, less transaction costs, is less than the cost
of the underlying security, the Fund's loss would be reduced by the amount of
the option premium.
As the writer of a covered put option, the Fund will write a put option
only with respect to securities it intends to acquire for its portfolio and will
maintain in a segregated account with its custodian bank cash or liquid
securities with a value equal to the price at which the underlying security may
be sold to the Fund in the event the put option is exercised by the purchaser.
The Fund may also write a "covered" put option by purchasing on a
share-for-share basis a put on the same security as the put written by the Fund
if the exercise price of the covering put held is equal to or greater than the
exercise price of the put written and the covering put expires at the same time
as or later than the put written.
When writing listed and over-the-counter covered put options on
securities, the Fund would earn income from the premiums received. If a covered
put option is not exercised, the Fund would keep the option premium and the
assets maintained to cover the option. If the option is exercised and the
exercise price, including transaction costs, exceeds the market price of the
underlying security, the Fund would realize a loss, but the amount of the loss
would be reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its
obligation prior to its exercise, it may effect a "closing purchase
transaction". This is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that the Fund's
position will be offset by the Options Clearing Corporation. The Fund may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. There is no guarantee that a closing purchase transaction can be
effected. Although the Fund will generally write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular option or at any particular time, and for some options no secondary
market on an exchange may exist.
In the case of a written call option, effecting a closing transaction
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. In the case of
a written put option, it will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option. The Fund will realize a loss from a closing transaction if the cost of
the closing transaction is more than the premium received for writing the
option. However, because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation in the value of the underlying security owned
by the Fund.
Over-the-Counter Options. The Fund may engage in options transactions on
exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e. performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the-counter ("OTC") transactions are two-party
contracts with price and terms negotiated by the buyer and seller. The Fund will
acquire only those OTC options for which management believes the Fund can
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receive on each business day at least two separate bids or offers (one of which
will be from an entity other than a party to the option) or those OTC options
valued by an independent pricing service. The Fund will write and purchase OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or their affiliates which have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million. The Securities and Exchange Commission (the "SEC") has
taken the position that OTC options are subject to the Fund's 15% restriction on
illiquid investments. The SEC, however, allows the Fund to exclude from the 15%
limitation on illiquid securities a portion of the value of the OTC options
written by the Fund, provided that certain conditions are met. First, the other
party to the OTC options has to be a primary U.S. Government securities dealer
designated as such by the Federal Reserve Bank. Second, the Fund would have an
absolute contractual right to repurchase the OTC options at a formula price. If
the above conditions are met, a Fund may treat as illiquid only that portion of
the OTC option's value (and the value of its underlying securities) which is
equal to the formula price for repurchasing the OTC option, less the OTC
option's intrinsic value.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers and financial institutions if the loan is collateralized by cash or U.S.
Government securities according to applicable regulatory requirements. The Fund
may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the loaned securities. As a result, the Fund may
incur a loss or, in the event of the borrower's bankruptcy, may be delayed in or
prevented from liquidating the collateral. It is a fundamental policy of the
Fund not to lend portfolio securities having a total value in excess of 33 _% of
its total assets.
Government Securities. Certain U.S. Government securities, including U.S.
Treasury bills, notes and bonds, and Government National Mortgage Association
certificates ("Ginnie Maes"), are supported by the full faith and credit of the
United States. Certain other U.S. Government securities, issued or guaranteed by
Federal agencies or government sponsored enterprises, are not supported by the
full faith and credit of the United States, but may be supported by the right of
the issuer to borrow from the U.S. Treasury. These securities include
obligations of the Federal Home Loan Mortgage Corporation ("Freddie Macs"), and
obligations supported by the credit of the instrumentality, such as Federal
National Mortgage Association Bonds ("Fannie Maes"). No assurance can be given
that the U.S. Government will provide financial support to such Federal
agencies, authorities, instrumentalities and government sponsored enterprises in
the future.
Ginnie Maes, Freddie Macs and Fannie Maes are mortgage-backed
securities which provide monthly payments which are, in effect, a "pass-through"
of the monthly interest and principal payments (including any prepayments) made
the by individual borrowers on the pooled mortgage loans. Collateralized
mortgage obligations ("CMOs") in which the Fund may invest are securities issued
by a U.S. Government instrumentality that are collateralized by a portfolio of
mortgages or mortgage-backed securities. Mortgage-backed securities may be less
effective than traditional debt obligations of similar maturity at maintaining
yields during periods of declining interest rates.
Foreign Currency Transactions. The Fund's foreign currency exchange transactions
may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. The Fund may also
enter into forward foreign currency contracts involving currencies of the
different countries in which it will invest as a hedge against possible
variations in the foreign exchange rate between these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
Transaction hedging is the purchase or sale of forward foreign currency
10
<PAGE>
contracts with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities denominated
in foreign currencies. Portfolio hedging is the use of forward foreign currency
contracts to offset portfolio security positions denominated or quoted in such
foreign currencies. The Fund will not attempt to hedge all of its foreign
portfolio positions and will enter into such transactions only to the extent, if
any, deemed appropriate by the Advisers. The Fund will not engage in speculative
forward currency transactions.
If the Fund enters into a forward contract requiring it to purchase
foreign currency, its custodian bank will segregate cash or liquid securities in
a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. Those
assets will be valued at market daily and if the value of the assets in the
separate account declines, additional cash or liquid assets will be placed in
the account so that the value of the account will be equal to the amount of the
Fund's commitment with respect to such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency transactions
varies with such factors as the currency involved, the length of the contract
period and the market conditions then prevailing. Since transactions in foreign
currency are usually conducted on a principal basis, no fees or commissions are
involved.
Investment in Foreign Securities. The Fund may invest up to 50% of its assets in
securities of foreign issuers, including American Depository Receipts ("ADRs").
ADRs (sponsored or unsponsored) are receipts typically issued by an American
bank or trust company. They evidence ownership of underlying securities issued
by a foreign corporation, and are designed for trading in United States
securities markets. Issuers of the shares underlying unsponsored ADRs are not
contractually obligated to disclose material information in the United States
and, therefore, there may not be a correlation between that information and the
market value of the unsponsored ADR.
Investments in foreign securities may involve risks and considerations
not present in domestic investments. Since foreign securities generally may be
quoted and pay interest or dividends in foreign currencies, the value of the
assets of the Fund as measured in U.S. dollars will be affected favorably or
unfavorably by changes in the relationship of the U.S. dollar and other currency
rates. The Fund may incur costs in connection with the conversion of foreign
currencies into U.S. dollars and may be adversely affected by restrictions on
the conversion or transfer of foreign currencies. In addition, there may be less
publicly available information about foreign companies than U.S. companies.
Foreign companies may not be subject to accounting, auditing, and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. There may also be difficulty in enforcing legal rights
outside the United States. Security trading practices abroad may offer less
protection to investors such as the Fund. In addition, the expense ratios of
international funds generally are higher than those of domestic funds. This is
because there are greater costs associated with maintaining custody of foreign
securities, and the increased research necessary for international investing.
11
<PAGE>
Foreign securities markets, while growing in volume, have for the most
part substantially less volume than U.S. securities markets and securities of
foreign companies are generally less liquid and at times their prices may be
more volatile than securities of comparable U.S. companies. Foreign stock
exchanges, brokers and listed companies are generally subject to less government
supervision and regulation than those in the U.S. The customary settlement time
for foreign securities is less frequent than in the U.S., which could affect the
liquidity of the Fund's investments.
In some countries, there is the possibility of expropriation or
confiscatory taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of foreign
government restrictions or other adverse political, social or diplomatic
developments that could affect investments in these nations.
These risks may be intensified in the case of investments in emerging
markets or countries with limited or developing capital markets. These countries
are located in the Asia-Pacific region, Eastern Europe, Latin and South America
and Africa. Security prices in these markets can be significantly more volatile
than in more developed countries, reflecting the greater uncertainties of
investing in less established markets and economies. Political, legal and
economic structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens,
unstable currencies or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. The Fund may be required to establish special
custodial or other arrangements before making certain investments in those
countries. Securities of issuers located in these countries may have limited
marketability and may be subject to more abrupt or erratic price movements.
Short Sales. The Fund may engage in short sales in order to profit from an
anticipated decline in the value of a security. The Fund may also engage in
short sales to attempt to limit its exposure to a possible market decline in the
value of its portfolio securities through short sales of securities which the
Adviser believes possess volatility characteristics similar to those being
hedged. To effect such a transaction, the Fund must borrow the security sold
short to make delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. Until the security is replaced, the Fund is required to pay to the
lender any accrued interest or dividends and may be required to pay a premium.
The Fund may only make short sales "against the box," meaning that the Fund, by
virtue of its ownership of other securities, 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.
The Fund will realize a gain if the security declines in price between
the date of the short sale and the date on which the Fund replaces the borrowed
security. On the other hand, the Fund will incur a loss as a result of the short
sale if the price of the security increases between those dates. The amount of
any gain will be decreased, and the amount of any loss increased, by the amount
of any premium or interest or dividends the Fund may be required to pay in
connection with a short sale. The successful use of short selling as a hedging
device may be adversely affected by imperfect correlation between movements in
the price of the security sold short and the securities being hedged.
12
<PAGE>
Under applicable guidelines of the staff of the SEC, if the Fund
engages in short sales, it must put in a segregated account (not with the
broker) an amount of cash or U.S. Government securities equal to the difference
between (a) the market value of the securities sold short at the time they were
sold short and (b) any cash or U.S. Government Securities required to be
deposited as collateral with the broker in connection with the short sale (not
including the proceeds from the short sale). In addition, until the Fund
replaces the borrowed security, it must daily maintain the segregated account at
such a level that the amount deposited in it plus the amount deposited with the
broker as collateral will equal the current market value of the securities sold
short.
Short selling may produce higher than normal portfolio turnover which
may result in increased transaction costs to the Fund and may result in gains
from the sale of securities deemed to have been held for less than three months,
which gains must be less than 30% of the Fund's gross income for a taxable year
in order for the Fund to qualify as a regulated investment company under the
Code for that year.
Short-Term Trading and Portfolio Turnover. Although the Fund does not intend to
invest for the purpose of seeking short-term profits, the Fund's particular
portfolio securities may be changed without regard to their holding period
(subject to certain tax restrictions) when the Advisers deem that this action is
appropriate in view of a change in the issuer's financial or business operations
or changes in general market conditions. Short-term trading may have the effect
of increasing portfolio turnover rate. A high rate of portfolio turnover (100%
or greater) involves corresponding higher transaction expenses and may make it
more difficult for the Fund to qualify as a regulated investment company for
Federal income tax purposes. It is anticipated that, under normal market
conditions, the Fund's annual portfolio turnover rate will be less than 100%.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of the Fund's outstanding voting securities
which, as used in the Prospectus, means approval by the lesser of (1) the
holders of 67% or more of the Fund's shares represented at a meeting if at least
50% of the Fund's outstanding shares are present in person or by proxy at the
meeting or (2) the holders of more than 50% of the Fund's outstanding shares.
The Fund observes the following fundamental investment restrictions.
The Fund may not:
(1) Purchase or sell real estate or any interest therein, except that the
Fund may invest in securities of corporate entities secured by real
estate or marketable interests therein or issued by companies that
invest in real estate or interests therein and may hold and sell real
estate acquired by the Fund as the result of ownership of securities.
(2) Make loans, except that the Fund may lend portfolio securities in
accordance with the Fund's investment policies. The Fund does not, for
this purpose, consider repurchase agreements, the purchase of all or a
portion of an issue of publicly distributed bonds, bank loan
participation agreements, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities, to be
the making of a loan.
13
<PAGE>
(3) Invest in commodities or in commodity contracts or in puts, calls, or
combinations of both except options on securities, securities indices,
currency and other financial instruments, futures contracts on
securities, securities indices, currency and other financial
instruments, options on such futures contracts, forward commitments,
forward foreign currency exchange contracts, interest rate or currency
swaps, securities index put or call warrants and repurchase agreements
entered into in accordance with the Fund's investment policies.
(4) Purchase securities of an issuer (other than the U.S. Government, its
agencies or instrumentalities), if (i) 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 (ii) such purchase would at the
time result in more than 10% of the outstanding voting securities of
such issuer being held by the Fund.
(5) Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, the Fund may be deemed to be
an underwriter for purposes of the Securities Act of 1933.
(6) 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.
(7) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted by paragraph (6) 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.
(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) Issue senior securities, except as permitted by paragraphs (2), (3) and
(6) above. 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 currency 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 (7) above are not deemed to be senior
securities.
In connection with the lending of portfolio securities under item (2)
above, such loans must at all times be fully collateralized and the Fund's
custodian must take possession of the collateral either physically or in book
entry form. Securities used as collateral must be marked to market daily.
Nonfundamental Investment Restrictions
The following restrictions are designated as nonfundamental and may be
changed by the Trustees without shareholder approval.
The Fund may not:
14
<PAGE>
(a) 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 without payment of additional consideration, securities
equivalent in kind and amount to the securities sold and, if the right
is conditional, the sale is made upon the same conditions, except that
a Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities.
(b) purchase securities of any issuer which, together with any predecessor,
has a record of less than three years' continuous operation prior to
the purchase if such purchase would cause the Fund's investment in all
such issuers to exceed 5% of the value of the Fund's total assets.
(c) invest for the purpose of exercising control over or management of any
company.
(d) purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii)
more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not
apply to (a) the investment of cash collateral, received by the Fund in
connection with lending the Fund's portfolio securities, in the
securities of open-end investment companies or (b) the purchase of
shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the
assets of another investment company. Subject to the above percentage
limitations, the Fund may, in connection with the John Hancock Group of
Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John
Hancock Group of Funds. The Fund may not purchase the shares of any
closed-end investment company except in the open market where no
commission or profit to a sponsor or dealer results from the purchase,
other than customary brokerage fees.
(e) knowingly purchase or retain securities of an issuer if one or more of
the Trustees or officers of the Trust or directors or officers of the
Adviser or any investment management subsidiary of the Adviser
individually owns beneficially more than 0.5%, and together own
beneficially more than 5%, of the securities of such issuer.
(f) invest in interests in oil, gas or other mineral exploration or
development programs; provided, however, that this restriction shall
not prohibit the acquisition of securities of companies engaged in the
production or transmission of oil, gas or other minerals.
(g) purchase warrants if as a result (i) more than 5% of the Fund's net
assets, valued at the lower of cost or market value, would be invested
in warrants or (ii) more than 2% of its net assets would be invested in
warrants, valued as aforesaid, which are not traded on the New York
Stock Exchange or American Stock Exchange; provided that for these
purposes, warrants are to be valued at the lesser of cost or market,
but warrants acquired in units or attached to securities will be deemed
to be without value.
(h) Purchase any security, including any repurchase agreement maturing in
more than seven days, which is not readily marketable, if more than 15%
of the net assets of the Fund, taken at market value, would be invested
in such securities.
15
<PAGE>
(i) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser to save commissions or to average prices
among them is not deemed to result in a joint securities trading
account.
(j) Invest more than 15% of its net assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933.
(k) Purchase interests in real estate limited partnerships.
(l) Purchase puts, calls, straddles, spreads or any combination thereof if
by reason of a purchase the Fund's aggregate investment in these
instruments would exceed 5% of its total assets.
In order to permit the sale of shares of the Fund in certain states,
the Trustees may, in their sole discretion, adopt restrictions or investment
policies more restrictive than those described above. Should the Trustees
determine that any such more restrictive policy is no longer in the best
interests of the Fund and its shareholders, the Fund may cease offering shares
in the state involved and the Trustees may revoke such restrictive policy.
Moreover, if the states involved shall no longer require any such restrictive
policy, the Trustees may, at their sole discretion, revoke such policy.
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 values 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 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").
The following table sets forth the principal occupations of the
Trustees and principal officers of the Trust during the past five years. Unless
otherwise indicated, the business address of each is 101 Huntington Avenue,
Boston, Massachusetts 02199.
16
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), John
Hancock Investor Services
Corporation ("Investor Services"),
First Signature Bank and Trust
Company and Sovereign Asset
Management Corporation
("SAMCorp."); Director, John
Hancock Freedom Securities
Corporation, John Hancock Insurance
Agency, Inc. ("Insurance Agency,
Inc."), John Hancock Capital
Corporation and New England/Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science; Vice
Chairman and President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc. (until
April, 1994).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
17
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dennis S. Aronowitz Trustee (3) Professor of Law, Boston University
Boston University School of Law; Trustee, Brookline
Boston, Massachusetts Savings Bank.
June 1931
Richard P. Chapman, Jr. Trustee (1, 3) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee (3) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 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.
(3) Member of the Audit Committee and the Administration Committee.
18
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Douglas M. Costle Trustee (1, 3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 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 (3) Director, Santa Fe Ingredients
8046 Mackenzie Court Company of California, Inc. and
Las Vegas, NV 89129 Santa Fe Ingredients Company, Inc.
December 1928 (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.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard A. Farrell Trustee(3) President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee (3) Vice President and Chief Economist,
4104 Woodbine Street The Conference Board (non-profit
Chevy Chase, MD 20815 economic and business research).
December 1947
William F. Glavin Trustee (3) President, Babson College; Vice
Babson College Chairman, Xerox Corporation (until
Horn Library June 1989); Director, Caldor Inc.,
Babson Park, MA 02157 Reebok, Ltd. (since 1994) and Inco
March 1931 Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Director,
Boston, MA 02199 The Berkeley Group, John Hancock
April 1953 Funds, Investor Services (since
October 1996); Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
20
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dr. John A. Moore Trustee (3) President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee (3) Cornell Institute of Public Affairs,
Cornell University Cornell University (since August
Institute of Public Affairs 1996); President Emeritus of Wells
364 Upson Hall College and St. Lawrence University;
Ithica, NY 14853 Director, Niagara Mohawk Power
May 1943 Corporation (electric utility) and
Security Mutual Life (insurance).
John W. Pratt Trustee (3) Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (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.
(3) Member of the Audit Committee and the Administration Committee.
21
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, Investor Services, John
August 1937 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,
John Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993)
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, Investor
Services, SAMCorp., Insurance
Agency, Inc., Southeastern Thrift &
Bank Fund and NM Capital; Senior
Vice President, The Berkeley Group;
President, the Adviser (until
December 1994);
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
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 Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Investor Services.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Investor Services and John Hancock
July 1950 Funds; Counsel, John Hancock Mutual
Life Insurance Company.
Susan S. Newton Vice President and Secretary Vice President and Assistant
101 Huntington Avenue Secretary, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds,
March 1950 Investor Services; Secretary,
SAMCorp; Vice President, The
Berkeley Group, John Hancock
Distributors, Inc. (until 1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
23
<PAGE>
All of the officers listed are officers or employees of the Adviser or
the Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.
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. The Trustees not listed
below were not Trustees of the Trust as of the end of the Fund's last completed
fiscal year. The three non-Independent Trustees, Messrs. Boudreau and Scipione
and Ms. Hodsdon, and each of the officers of the Trust are interested persons of
the Adviser, are compensated by the Adviser and receive no compensation from the
Fund for their services.
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Compensation the Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
- -------------------- ---------------- ----------------------
<S> <C> <C>
Dennis S. Aronowitz $154 $ 61,050
Richard P. Chapman, Jr. 158 62,800
William J. Cosgrove 154 61,050
Gail D. Fosler 154 60,800
Bayard Henry* 144 58,850
Edward J. Spellman 154 61,050
---- --------
TOTALS $918 $365,600
</TABLE>
(1) Compensation is for the fiscal year ended December 31, 1995.
(2) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31,
1995. As of such date there were 61 funds in the John Hancock Fund
Complex, of which each of these Independent Trustees served 16.
* Mr. Henry retired from his position as a Trustee of the Fund effective
April 26, 1996.
+ As of December 31, 1995 the value of the aggregate accrued deferred
compensation from each Fund in the John Hancock Fund Complex for Mr.
Chapman was $54,681 and for Mr. Cosgrove was $54,243 under the John
Hancock Deferred Compensation Plan for Independent Trustees (the
"Plan").
The Trustees and officers of the Fund may at times be the record
holders of in excess of 5% of the shares of the Fund by virtue of holding shares
in "street name." As of August 5, 1996 the officers and trustees of the Trust as
a group owned less than 1% of the outstanding shares of each class of the Fund.
24
<PAGE>
As of August 5, 1996 the following shareholders beneficially owned 5%
or more of the outstanding shares of the Fund listed below:
<TABLE>
<CAPTION>
Number of shares Percentage of total
of beneficial outstanding shares of
Name and Address of Shareholder Class of Shares Interest Owned the Class of the Fund
- ------------------------------- --------------- -------------- ---------------------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Class B Shares 152,433 7.98%
Smith, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT ADVISORY,
SUB-ADVISORY AND OTHER SERVICES
The Fund receives its investment advice from the Advisers. Each of the
Trustees and principal officers of the Fund who is also an affiliated person of
the Advisers is named above, together with the capacity in which such person is
affiliated with the Fund and the Advisers.
The Fund has entered into an investment management contract with the
Adviser and an investment sub-advisory contract with the Sub-Adviser. Under the
investment management contract, the Adviser provides the Fund with (i) a
continuous investment program, consistent with the Fund's stated investment
objective and policies, and (ii) supervision of all aspects of the Fund's
operations except those that are delegated to a custodian, transfer agent or
other agent. The Adviser is responsible for the management of the Fund's
portfolio assets.
The Adviser has entered into a sub-investment management contract with
the Sub-Adviser under which the Sub-Adviser, subject to the review of the
Trustees and the over-all supervision of the Adviser, is responsible for
managing the investment operations of the Fund and the composition of the Fund's
portfolio and furnishing the Fund with advice and recommendations with respect
to investments, investment policies and the purchase and sale of securities.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Advisers or their affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more other funds or clients are selling the same security. If opportunities for
purchase or sale of securities by the Advisers for the Fund or for other funds
or clients for which one of the Advisers 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 one of the Advisers or their affiliates may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
No person other than the Advisers and their directors and employees
regularly furnishes advice to the Fund with respect to the desirability of the
Fund's investing in, purchasing or selling securities. The Advisers may from
time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life Company
and its affiliates.
25
<PAGE>
All expenses which are not specifically paid by the Adviser and which
are incurred in the operation of the Fund (including fees of Trustees of the
Trust who are not "interested persons," as such term is defined in the
Investment Company Act of 1940, but excluding certain distribution related
activities required to be paid by the Adviser or John Hancock Funds) and the
continuous public offering of the shares of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Adviser monthly an investment management fee, which is accrued daily, of 0.70%
of the average of the daily net assets of the Fund. For its sub-advisory
services, the Adviser pays the Sub-Adviser monthly a sub-advisory fee of 40% of
the fee received by the Adviser for managing the Fund. The Fund is not
responsible for payment of the Sub-Adviser's fee.
The Adviser has voluntarily agreed to limit Fund expenses, including
the management fee (but not including the transfer agent fee and the 12b-1 fee
(as described below under "Distribution contract")), to 0.40% of the Fund's
average daily net assets. The Adviser reserves the right to terminate this
voluntary limitation in the future.
If the total of all ordinary business expenses of the Fund for any
fiscal year exceeds limitations prescribed in any state in which shares of the
Fund are qualified for sale, the fee payable to the Adviser will be reduced to
the extent required by these limitations. At this time, the most restrictive
limit on expenses imposed by a state requires that expenses charged to the Fund
in any fiscal year may not exceed 2 1/2% of the first $30,000,000 of the Fund's
average net assets, 2% of the next $70,000,000 of such net assets and 1 1/2% of
the remaining average net assets. When calculating the above limit, the Fund may
exclude interest, brokerage commissions and extraordinary expenses.
On December 31, 1995, the net assets of the Fund were $29,838,736. For
the year ended December 31, 1995 and the period ended December 31, 1994, the
Adviser's management fee was $140,122 and $18,489 respectively, prior to expense
reduction. After expense reduction by the Adviser, the Adviser's management fees
for the periods ended December 31, 1994 and December 31, 1995 were zero.
Pursuant to the investment management contract and sub-advisory
contract, the Adviser and Sub-Adviser are not liable to the Fund for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which their respective contract relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser or the Sub-Adviser in the performance of their duties or from their
reckless disregard of their obligations and duties under the applicable
contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and presently has more than $18 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,080,000 shareholders.
The Adviser is an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. The Sub-Adviser was organized in
1977 and is also an indirect subsidiary of the Life Company and provides
investment management advisory services for institutional and individual
investors. The Sub-Adviser manages approximately $1.3 billion in assets. With
total assets under management of approximately $80 billion, the Life Company is
one of the ten largest life insurance companies in the United States, and
carries the highest ratings from S&P's and A.M. Best's. Founded in 1862, the
Life Insurance Company has been serving clients for over 130 years.
26
<PAGE>
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
The investment management contract, the investment sub-advisory
contract and the distribution contract discussed below continue in effect from
year to year if approved annually by vote of a majority of the Trust's Trustees
who are not interested persons of one of the parties to the contract, cast in
person at a meeting called for the purpose of voting on such approval, and by
either the Trust's Trustees or the holders of a majority of the Trust's
outstanding voting securities. Each of these contracts automatically terminates
upon assignment. Each contract may be terminated without penalty on 60 days'
notice at the option of either party to the respective contract or by vote of a
majority of the outstanding voting securities of the Fund.
The Trust, on behalf of the Fund, is a party to an Accounting and Legal
Services Agreement with the Adviser. Pursuant to this agreement, the Adviser
provides the Fund with certain tax, accounting and legal services.
DISTRIBUTION CONTRACT
The Fund has a distribution contract with John Hancock Funds. Under the
contract, John Hancock Funds is obligated to use its best efforts to sell shares
of the Fund. Shares of the Fund are sold by selected broker-dealers (the
"Selling Brokers") which have entered into selling agency agreements with John
Hancock Funds. John Hancock Funds accepts orders for the purchase of the shares
of the Fund which are continually offered at net asset value next determined
plus any applicable sales charge. In connection with the sale of Class A or
Class B shares of the Fund, John Hancock Funds and Selling Brokers receive
compensation in the form of a sales charge imposed, in the case of Class A
shares, at the time of sale or, in the case of Class B shares, on a deferred
basis. The sales charges are discussed further in the Fund's Prospectus.
The Trust's Trustees adopted Distribution Plans on behalf of the Fund
with respect to the Fund's Class A and Class B shares (the "Plans"), pursuant to
Rule 12b-1 under the Investment Company Act of 1940. Under the Plans, the Fund
will pay distribution and service fees for Class A and Class B shares, at an
aggregate annual rate of up to 0.30% and 1.00%, respectively, of the Fund's
daily net assets attributable to the respective class of shares. However, the
amount of 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 John Hancock Funds for its distribution expenses, including but not
limited to: (i) initial and ongoing sales compensation to Selling Brokers and
others (including affiliates of John Hancock Funds) engaged in the sale of Fund
shares, (ii) marketing, promotional and overhead expenses incurred in connection
with the distribution of Fund shares, and (iii) with respect to Class B shares
only, interest expenses on unreimbursed distribution expenses. The service fees
will be used to compensate Selling Brokers for providing personal and account
maintenance services to shareholders. In the event that John Hancock Funds is
27
<PAGE>
not fully reimbursed for payments it makes or expenses it incurs under the Class
A Plan, these expenses will not be carried beyond one year from the date these
expenses were incurred. In the event that John Hancock Funds is not fully
reimbursed for expenses it incurs under the Class B Plan in any fiscal year,
John Hancock Funds may carry these expenses forward, provided, however, that the
Trustees may terminate the Class B Plan and thus the Fund's obligation to make
further payments at any time. Accordingly, the Fund does not treat unreimbursed
expenses relating to the Class B shares as a liability. For the period ended
December 31, 1995 an aggregate of $807,110 of distribution expenses or 7.5% 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
12b-1 fees in prior periods.
The Plans were approved by a majority of the voting securities of the
applicable class of the Fund. The Plans have also been approved by a majority of
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 Plan (the "Independent Trustees"), by votes cast in person at
meetings called for the purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds 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.
During the fiscal year ended December 31, 1995, the Fund paid John
Hancock Funds the following amounts of expenses with respect to the Class A
shares and Class B shares of the Fund:
<TABLE>
<CAPTION>
Expense Items
-------------
Printing and
Mailing of Expenses of Interest
Prospectus to Compensation John Carrying or
New to Selling Hancock Other Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A Shares $12,428 $1,300 $ 1,605 $12,438 $ 0
Class B Shares $40,449 $2,812 $14,029 $41,007 $9,306
</TABLE>
Each of the Plans provides that it will continue in effect only so long
as its continuance is approved at least annually by a majority of both the
Trustees and the Independent Trustees. Each of the Plans provides that it may be
terminated 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. Each of the Plans further
provides that it may not be amended to increase the maximum amount of the fees
for the services described therein without the approval of a majority of the
outstanding shares of the class of the Fund which has voting rights with respect
to the Plan. And finally, each of the Plans provides that no material amendment
to the Plan will, in any event, be effective unless it is approved by a majority
vote of both the Trustees and the Independent Trustees of the Trust. The holders
of Class A shares and Class B shares have exclusive voting rights with respect
to the Plan applicable to their respective class of shares. In adopting the
Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that each Plan will benefit the holders of the applicable class of
shares of the Fund.
28
<PAGE>
When the Trust seeks an Independent Trustee to fill a vacancy or as a
nominee for election by shareholders, the selection or nomination of the
Independent Trustee is, under resolutions adopted by the Trustees
contemporaneously with their adoption of the Plans, committed to the discretion
of the Committee on Administration of the Trustees. The members of the Committee
on Administration are all Independent Trustees and are identified in this
Statement of Additional Information under the heading "Those Responsible for
Management."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National
Market Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the
primary market in which they are traded.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank based on London currency
exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of the Fund's NAV. If accurate quotations are not
readily available, or the value has been materially affected by events occurring
after the closing of a foreign market, assets are valued by a method that the
Trustees believe accurately reflects fair value.
The Fund will not price its securities on the following national
holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day. On any day an
international market is closed and the New York Stock Exchange is open, any
foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
29
<PAGE>
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 cumulate current purchases with the
greater of the current value (at offering price) of the Class A shares of the
Fund, or if Investor Services is notified by the investor's dealer or the
investor at the time of the purchase, the cost of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases of
Class A shares made at one time, the purchases will be combined if made by (a)
an individual, his spouse and their children under the age of 21, purchasing
securities for his or their own account, (b) a trustee or other fiduciary
purchasing for a single trust, estate or fiduciary account and (c) certain
groups of four or more individuals making use of salary deductions or similar
group methods of payment whose funds are combined for the purchase of mutual
fund shares. Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Investor Services or
a Selling Broker's representative.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or contingent deferred sales charge ("CDSC") to various individuals and
institutions as follows:
o Any state, county or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment
laws from paying a sales charge or commission when it purchases shares
of any registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust department or common trust funds if
it is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, mother, father, sister, brother, mother-in-law,
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into an agreement with John Hancock
Funds providing specifically for the use of Fund shares in fee-based
investment products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock
Funds, when he or she withdraws from his or her plan and transfers any
or all of his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed defined contribution plans with at least 100 eligible
employees at the inception of the Fund account, may purchase Class A
shares with no initial sales charge. However, if the shares are
30
<PAGE>
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
- --------------- ---------
$1 million to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or current value of the Class A shares already held by
such person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. The reduced sales charges are also applicable to
investments made over a thirteen-month period 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 IRA, SEP, SARSEP,
and 401(k), 403(b) (including TSAs) and 457 plans. Such an investment (including
accumulations and combinations) must aggregate $50,000 or more invested during
the specified period from the date of the LOI or from a date within ninety (90)
days prior thereto, upon written request to Investor Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
amount 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 Investor Services to hold in escrow sufficient Class
A shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Investor Services to act as his attorney-in-fact to
redeem any escrowed shares and adjust the sales charge, if necessary. A LOI does
not constitute a binding commitment by an investor to purchase, or by the Fund
to sell, any additional shares and may be terminated at any time.
31
<PAGE>
Class A shares may be purchased without a sales charge by clients of
the Sub-Adviser if funds are transferred directly to the Fund from accounts
managed by the Sub-Adviser.
Class A shares of the Fund may also be purchased without an initial
sales charge in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding companies.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution
plans administered by Investor Services or the Life Company that had more than
100 eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six-year CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please
indicate if you require the proceeds to equal the dollar amount requested. If
not indicated, only the specified dollar amount will be redeemed from your
account and the proceeds will be less any applicable CDSC.
Example:
32
<PAGE>
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC -120
(dividend reinvestment)
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by John Hancock Funds to defray its expenses related to
providing distribution-related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees facilitates the ability of the Fund to sell the
Class B shares without a sales charge being deducted at the time of the
purchase. See the Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in these circumstances:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than [$1,000].
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established your
periodic withdrawal plan and 12% of the value of subsequent investments
(less redemptions) in that account at the time you notify Investor
Services. (Please note, this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a
CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Internal Revenue Code unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement under section 401(a)
of the Code (such as 401(k), Money Purchase Pension Plan and
Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
33
<PAGE>
Please see matrix for reference.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-
Distribution (401(k), MPP, Rollover Retirement
PSP)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ---------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account value
distributions annually in
or 12% of periodic
account value payments
annually in
periodic
payments.
- ---------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of
and 70 1/2 Expectancy or account value
12% of account annually in
value annually periodic
in periodic payments
payments.
- ---------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account value
payments (72t) payments (72t) payments (72t) annually in
or 12% of or 12% of or 12% of periodic
account value account value account value payments
annually in annually in annually in
periodic periodic periodic
payments. payments. payments.
- ---------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ---------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you
must notify Investor Services at the time you make your redemption. The waiver
will be granted once Investor Services has confirmed that you are entitled to
the waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder were to sell
portfolio securities received in this fashion he would incur a brokerage charge.
Any such securities would be valued for the purposes of making such payment at
the same value as used in determining net asset value. The Fund has, however,
elected to be governed by Rule 18f-1 under the Investment Company Act of 1940.
Under that rule, the Fund must redeem its shares for cash except to the extent
34
<PAGE>
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. As described more fully in the Prospectus, the Fund permits
exchanges of shares of any class of the Fund for shares of the same class in any
other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the Fund
permits the establishment of a Systematic Withdrawal Plan. Payments under this
plan represent proceeds from the redemption of Fund shares. Since the redemption
price of the Fund shares may be more or less than the shareholder's cost,
depending upon the market value of the securities owned by the Fund at the time
of redemption, the distribution of cash pursuant to this plan may result in
realization of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional Class A or Class B shares of the Fund could be
disadvantageous to a shareholder because of the initial sales charge payable on
purchases of Class A shares and the CDSC imposed on redemptions of Class B
shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Class A or Class B shares at the same time that a Systematic
Withdrawal Plan is in effect. The Fund reserves the right to modify or
discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior
written notice to such shareholder, or to discontinue the availability of such
plan in the future. The shareholder may terminate the plan at any time by giving
proper notice to Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). This program applies solely to
Class A shares of the Fund and is explained more fully in the Prospectus and the
Account Privilege Application. The program, as it relates to automatic
investment checks, is subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may, within
120 days after the date of redemption, reinvest without payment of a sales
charge any part of the redemption proceeds in shares of the same class of the
Fund or another John Hancock 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 another John Hancock mutual 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
charge 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
35
<PAGE>
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Trust without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have authorized shares of the Fund and
two other series. Additional series may be added in the future. The Declaration
of Trust also authorizes the Trustees to classify and reclassify the shares of
the Fund, or any other series of the Trust, into one or more classes. As of the
date of this Statement of Additional Information, the Trustees have authorized
the issuance of two classes of shares of the Fund, designated as Class A and
Class B.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Holders of Class A shares and Class B shares have certain exclusive voting
rights on matters relating to their respective distribution plans. The different
classes of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences resulting from the
facts that (i) the distribution and service fees relating to Class A and Class B
shares will be borne exclusively by that class (ii) Class B shares will pay
higher distribution and service fees than Class A shares and (iii) each of Class
A shares and Class B shares will bear any other class expenses properly
allocable to such class of shares, subject to the requirements imposed by the
Internal Revenue Service on funds having a multiple-class structure. Similarly,
the net asset value per share may vary depending on whether Class A shares or
Class B shares are purchased.
In the event of liquidation, shareholders of each class are entitled to
share pro rata in the net assets of the class 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.
36
<PAGE>
Unless otherwise required by the Investment Company Act of 1940 or the
Declaration of Trust, the Trust has no intention of holding annual meetings of
shareholders. Trust shareholders may remove a Trustee by the affirmative vote of
at least two-thirds of the Trust's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Fund's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. 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.
Pursuant to an order granted by the SEC, the Fund has adopted a
deferred compensation plan for its Independent Trustees which allows Trustees'
fees to be invested by the Fund in other John Hancock funds.
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.
Notwithstanding the fact that the Prospectus is a combined prospectus
for the Fund and other John Hancock mutual funds, the Fund shall not be liable
for the liabilities of any other John Hancock mutual fund.
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and intends to
continue to qualify as a "regulated investment company" under Subchapter M of
the Code. As such and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions and the
diversification of its assets, the Fund will not be subject to Federal income
tax on taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
The Fund will be subject to a four percent nondeductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to seek to avoid or
minimize liability for this tax by satisfying such distribution requirements.
37
<PAGE>
Distributions from the Fund's current or accumulated earnings and
profits ("E&P") will be taxable under the Code for investors who are subject to
tax. If these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's Federal tax basis
in Fund shares and then, to the extent such basis is exceeded, will generally
give rise to capital gains. Shareholders who have chosen automatic reinvestment
of their distributions will have a Federal tax basis in each share received
pursuant to such a reinvestment equal to the amount of cash they would have
received had they elected to receive the distribution in cash, divided by the
number of shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, certain foreign currency options and futures contracts, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and may affect the amount, timing and character of distributions to
shareholders. Any such transactions that are not directly-related to the Fund's
investment in stock or securities, possibly including certain currency positions
or derivatives not used for hedging purposes, may increase the amount of gain it
is deemed to recognize from the sale of certain investments or derivatives held
for less than three months, which gain is limited under the Code to less than
30% of its gross income for each taxable year, and may under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed the Fund's investment company taxable income (computed
without regard to such a loss but after considering the post-October loss
regulations) the resulting overall ordinary loss for such a year would not be
deductible by the Fund or its shareholders in future years.
The Fund may be subject to withholding and other taxes imposed by
foreign countries with respect to its investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Because more than 50% of the Fund's assets at the close of any taxable
year will not consist of stocks or securities of foreign corporations, the Fund
will be unable to pass such taxes through to shareholders who consequently will
not take such taxes into account on their own tax returns. However, the Fund
will deduct such taxes in determining the amount it has available for
distribution to shareholders.
If the Fund acquires stock in certain foreign corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may, if available, ameliorate these
38
<PAGE>
adverse tax consequences, but any such election would required the Fund to
recognize taxable income or gain without the concurrent receipt of cash. The
Fund may limit and/or manage its holdings in passive foreign investment
companies to minimize its tax liability or maximize its return from these
investments.
The amount of net realized capital gains, if any, in any given year
will vary depending upon the Advisers' current investment strategy and whether
the Advisers believe it to be in the best interest of the Fund to dispose of
portfolio securities or engage in certain other transactions or derivatives that
will generate capital gains . At the time of an investor's purchase of shares of
the Fund, a portion of the purchase price is often attributable to realized or
unrealized appreciation in the Fund's portfolio or undistributed taxable income
of the Fund. Consequently, subsequent distributions on these shares from such
appreciation or income may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for those shares and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. This gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
90 days after their purchase to the extent Class A shares of the Fund or another
John Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. This disregarded charge will
result in an increase in the shareholder's tax basis in the Class A shares
subsequently acquired. Also, any loss realized on a redemption or exchange may
be disallowed for tax purposes to the extent the shares disposed of are replaced
with other shares of the Fund within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of, such as pursuant to
automatic dividend reinvestments. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized upon
the redemption of shares with a tax holding period of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares.
Although its present intention is to distribute, at least annually, all
net capital gain annually, 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 carry forward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his tax return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares in the Fund by
the difference between his pro rata share of such excess and his pro rata share
of such taxes.
39
<PAGE>
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. Presently, there are no capital loss carryforwards to offset
future net realized capital gains.
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, foreign currency positions, and foreign currency forward
contracts. Certain of these transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term (or, in the case of certain foreign currency forwards, options and
futures, as ordinary income or loss) and timing of some gains and losses
realized by the Fund. Also, certain of the Fund's losses on its transactions
involving options, futures or forward contracts and/or offsetting or successor
portfolio positions may be deferred rather than being taken into account
currently in calculating the Fund's taxable income or gain. Certain of these
transactions may also cause the Fund to dispose of investments sooner than would
otherwise have occurred. These transactions may therefore affect the amount,
timing and character of the Fund's distributions to shareholders. 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 applicable to options, futures or forward
contracts (including consideration of any available elections) in order to
minimize any potential adverse tax consequences.
For purposes of the dividends-received deduction available to
corporations, dividends received by the Fund, if any, from U.S. domestic
corporations in respect of the stock of such corporations held by the Fund, for
U.S. Federal income tax purposes, for at least 46 days (91 days in the case of
certain preferred stock) and distributed and properly designated by the Fund may
be treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
shares of the Fund in order to qualify for the deduction and, if they have any
debt that is deemed under the Code directly attributable to such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise-deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability, if any. Additionally, any corporate
shareholder should consult its tax adviser regarding the possibility that its
tax basis in its Fund shares may also be reduced, for Federal income tax
purposes, by reason of "extraordinary dividends" received with respect to the
shares, for the purpose of computing its gain or loss on redemption or other
disposition of the shares.
The Fund is required to accrue income on any debt securities that have
more than a de minimis amount of original issue discount (or debt securities
acquired at a market discount, if the Fund elects to include market discount in
income currently) prior to the receipt of the corresponding cash payments. The
mark to market rules applicable to certain options, futures contracts, and
forward contracts may also require the Fund to recognize income or gain without
a concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any Federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or may have to leverage itself by borrowing the cash, to
satisfy these distribution requirements.
40
<PAGE>
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. The Fund will not
seek to satisfy any threshold or reporting requirements that may apply in
particular taxing jurisdictions, although the Fund may in its sole discretion
provide relevant information to shareholders.
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all taxable distributions to shareholders, as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt recipients, i.e., corporations and certain other investors distributions
to which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of Federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish 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.
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 foregoing discussion relates solely to U.S. Federal income tax laws
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 the
laws. 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 non- resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from the Fund and, unless an effective IRS Form W-8 or
authorized substitute for Form W-8 is on file, to 31% backup withholding on
certain other payments from the Fund. Non-U.S. investors should consult their
tax advisers regarding such treatment and the application of foreign taxes to an
investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
41
<PAGE>
CALCULATION OF PERFORMANCE
The average annual total return of the Class A shares of the Fund, for
the one year period ended December 31, 1995 and since commencement of
operations, January 3, 1994 was 14.28% and 11.01%, respectively.
The average annual total return of the Class B shares of the fund for
the one year period ended December 31, 1995 and since commencement of
operations, January 3, 1994 was 14.11% and 10.78%, respectively.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 year and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made
at the beginning of the 1 year, 5 year and 10 year periods.
Because each share has its own sales charge and fee structure, the
classes have different performance results. In the case of Class A shares or
Class B shares, this calculation assumes the maximum sales charge is included in
the initial investment or the CDSC is applied at the end of the period. This
calculation also assumes that all dividends and distributions are reinvested at
net asset value on the 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.
The result of the above calculation is an average and is not the same
as the actual year-to-year results.
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.
42
<PAGE>
From time to time, in reports and promotional literature, the Fund's
total return 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, MICROPAL, INC., MORNINGSTAR, STANGER'S 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.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and
the allocation of brokerage commissions are made by the Advisers pursuant to
recommendations made by an investment committee, which consists of officers and
directors of the Advisers and affiliates and officers and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Advisers, 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 commission paid
by the issuer and transactions with dealers serving as market makers reflect a
"spread." Investments in debt securities are generally traded on a net basis
through dealers acting for their own account as principals and not as brokers;
no brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and other policies that the Trustees may determine, the Advisers
may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser or 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 Insurance 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 not make commitments to
allocate portfolio transactions upon any prescribed basis. While the Fund's
officers will be primarily responsible for the allocation of the Fund's
43
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brokerage business, their policies and practices in this regard must be
consistent with the foregoing and will at all times be subject to review by the
Trustees. For the year ended on December 31, 1995 and 1994, the Fund paid
negotiated brokerage commissions of $78,514 and $24,810, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Fund may pay a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies the Trustees may
adopt from time to time. During the period ended December 31, 1995, the Fund
paid no commissions to compensate brokers for research services such as industry
and company reviews and evaluations of the securities.
The Adviser's indirect parent, the Life Insurance Company, is the
indirect sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, two of which, Tucker Anthony Incorporated, John Hancock
Distributors, and Sutro & Company, Inc., are broker-dealers ("Affiliated
Brokers"). Pursuant to procedures established 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 period
ended December 31, 1995, the Fund did not execute any portfolio transactions
with affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Fund on
exchange transactions, subject, however, to the general policy of the Fund set
forth above and the procedures adopted by the Trustees pursuant to the
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 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 include elements of research and
related investment skills, such research and related skills will not be used by
the Affiliated Broker as a basis for negotiating commissions at a rate higher
than that determined in accordance with the above criteria. The Fund will not
effect principal transactions with Affiliated Brokers.
TRANSFER AGENT SERVICES
John Hancock Investors Services, Inc., P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Insurance Company, is
the transfer and dividend paying agent for the Fund. The Fund pays Investor
Services an annual fee for Class A shares of $16.00 per shareholder account and
for Class B shares of $18.50 per shareholder account plus certain out-of-pocket
expenses. These expenses are aggregated and charged to the Fund allocated to
each class on the basis of their relative net asset values.
CUSTODY OF PORTFOLIO
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Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and Investors Bank & Trust Company, 89 South Street,
Boston, Massachusetts 02111. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116. Ernst & Young audits and renders
an opinion on the Fund's annual financial statements and prepares the Fund's
annual Federal income tax return.
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APPENDIX A
Description of Bond Ratings
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment at some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-1
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STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated BB, and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
A-2
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FINANCIAL STATEMENTS
F-1
