JOHN HANCOCK
Growth and
Income Funds
[GRAPHIC]
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Prospectus
May 1, 1997*
This prospectus gives vital information about these funds. For your own benefit
and protection, please read it before you invest, and keep it on hand for future
reference.
Please note that these funds:
o are not bank deposits
o are not federally insured
o are not endorsed by any bank
or government agency
o are not guaranteed to
achieve their goal(s)
Like all mutual fund shares, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission, nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
*Revised December 8, 1997
Growth and Income Fund
Independence Equity Fund
Sovereign Balanced Fund
Sovereign Investors Fund
Special Value Fund
[LOGO] John Hancock Funds
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
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A fund-by-fund look at goals, Growth and Income Fund 4
strategies, risks, expenses
and financial history. Independence Equity Fund 6
Sovereign Balanced Fund 8
Sovereign Investors Fund 10
Special Value Fund 12
Policies and instructions for Your account
opening, maintaining and Choosing a share class 14
closing an account in any growth How sales charges are calculated 14
and income fund. Sales charge reductions and waivers 15
Opening an account 15
Buying shares 16
Selling shares 17
Transaction policies 19
Dividends and account policies 19
Additional investor services 20
Details that apply to the Fund details
growth and income funds Business structure 21
as a group. Sales compensation 22
More about risk 24
For more information back cover
<PAGE>
Overview
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GOAL OF THE GROWTH AND INCOME FUNDS
John Hancock growth and income funds invest for varying combinations of income
and capital appreciation. Each fund has its own emphasis with regard to income,
growth and total return, and has its own strategy and risk/reward profile.
Because you could lose money by investing in these funds, be sure to read all
risk disclosure carefully before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are looking for a more conservative alternative to exclusively
growth-oriented funds
o need an investment to form the core of a portfolio
o seek above-average total return over the long term
o are retired or nearing retirement
Growth and income funds may NOT be appropriate if you:
o are investing for maximum return over a long time horizon
o require a high degree of stability of your principal
THE MANAGEMENT FIRM
All John Hancock growth and income funds are managed by John Hancock Advisers,
Inc. Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Mutual Life Insurance Company and manages more than $22 billion in
assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip art] Portfolio securities The primary types of securities in which the
fund invests. Secondary investments are described in "More about risk" at the
end of the prospectus.
[Clip art] Risk factors The major risk factors associated with the fund.
[Clip art] Portfolio management The individual or group (including subadvisers,
if any) designated by the investment adviser to handle the fund's day-to-day
management.
[Clip art] Expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
[Clip art] Financial highlights A table showing the fund's financial performance
for up to ten years, by share class. A bar chart showing total return allows you
to compare the fund's historical risk level to those of other funds.
<PAGE>
Growth and Income Fund
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST TICKER SYMBOL
CLASS A: TAGRX CLASS B: TSGWX
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GOAL AND STRATEGY
[Clip art] The fund seeks the highest total return (capital appreciation plus
current income) that is consistent with reasonable safety of capital. To pursue
this goal, the fund invests in a diversified portfolio of stocks, bonds and
money market instruments. Although the fund may concentrate in any of these
securities, under normal circumstances it invests primarily in stocks. The fund
may not invest more than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[Clip art] The fund may invest in most types of securities, including:
o common and preferred stocks, warrants and convertible securities
o U.S. Government and agency debt securities, including mortgage-backed
securities
o corporate bonds, notes and other debt securities of any maturity
The fund may invest up to 15% of net assets in junk bonds, including convertible
securities, that may be rated as low as CC/Ca and their unrated equivalents.
The fund may invest up to 25% of assets in foreign securities (35% during
adverse U.S. market conditions); however, foreign securities typically have not
exceeded 5% of assets. 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.
RISK FACTORS
[Clip art] As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements.
To the extent that it invests in certain securities, the fund may be affected by
additional risks:
o foreign securities: currency, information, natural event and political risks
o mortgage-backed securities: extension and prepayment risks
These risks are defined in "More about risk" starting on page 24. This section
also details other higher-risk securities and practices that the fund may
utilize. Before you invest, please read "More about risk" carefully.
PORTFOLIO MANAGEMENT
[Clip art] Timothy E. Keefe, CFA, has been the leader of the fund's portfolio
management team since joining John Hancock Funds in July 1996. He is a senior
vice president of the adviser and has been in the investment business since
1987.
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INVESTOR EXPENSES
[Clip art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
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Shareholder transaction expenses Class A Class B
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Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
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Maximum sales charge imposed on
reinvested dividends none none
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Maximum deferred sales charge none(1) 5.00%
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Redemption fee(2) none none
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Exchange fee none none
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Annual fund operating expenses (as a % of average net assets)
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Management fee(3) 0.625% 0.625%
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12b-1 fee(4) 0.250% 1.00%
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Other expenses 0.355% 0.355%
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Total fund operating expenses 1.230% 1.980%
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Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
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Share class Year 1 Year 3 Year 5 Year 10
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Class A shares $62 $87 $114 $191
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Class B shares
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Assuming redemption
at end of period $70 $92 $127 $211
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Assuming no redemption $20 $62 $107 $211
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This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) There will be a one-time reduction of $150,000 in management fee in fiscal
year 1998.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly
pay more than the equivalent of the maximum permitted front-end sales
charge.
4 GROWTH AND INCOME FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[Clip art] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The table below was represented as a bar graph in the printed material.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 22.58 (9.86) 23.47 0.18 23.80 10.47 13.64 (2.39) 19.22 15.33 14.53(4)
(scale varies from fund to fund) four
months
</TABLE>
<TABLE>
<CAPTION>
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Class A - period ended: 8/87 8/88 8/89 8/90 8/91 8/92
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<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
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Net asset value, beginning of period $11.11 $12.04 $8.83 $10.19 $9.87 $11.77
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Net investment income (loss) 0.42 0.50 0.55 0.20 0.20 0.32(2)
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Net realized and unrealized gain
(loss) on investments 1.77 (1.73) 1.42 (0.18) 2.07 0.89
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Total from investment operations 2.19 (1.23) 1.97 0.02 2.27 1.21
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Less distributions
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Dividends from net investment income (0.38) (0.49) (0.61) (0.27) (0.19) (0.25)
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Distributions from net realized gain
on investments sold (0.88) (1.49) -- (0.07) (0.18) (0.30)
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Total distributions (1.26) (1.98) (0.61) (0.34) (0.37) (0.55)
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Net asset value, end of period $12.04 $8.83 $10.19 $9.87 $11.77 $12.43
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Total investment return at net asset
value(3) (%) 22.58 (9.86) 23.47 0.18 23.80 10.47
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Ratios and supplemental data
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Net assets, end of period (000s
omitted) ($) 90,974 69,555 70,513 63,150 77,461 89,682
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Ratio of expenses to average net
assets (%) 1.21 1.29 1.12 1.29 1.38 1.34
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Ratio of net investment income
(loss) to average net assets (%) 3.86 5.45 6.07 1.96 1.90 2.75
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Portfolio turnover rate (%) 138 120 214 69 70 119
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Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
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Class A - period ended: 8/93 8/94 8/95 8/96 12/96(1)
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<S> <C> <C> <C> <C> <C>
Per share operating performance
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Net asset value, beginning of period $12.43 $12.08 $11.42 $13.38 $15.07
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Net investment income (loss) 0.40(2) 0.32(2) 0.21(2) 0.19(2) 0.05(2)
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Net realized and unrealized gain
(loss) on investments 1.12 (0.61) 1.95 1.84 2.15
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Total from investment operations 1.52 (0.29) 2.16 2.03 2.20
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Less distributions
Dividends from net investment income (0.42) (0.37) (0.20) (0.19) (0.08)
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Distributions from net realized gain
on investments sold (1.45) -- -- (0.15) (1.57)
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Total distributions (1.87) (0.37) (0.20) (0.34) (1.65)
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Net asset value, end of period $12.08 $11.42 $13.38 $15.07 $15.62
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Total investment return at net asset
value(3) (%) 13.64 (2.39) 19.22 15.33 14.53(4)
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Ratios and supplemental data
Net assets, end of period (000s
omitted) ($) 115,780 121,160 130,183 139,548 163,154
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Ratio of expenses to average net
assets (%) 1.29 1.31 1.30 1.17 1.22(5)
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Ratio of net investment income
(loss) to average net assets (%) 3.43 2.82 1.82 1.28 0.85(5)
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Portfolio turnover rate (%) 107 195 99 74 26
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Average brokerage commission rate(6) ($) N/A N/A N/A 0.0665 0.0692
<CAPTION>
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Class B - period ended: 8/91(7) 8/92 8/93 8/94 8/95 8/96 12/96(1)
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<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
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Net asset value, beginning of period $11.52 $11.77 $12.44 $12.10 $11.44 $13.41 $15.10
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Net investment income (loss)(2) -- 0.23 0.30 0.24 0.13 0.08 0.01
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Net realized and unrealized gain (loss) on investments 0.25 0.89 1.12 (0.61) 1.96 1.85` 2.14
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Total from investment operations 0.25 1.12 1.42 (0.37) 2.09 1.93 2.15
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Less distributions:
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Dividends from net investment income -- (0.15) (0.31) (0.29) (0.12) (0.09) (0.02)
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Distributions from net realized gain on
investments sold -- (0.30) (1.45) -- -- (0.15) (1.57)
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Total distributions -- (0.45) (1.76) (0.29) (0.12) (0.24) (1.59)
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Net asset value, end of period $11.77 $12.44 $12.10 $11.44 $13.41 $15.10 $15.66
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Total investment return at net asset value(3) (%) 2.17(4) 9.67 12.64 (3.11) 18.41 14.49 14.15(4)
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Ratios and supplemental data
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Net assets, end of period (000s omitted) ($) 7,690 29,826 65,010 114,025 114,723 125,781 146,399
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Ratio of expenses to average net assets (%) 2.19(5) 2.07 2.19 2.06 2.03 1.90 1.98(5)
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Ratio of net investment income (loss) to average
net assets (%) 1.46(5) 2.02 2.53 2.07 1.09 0.55 0.10(5)
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Portfolio turnover rate (%) 70 119 107 195 99 74 26
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Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A 0.0665 0.0692
</TABLE>
(1) Effective December 31, 1996, the fiscal year end changed from August 31 to
December 31.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
(6) Per portfolio share traded. Required for fiscal years that began
September 1, 1995 or later.
(7) Class B shares commenced operations on August 22, 1991.
GROWTH AND INCOME FUND 5
<PAGE>
Independence Equity Fund
REGISTRANT NAME: JOHN HANCOCK CAPITAL SERIES
TICKER SYMBOL CLASS A: JHDCX CLASS B: JHIDX
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GOAL AND STRATEGY
[Clip art] The fund seeks above-average total return (capital appreciation plus
income). To pursue this goal, the fund invests primarily in a diversified stock
portfolio whose risk profile is similar to that of the S&P 500 index. The fund
does not invest exclusively in S&P 500 stocks.
In choosing stocks, the fund uses a proprietary computer model (NIXDEX) to
identify stocks that appear to be undervalued. The fund favors those undervalued
stocks that are selected by its model and that are believed to have improving
fundamentals. The fund may not invest more than 25% of assets in any one
industry.
PORTFOLIO SECURITIES
[Clip art] Under normal circumstances, the fund invests at least 65% of assets
in common stocks. It may also invest in warrants, preferred stocks and
investment-grade convertible debt securities.
The fund may invest in foreign securities in the form of American Depository
Receipts (ADRs) and U.S. dollar-denominated securities of foreign issuers traded
on U.S. exchanges. 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.
RISK FACTORS
[Clip art] As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements. Because the fund
follows an index-tracking strategy, it is likely to remain fully invested even
if the fund's managers anticipate a market downturn.
To the extent that it invests in foreign securities, the fund may be affected by
additional risks, such as information, natural event and political risks. These
risks are defined in "More about risk" starting on page 24. This section also
details other higher-risk securities and practices that the fund may utilize.
Please read "More about risk" carefully before you invest.
MANAGEMENT/SUBADVISER
[Clip art] The fund's investment decisions are made by a portfolio management
team, and no individual is primarily responsible for making them. Team members
are employees of Independence Investment Associates, Inc., the fund's subadviser
and a subsidiary of John Hancock Mutual Life Insurance Company.
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INVESTOR EXPENSES
[Clip art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
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Shareholder transaction expenses Class A Class B
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Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
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Maximum sales charge imposed on
reinvested dividends none none
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Maximum deferred sales charge none(1) 5.00%
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Redemption fee(2) none none
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Exchange fee none none
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Annual fund operating expenses (as a % of average net assets)
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Management fee(3) 0.75% 0.75%
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12b-1 fee(4) 0.30% 1.00%
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Other expenses 0.68% 0.68%
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Total fund operating expenses 1.73% 2.43%
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Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
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Share class Year 1 Year 3 Year 5 Year 10
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Class A shares $67 $102 $139 $244
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Class B shares
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Assuming redemption
at end of period $75 $106 $150 $259
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Assuming no redemption $25 $76 $130 $259
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This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Management fee includes a subadviser fee equal to 55% of the management fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
6 INDEPENDENCE EQUITY FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
[Clip art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The table below was represented as a bar graph in the printed material.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 10.95(5) 13.58 6.60 16.98 29.12 10.33(5)
(scale varies from fund to fund) seven
months
</TABLE>
<TABLE>
<CAPTION>
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Class A - period ended: 5/92(1) 5/93 5/94 5/95 5/96 12/96(2)
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<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
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Net asset value, beginning of period $10.00 $10.98 $12.16 $12.68 $14.41 $17.98
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.15 0.22 0.28(3) 0.32(3) 0.20(3) 0.13(3)
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Net realized and unrealized gain (loss)
on investments 0.94 1.25 0.52 1.77 3.88 1.72
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Total from investment operations 1.09 1.47 0.80 2.09 4.08 1.85
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Less distributions:
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Dividends from net investment income (0.11) (0.23) (0.23) (0.28) (0.22) (0.14)
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Distributions from net realized gain on
investments sold -- (0.06) (0.05) (0.08) (0.29) (0.27)
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Total distributions (0.11) (0.29) (0.28) (0.36) (0.51) (0.41)
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Net asset value, end of period $10.98 $12.16 $12.68 $14.41 $17.98 $19.42
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Total investment return at net asset
value(4) (%) 10.95(5) 13.58 6.60 16.98 29.12 10.33(5)
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Total adjusted investment return at net
asset value(4,6) (%) 9.28(5) 11.40 6.15 16.94 28.47 10.08(5)
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Ratios and supplemental data
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Net assets, end of period (000s omitted) ($) 2,622 12,488 66,612 101,418 14,878 31,013
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Ratio of expenses to average net assets (%) 1.66(7) 0.76 0.70 0.70 0.94 1.30(7)
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Ratio of adjusted expenses to average net
assets(8) (%) 3.38(7) 2.94 1.15 0.74 1.59 1.73(7)
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Ratio of net investment income (loss) to
average net assets (%) 1.77(7) 2.36 2.20 2.43 1.55 1.16(7)
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Ratio of adjusted net investment income
(loss) to average net assets(8) (%) 0.05(7) 0.18 1.75 2.39 0.90 0.73(7)
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Portfolio turnover rate (%) 53 53 43 71 157 35
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Fee reduction per share ($) 0.15 0.20 0.06(3) 0.005(3) 0.08(3) 0.05(3)
- -----------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate(9) ($) N/A N/A N/A N/A N/A 0.0326
<CAPTION>
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Class B - period ended: 5/96(1) 12/96(2)
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<S> <C> <C>
Per share operating performance
- -----------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.25 $17.96
- -----------------------------------------------------------------------------------------------
Net investment income (loss)(3) 0.09 0.05
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Net realized and unrealized gain (loss) on investments 2.71 1.72
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Total from investment operations 2.80 1.77
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Less distributions:
- -----------------------------------------------------------------------------------------------
Dividends from net investment income (0.09) (0.05)
Distributions from net realized gain on investments sold -- (0.27)
Total distributions (0.09) (0.32)
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Net asset value, end of period $17.96 $19.41
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Total investment return at net asset value(4) (%) 18.46(5) 9.83(5)
- -----------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,6) (%) 17.59(5) 9.58(5)
- -----------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 15,125 42,461
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Ratio of expenses to average net assets (%) 2.00(7) 2.00(7)
- -----------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(8) (%) 3.21(7) 2.43(7)
- -----------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 0.78(7) 0.45(7)
- -----------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) (0.43)(7) 0.02(7)
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 157 35
- -----------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.13 0.05
- -----------------------------------------------------------------------------------------------
Average brokerage commission rate(9) ($) N/A 0.0326
</TABLE>
(1) Class A and Class B shares commenced operations on June 10, 1991 and
September 7, 1995, respectively.
(2) Effective December 31, 1996, the fiscal year end changed from May 31 to
December 31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(7) Annualized.
(8) Unreimbursed, without fee reduction.
(9) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
INDEPENDENCE EQUITY FUND 7
<PAGE>
Sovereign Balanced Fund
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST
TICKER SYMBOL CLASS A: SVBAX CLASS B: SVBBX
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GOAL AND STRATEGY
[Clip art] The fund seeks current income, long-term growth of capital and
income, and preservation of capital. To pursue these goals, the fund allocates
its assets among a diversified mix of debt and equity securities. While the
relative weightings of debt and equity securities will shift over time, at least
25% of assets will be invested in senior debt securities. The fund may not
invest more than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[Clip art] The fund may invest in any type or class of security, including (but
not limited to) stocks, warrants, U.S. Government and agency securities,
corporate debt securities, investment-grade short-term securities, foreign
currencies and options and futures contracts.
The fund's stock investments are exclusively in companies that have increased
their dividend payout in each of the last ten years. Up to 25% of the fund's
bond investments may be rated from BB/Ba to C (junk bonds).
The fund may invest up to 35% of assets in foreign securities; however, these
typically have not exceeded 5% of assets. 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.
RISK FACTORS
[Clip art] As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements. To the extent that it
invests in certain securities, the fund may be affected by additional risks:
o junk bonds: above-average credit, market and other risks
o foreign securities: currency, information, natural event and political
risks
o mortgage-backed securities: extension and prepayment risks
These risks are listed and defined in "More about risk" starting on page 24.
This section also details other higher-risk securities and practices that the
fund may utilize. Please read "More about risk" carefully before you invest.
MANAGEMENT/SUBADVISER
[Clip art] John F. Snyder III and Barry H. Evans, CFA, lead the fund's portfolio
management team. Mr. Snyder, an investment manager since 1971, is an executive
vice president of Sovereign Asset Management Corporation, the fund's subadviser
and a subsidiary of John Hancock Funds. Mr. Evans, a senior vice president of
the adviser, has been in the investment business since joining John Hancock
Funds in 1986.
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INVESTOR EXPENSES
[Clip art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
- --------------------------------------------------------------------------------
Maximum sales charge imposed on
reinvested dividends none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge none(1) 5.00%
- --------------------------------------------------------------------------------
Redemption fee(2) none none
- --------------------------------------------------------------------------------
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee(3) 0.60% 0.60%
- --------------------------------------------------------------------------------
12b-1 fee(4) 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.39% 0.39%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.29% 1.99%
- --------------------------------------------------------------------------------
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $62 $89 $117 $198
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $70 $92 $127 $214
- --------------------------------------------------------------------------------
Assuming no redemption $20 $62 $107 $214
- --------------------------------------------------------------------------------
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Management fee includes a subadviser fee equal to 40% of the stock portion
of the management fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
8 SOVEREIGN BALANCED FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip art] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The table below was represented as a bar graph in the printed material.]
Volatility, as indicated by Class A
year-by-year total investment return (%) 2.37(4) 11.38 (3.51) 24.23 12.13
(scale varies from fund to fund)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/92(1) 12/93 12/94 12/95 12/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.00 $10.19 $10.74 $9.84 $11.75
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.04(2) 0.46 0.50 0.44(2) 0.41(2)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.20 0.68 (0.88) 1.91 0.99
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.24 1.14 (0.38) 2.35 1.40
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.05) (0.45) (0.50) (0.44) (0.41)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.14) (0.02) -- (0.47)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) (0.59) (0.52) (0.44) (0.88)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.19 $10.74 $9.84 $11.75 $12.27
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 2.37(4) 11.38 (3.51) 24.23 12.13
- ---------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(3,5) (%) 2.34(4) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 5,796 62,218 61,952 69,811 71,242
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 2.79(6) 1.45 1.23 1.27 1.29
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(7) (%) 2.94(6) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 3.93(6) 4.44 4.89 3.99 3.33
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.78(6) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 0 85 78 45 80
- ---------------------------------------------------------------------------------------------------------------------------
Fee reduction per share ($) 0.0016(2) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate(8) ($) N/A N/A N/A N/A 0.0700
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/92(1) 12/93 12/94 12/95 12/96
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.00 $10.20 $10.75 $9.84 $11.74
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.03(2) 0.37 0.43 0.36(2) 0.32(2)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.20 0.70 (0.89) 1.90 1.01
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.23 1.07 (0.46) 2.26 1.33
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.03) (0.38) (0.43) (0.36) (0.33)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.14) (0.02) -- (0.47)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.03) (0.52) (0.45) (0.36) (0.80)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.20 $10.75 $9.84 $11.74 $12.27
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 2.29(4) 10.63 (4.22) 23.30 11.46
- ---------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(3,5) (%) 2.26(4) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 14,311 78,775 79,176 87,827 90,855
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 3.51(6) 2.10 1.87 1.96 1.99
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(7) (%) 3.66(6) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 3.21(6) 4.01 4.25 3.31 2.63
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.06(6) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 0 85 78 45 80
- ---------------------------------------------------------------------------------------------------------------------------
Fee reduction per share ($) 0.0012(2) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate(8) ($) N/A N/A N/A N/A 0.0700
</TABLE>
(1) Class A and Class B shares commenced operations on October 5, 1992. This
period is covered by the report of other independent auditors (not included
herein).
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
SOVEREIGN BALANCED FUND 9
<PAGE>
Sovereign Investors Fund
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST
TICKER SYMBOL CLASS A: SOVIX CLASS B: SOVBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip art] The fund seeks long-term growth of capital and of income without
assuming undue market risks. Under normal circumstances, the fund invests most
of its assets in a diversified selection of stocks, although it may respond to
market conditions by investing in other types of securities such as bonds or
short-term securities. The fund may not invest more than 25% of assets in any
one industry.
Currently, the fund utilizes a "dividend performers" strategy in selecting
common stocks, investing exclusively in companies that have increased their
dividend payout in each of the last ten years.
PORTFOLIO SECURITIES
[Clip art] The fund may invest in most types of securities, including:
o common and preferred stocks, warrants and convertible securities
o U.S. Government and agency debt securities, including
mortgage-backed securities
o corporate bonds, notes and other debt securities of any maturity
The fund's bond investments are primarily investment-grade, although up to 5% of
assets may be invested in junk bonds rated as low as C and their unrated
equivalents. To a limited extent, the fund 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.
RISK FACTORS
[Clip art] As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements.
To the extent that the fund invests in higher-risk securities, it takes on
additional risks that could adversely affect its performance. Before you invest,
please read "More about risk" starting on page 24.
MANAGEMENT/SUBADVISER
[Clip art] John F. Snyder III and Barry H. Evans, CFA, lead the fund's portfolio
management team. Mr. Snyder, an investment manager since 1971, is an executive
vice president of Sovereign Asset Management Corporation, the fund's subadviser
and a subsidiary of John Hancock Funds. Mr. Evans, a senior vice president of
the adviser, has been in the investment business since joining John Hancock
Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
- --------------------------------------------------------------------------------
Maximum sales charge imposed on
reinvested dividends none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge none(1) 5.00%
- --------------------------------------------------------------------------------
Redemption fee(2) none none
- --------------------------------------------------------------------------------
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee(3) 0.57% 0.57%
- --------------------------------------------------------------------------------
12b-1 fee(4) 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.26% 0.34%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.13% 1.91%
- --------------------------------------------------------------------------------
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $61 $84 $109 $181
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $69 $90 $123 $203
- --------------------------------------------------------------------------------
Assuming no redemption $19 $60 $103 $203
- --------------------------------------------------------------------------------
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Management fee includes a subadviser fee equal to 40% of the management
fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
10 SOVEREIGN INVESTORS FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[Clip art] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The table below was represented as a bar graph in the printed material.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 0.28 11.23 23.76 4.38 30.48 7.23 5.71 (1.85) 29.15 17.57
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/87(1,2) 12/88(1) 12/89(1) 12/90(1) 12/91(1,3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.36 $10.96 $11.19 $12.60 $11.94
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.53 0.57 0.59 0.58 0.54
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.45) 0.65 2.01 (0.05) 3.03
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.08 1.22 2.60 0.53 3.57
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.58) (0.61) (0.61) (0.59) (0.53)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain
on investments sold (0.90) (0.38) (0.58) (0.60) (0.67)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.48) (0.99) (1.19) (1.19) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.96 $11.19 $12.60 $11.94 $14.31
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at net
asset value(5) (%) 0.28 11.23 23.76 4.38 30.48
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
Net assets, end of period (000s
omitted) ($) 40,564 45,861 66,466 83,470 194,055
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) 0.85 0.86 1.07 1.14 1.18
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) 3.96 4.97 4.80 4.77 4.01
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 59 35 40 55 67
- ------------------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/92(1) 12/93 12/94 12/95 12/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $14.31 $14.78 $15.10 $14.24 $17.87
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.47 0.44 0.46 0.40 0.36(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 0.54 0.39 (0.75) 3.71 2.77
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.01 0.83 (0.29) 4.11 3.13
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.45) (0.42) (0.46) (0.40) (0.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain
on investments sold (0.09) (0.09) (0.11) (0.08) (1.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.54) (0.51) (0.57) (0.48) (1.52)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.78 $15.10 $14.24 $17.87 $19.48
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at net
asset value(5) (%) 7.23 5.71 (1.85) 29.15 17.57
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
Net assets, end of period (000s
omitted) ($) 872,932 1,258,575 1,090,231 1,280,321 1,429,523
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) 1.13 1.10 1.16 1.14 1.13
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) 3.32 2.94 3.13 2.45 1.86
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 30 46 45 46 59
- ------------------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate(6) ($) N/A N/A N/A N/A 0.0696
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(7) 12/95 12/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.02 $14.24 $17.86
- ------------------------------------------------------------------------------------------------------
Net investment income (loss)(4) 0.38 0.27 0.21
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment (0.69) 3.71 2.77
- ------------------------------------------------------------------------------------------------------
Total from investment operations (0.31) 3.98 2.98
- ------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.36) (0.28) (0.22)
- ------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.11) (0.08) (1.16)
- ------------------------------------------------------------------------------------------------------
Total distributions (0.47) (0.36) (1.38)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.24 $17.86 $19.46
- ------------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) (2.04)(8) 28.16 16.67
- ------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 128,069 257,781 406,523
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.86(9) 1.90 1.91
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 2.57(9) 1.65 1.10
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 45 46 59
- ------------------------------------------------------------------------------------------------------
Average brokerage commission rate(6) ($) N/A N/A 0.0696
</TABLE>
(1) These periods are covered by the report of other independent auditors (not
included herein).
(2) Restated for 2-for-1 stock split effective April 29, 1987.
(3) On October 23, 1991, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(7) Class B shares commenced operations on January 3, 1994.
(8) Not annualized.
(9) Annualized.
SOVEREIGN INVESTORS FUND 11
<PAGE>
Special Value Fund
REGISTRANT NAME: JOHN HANCOCK CAPITAL SERIES
TICKER SYMBOL CLASS A: SPVAX CLASS B: SPVBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip art] The fund seeks capital appreciation, with income as a secondary
consideration. To pursue this goal, the fund invests primarily in stocks that
appear comparatively undervalued and are out of favor. The fund looks for
companies of any size whose earnings power or asset value does not appear to be
reflected in the current stock price, and whose stocks thus have potential for
appreciation. The fund also takes a "margin of safety" approach, seeking those
stocks that are believed to have limited downside risk. The fund may not invest
more than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[Clip art] 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. The fund may invest up to 15% of net assets in
junk bonds, including convertible securities, that may be rated as low as CC/Ca
and their unrated equivalents. 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.
RISK FACTORS
[Clip art] As with any growth and income fund, the value of your investment will
fluctuate. Even comparatively undervalued stocks typically fall in price during
broad market declines. Small- and medium-sized company stocks, which may
comprise a portion of the fund's portfolio, tend to be more volatile than the
market as a whole.
To the extent that it invests in foreign securities, the fund may be affected by
additional risks, such as currency, information, natural event and political
risks. These risks are defined in "More about risk" starting on page 24. This
section also details other higher-risk securities and practices that the fund
may utilize. Please read "More about risk" carefully before you invest.
PORTFOLIO MANAGEMENT
[Clip art] Timothy E. Keefe, CFA, has been the leader of the fund's portfolio
management team since August 1996. He is a senior vice president of the adviser.
He joined John Hancock Funds in July 1996 and has been in the investment
business since 1987.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
- --------------------------------------------------------------------------------
Maximum sales charge imposed on
reinvested dividends none none
- --------------------------------------------------------------------------------
Maximum deferred sales charge none(1) 5.00%
- --------------------------------------------------------------------------------
Redemption fee(2) none none
- --------------------------------------------------------------------------------
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.00% 0.00%
- --------------------------------------------------------------------------------
12b-1 fee(4) 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses (after limitation)(3) 0.69% 0.69%
- --------------------------------------------------------------------------------
Total fund operating expenses (after limitation)(3) 0.99% 1.69%
- --------------------------------------------------------------------------------
Example The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
- --------------------------------------------------------------------------------
Share class Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class A shares $60 $80 $102 $165
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $67 $83 $112 $181
- --------------------------------------------------------------------------------
Assuming no redemption $17 $53 $92 $181
- --------------------------------------------------------------------------------
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's agreement to limit expenses (except for 12b-1 and
transfer agent expenses). Without this limitation, management fees would be
0.70% for each class, other expenses would be 0.70% for each class, and
total fund operating expenses would be 1.70% for Class A and 2.40% for
Class B. The adviser may terminate this limitation in the future.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
12 SPECIAL VALUE FUND
<PAGE>
FINANCIAL HIGHLIGHTS
[Clip art] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The table below was represented as a bar graph in the printed material.]
Volatility, as indicated by Class A
year-by-year total investment return (%) 7.81(4) 20.26 12.91
(scale varies from fund to fund)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/94(1) 12/95 12/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.50 $8.99 $10.39
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss)(2) 0.18 0.21 0.14
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.48 1.60 1.17
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.66 1.81 1.31
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.17) (0.20) (0.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.21) (1.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.17) (0.41) (1.38)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.99 $10.39 $10.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 7.81(4) 20.26 12.91
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(3,5) (%) 7.30(4) 19.39 12.20
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 4,420 12,845 15,853
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.99(6) 0.98 0.99
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(7) (%) 4.98(6) 1.85 1.70
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 2.10(6) 2.04 1.31
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (1.89)(6) 1.17 0.60
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 0.3 9 72
- ------------------------------------------------------------------------------------------------------------------------------------
Fee reduction per share (2) ($) 0.34 0.09 0.08
- ------------------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate(8) ($) N/A N/A 0.0658
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(1) 12/95 12/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.50 $9.00 $10.38
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss)(2) 0.13 0.12 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.48 1.59 1.17
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.61 1.71 1.24
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.11) (0.12) (0.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.21) (1.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.11) (0.33) (1.31)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.00 $10.38 $10.31
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 7.15(4) 19.11 12.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(3,5) (%) 6.64(4) 18.24 11.43
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 3,296 16,994 22,097
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.72(6) 1.73 1.69
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(7) (%) 5.71(6) 2.60 2.40
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 1.53(6) 1.21 0.62
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (2.46)(6) 0.34 (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 0.3 9 72
- ------------------------------------------------------------------------------------------------------------------------------------
Fee reduction per share (2)($) 0.34 0.09 0.08
- ------------------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate(8) ($) N/A N/A 0.0658
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1994.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
SPECIAL VALUE FUND 13
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock growth and income funds offer two classes of shares, Class A
and Class B. Each class has its own cost structure, allowing you to choose the
one that best meets your requirements. Your financial representative can help
you decide.
- --------------------------------------------------------------------------------
Class A Class B
- --------------------------------------------------------------------------------
o Front-end sales charges, as o No front-end sales charge;
described below. There are all your money goes to work
several ways to reduce these for you right away.
charges, also described below.
o Higher annual expenses than
o Lower annual expenses than Class A shares.
Class B shares.
o A deferred sales charge on shares
you sell within six years
of purchase, as described below.
o Automatic conversion to Class A
shares after eight years,
thus reducing future annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
Sovereign Investors Fund offers Class C shares, which have their own expense
structure and are available to financial institutions only. Call Signature
Services for more information (see the back cover of this prospectus).
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
- --------------------------------------------------------------------------------
Up to $49,999 5.00% 5.26%
- --------------------------------------------------------------------------------
$50,000 - $99,999 4.50% 4.71%
- --------------------------------------------------------------------------------
$100,000 - $249,999 3.50% 3.63%
- --------------------------------------------------------------------------------
$250,000 - $499,999 2.50% 2.56%
- --------------------------------------------------------------------------------
$500,000 - $999,999 2.00% 2.04%
- --------------------------------------------------------------------------------
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments
- --------------------------------------------------------------------------------
Your investment CDSC on shares being sold
- --------------------------------------------------------------------------------
First $1M - $4,999,999 1.00%
- --------------------------------------------------------------------------------
Next $1 - $5M above that 0.50%
- --------------------------------------------------------------------------------
Next $1 or more above that 0.25%
- --------------------------------------------------------------------------------
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within six years of buying them. There is no CDSC on
shares acquired through reinvestment of dividends. The CDSC is based on the
original purchase cost or the current market value of the shares being sold,
whichever is less. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC on shares being sold
- --------------------------------------------------------------------------------
1st year 5.00%
- --------------------------------------------------------------------------------
2nd year 4.00%
- --------------------------------------------------------------------------------
3rd or 4th year 3.00%
- --------------------------------------------------------------------------------
5th year 2.00%
- --------------------------------------------------------------------------------
6th year 1.00%
- --------------------------------------------------------------------------------
After 6 years None
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the FIRST day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
14 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Signature Services to add these options.
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge, no obligation to invest (although initial investments must
total at least $250) and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of the prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize: If you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including: o
government entities that are prohibited from paying mutual fund sales charges o
financial institutions or common trust funds investing $1 million or more for
non-discretionary accounts o selling brokers and their employees and sales
representatives
o financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds o individuals transferring assets from an employee
benefit plan into a John Hancock fund
o members of an approved affinity group financial services program
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 members
(one-year CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
your financial representative or Signature Services, or consult the SAI.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion in
John Hancock funds: $500
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges section of the
application. By applying for privileges now, you can avoid the delay and
inconvenience of having to file an additional application if you want to
add privileges later.
5 Make your initial investment using the table on the next page. You and your
financial representative can initiate any purchase, exchange or sale of
shares.
YOUR ACCOUNT 15
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
- --------------------------------------------------------------------------------
By check
- --------------------------------------------------------------------------------
[Clip art] o Make out a check for the o Make out a check for the
investment amount, payable investment amount payable to
to "John Hancock Signature "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to investment slip from an
your financial account statement. If no
representative, or mail them slip is available, include a
to Signature Services (address note specifying the fund
on next page). name, your share class, your
account number and the
name(s) in which the account
is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail them
to Signature Services
(address on next page).
- --------------------------------------------------------------------------------
By exchange
- --------------------------------------------------------------------------------
[Clip art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
- --------------------------------------------------------------------------------
By wire
- --------------------------------------------------------------------------------
[Clip art] o Deliver your completed o Instruct your bank to wire
application to your the amount of your
financial representative, or investment to:
mail it to Signature First Signature Bank & Trust
Services. Account # 900000260
Routing # 211475000
o Obtain your account number Specify the fund name, your
by calling your financial share class, your account
representative or Signature number and the name(s) in
Services. which the account is
registered. Your bank may
o Instruct your bank to wire the charge a fee to wire funds.
amount of your investment to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the
new account number and the
name(s) in which the account
is registered. Your bank may
charge a fee to wire funds.
- --------------------------------------------------------------------------------
By phone
- --------------------------------------------------------------------------------
[Clip art] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing House
(ACH) system.
o Complete the
"Invest-By-Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your
account.
o Tell the Signature Services
representative the fund
name, your share class, your
account number, the name(s)
in which the account is
registered and the amount of
your investment.
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
16 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
- --------------------------------------------------------------------------------
By letter
- --------------------------------------------------------------------------------
[Clip art] o Accounts of any type. o Write a letter of
instruction or complete a
o Sales of any amount. stock power indicating the
fund name, your share
class, your account number,
the name(s) in which the
account is registered and
the dollar value or number
of shares you wish to sell.
o Include all signatures and
any additional documents
that may be required (see
next page).
o Mail the materials to
Signature Services.
o A check will be mailed to
the name(s) and address in
which the account is
registered, or otherwise
according to your letter of
instruction.
- --------------------------------------------------------------------------------
By phone
- --------------------------------------------------------------------------------
[Clip art] o Most accounts. o For automated service 24
hours a day using your
o Sales of up to $100,000. touch-tone phone, call the
EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John
Hancock Funds, call
Signature Services between
8 A.M. and 4 P.M. Eastern
Time on most business days.
- --------------------------------------------------------------------------------
By wire or electronic funds transfer (EFT)
- --------------------------------------------------------------------------------
[Clip art] o Requests by letter to sell o Fill out the "Telephone
any amount (accounts of any Redemption" section of your
type). new account application.
o Requests by phone to sell o To verify that the
up to $100,000 (accounts telephone redemption
with telephone redemption privilege is in place on an
privileges). account, or to request the
forms to add it to an
existing account, call
Signature Services.
o Amounts of $1,000 or more
will be wired on the next
business day. A $4 fee will
be deducted from your
account.
o Amounts of less than $1,000
may be sent by EFT or by
check. Funds from EFT
transactions are generally
available by the second
business day. Your bank may
charge a fee for this
service.
- --------------------------------------------------------------------------------
By exchange
- --------------------------------------------------------------------------------
[Clip art] o Accounts of any type. o Obtain a current prospectus
for the fund into which you
o Sales of any amount. are exchanging by calling
your financial representative
or Signature Services.
o Call your financial
representative or Signature
Services to request an
exchange.
- ---------------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- ---------------------------------------------
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
YOUR ACCOUNT 17
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past
30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clip art]
- --------------------------------------------------------------------------------
Owners of individual, joint, o Letter of instruction.
sole proprietorship, UGMA/UTMA
(custodial accounts for minors) o On the letter, the signatures and
or general partner accounts. titles of all persons authorized to
sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Owners of corporate or o Letter of instruction.
association accounts.
o Corporate resolution, certified
within the past twelve months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o If the names of all trustees are
not registered on the account,
please also provide a copy of the
trust document certified within the
past twelve months.
o Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor.
o Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
- --------------------------------------------------------------------------------
18 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time) by dividing a class's net assets
by the number of its shares outstanding.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Signature Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Signature Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are taken, Signature Services is not
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B shares
will continue to age from the original date and will retain the same CDSC rate
as they had before the exchange, except that the rate will change to the new
fund's rate if that rate is higher. A CDSC rate that has increased will drop
again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Signature Services. Certificated
shares can only be sold by returning the certificates to Signature Services,
along with a letter of instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally distribute most or all of their net earnings in
the form of dividends.The funds seek to pay income dividends quarterly, and
capital gains dividends, if any, are typically paid annually.
YOUR ACCOUNT 19
<PAGE>
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
Taxability of dividends As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Consequently, dividends you receive from a fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction for a portion of certain dividends they receive.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum) for
your first investment amount payable to "John Hancock Signature Services,
Inc." Deliver your check and application to your financial representative or
Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and there
is no limit to the number of payees you may have, as long as they are all on
the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial representative
or Signature Services.
Retirement plans John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SIMPLE plans, SEPs, 401(k) plans, 403(b) plans (including
TSAs) and other pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund (except tax-free income funds) with a low
minimum investment of $250 or, for some group plans, no minimum investment at
all. To find out more, call Signature Services at 1-800-225-5291.
20 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
How the funds are organized Each John Hancock growth and income fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others (see diagram). The board has the right, and
the obligation, to terminate the fund's relationship with any of these companies
and to retain a different company if the board believes it is in the
shareholders' best interests.
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock growth and income funds
may include individuals who are affiliated with the investment adviser. However,
the majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[The following information was represented as a flow chart in the printed
material.]
----------------
Shareholders
----------------
Distribution and
shareholder services
---------------------------------------------------
Financial services firms and
their representatives
Advise current and prospective share-
holders on their fund investments, often
in the context of an overall financial plan.
---------------------------------------------------
---------------------------------------------------
Principal distributor
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Markets the funds and distributes shares
through selling brokers, financial planners
and other financial representatives.
---------------------------------------------------
-------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Handles shareholder services, including record-
keeping and statements, distribution of dividends
and processing of buy and sell requests.
-------------------------------------------------------
Asset management
---------------------------------------------------
Subadvisers
Independence Investment
Associates, Inc.
53 State Street
Boston, MA 02109
Sovereign Asset
Management Corporation
One Westlakes
1235 Westlakes Drive
Berwyn, PA 19312
Provide portfolio management
services to certain funds.
---------------------------------------------------
----------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
----------------------------------------
--------------------------------------------
Custodian
Investors Bank & Trust Co.
200 Clarendon Street
Boston, MA 02116
Holds the funds' assets, settles all
portfolio trades and collects most of
the valuation data required for
calculating each fund's NAV.
--------------------------------------------
----------------------------------------
Trustees
Supervise the funds' activities.
----------------------------------------
FUND DETAILS 21
<PAGE>
Accounting compensation The funds compensate the adviser for performing tax and
financial management services. Annual compensation is not expected to exceed
0.02% of each fund's average net assets.
Portfolio trades In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock Mutual
Life Insurance Company, but only when the adviser believes no other firm offers
a better combination of quality execution (i.e., timeliness and completeness)
and favorable price.
Investment goals Except for Growth and Income Fund, Sovereign Balanced Fund and
Special Value Fund, each fund's investment goal is fundamental and may only be
changed with shareholder approval.
Diversification All of the growth and income funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock Funds,
pay compensation to financial services firms that sell the funds' shares. These
firms typically pass along a portion of this compensation to your financial
representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation authorizing annual fees of this type). The 12b-1 fee rates
vary by fund and by share class, according to Rule 12b-1 plans adopted by the
funds. The sales charges and 12b-1 fees paid by investors are detailed in the
fund-by-fund information. The portions of these expenses that are reallowed to
financial services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
- --------------------------------------------------------------------------------
Growth and Income $ 3,586,396 2.57%
- --------------------------------------------------------------------------------
Independence Equity $ 345,426 1.30%
- --------------------------------------------------------------------------------
Sovereign Balanced $ 3,393,763 3.88%
- --------------------------------------------------------------------------------
Sovereign Investors $ 10,068,331 3.00%
- --------------------------------------------------------------------------------
Special Value $ 964,684 4.81%
- --------------------------------------------------------------------------------
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
Initial compensation Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
Annual compensation Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
22 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Class A investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maximum
Sales charge reallowance First year Maximum total
paid by investors or commission service fee compensation(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Up to $49,999 5.00% 4.01% 0.25% 4.25%
- ------------------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 4.50% 3.51% 0.25% 3.75%
- ------------------------------------------------------------------------------------------------------------------------------
$100,000 - $249,999 3.50% 2.61% 0.25% 2.85%
- ------------------------------------------------------------------------------------------------------------------------------
$250,000 - $499,999 2.50% 1.86% 0.25% 2.10%
- ------------------------------------------------------------------------------------------------------------------------------
$500,000 - $999,999 2.00% 1.36% 0.25% 1.60%
- ------------------------------------------------------------------------------------------------------------------------------
Regular investments of
$1 million or more
- ------------------------------------------------------------------------------------------------------------------------------
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------
Next $1 or more above that -- 0.00% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------------------
Waiver investments(2) -- 0.00% 0.25% 0.25%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class B investments
- ------------------------------------------------------------------------------------------------------------------------------
Maximum
reallowance First year Maximum total
or commission service fee compensation
(% of offering price) (% of net investment) (% of offering price)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
FUND DETAILS 23
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. On the following page are brief descriptions
of these securities and practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the performance of a John
Hancock growth and income fund will be positive over any period of time.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Information risk The risk that key information about a security or market is
inaccurate or unavailable.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value.
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the
fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like.
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Common to all stocks and bonds and the
mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.
Political risk The risk of losses directly attributable to government or
political actions of any sort.
Prepayment risk The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
- --------------------------------------------------------------------------------
Analysis of funds with 5% or more in junk bonds(1)
- --------------------------------------------------------------------------------
Quality rating
(S&P/Moody's)(2) Sovereign Balanced Fund
Investment-Grade Bonds
---------------------------------------------------------------------------
AAA/Aaa 17.7%
---------------------------------------------------------------------------
AA/Aa 2.0%
---------------------------------------------------------------------------
A/A 5.1%
---------------------------------------------------------------------------
BBB/Baa 4.2%
- --------------------------------------------------------------------------------
Junk Bonds
---------------------------------------------------------------------------
BB/Ba 2.6%
---------------------------------------------------------------------------
B/B 2.1%
---------------------------------------------------------------------------
CCC/Caa 0.0%
---------------------------------------------------------------------------
CC/Ca 0.0%
---------------------------------------------------------------------------
C/C 0.0%
---------------------------------------------------------------------------
% of portfolio in bonds 33.7%
n Rated by Standard & Poor's or Moody's
(1) Average weighted quality distribution for the most recent fiscal year.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
24 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Higher-risk securities and practices
- --------------------------------------------------------------------------------
This table shows each fund's investment limitations as a percentage of portfolio
assets. In each case the principal types of risk are listed (see previous page
for definitions). Numbers in this table show allowable usage only; for actual
usage, consult the fund's annual/semi-annual reports.
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
* No policy limitation on usage; fund may be using currently
l Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
------------- ------------- -------------
Growth Independence Sovereign Sovereign Special
and Income Equity Balanced Investors Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment practices
Borrowing; reverse repurchase agreements
The borrowing of money from banks
or through reverse repurchase agreements
Leverage, credit risks 33.3 33.3 33 -- 33.3
Repurchase agreements The purchase of a
security that must later be sold back to
the issuer at the same price plus interest
Credit risk * * * * *
Securities lending The lending of securities
to financial institutions, which provide cash
or government securities as collateral
Credit risk.` 33 33.3 33.3 33.3 33.3
Short sales The selling of securities that
have been borrowed on the expectation
that the market price will drop
o Hedged. Hedged leverage, market,
correlation, liquidity, opportunity risks -- l l l l
o Speculative. Speculative leverage, market,
liquidity risks -- l -- -- l
Short-term trading Selling a security soon
after purchase. A portfolio engag ing in
short-term trading will have higher turnover
and transaction expenses. Market risk * * * * *
When-issued securities and forward commitments
The purchase or sale of securities for
delivery at a future date; market value may
change before delivery. Market, opportunity,
leverage risks * * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
Conventional securities
Non-investment-grade debt securities Debt
securities rated below BBB/Baa are
considered junk bonds. Credit, market,
interest rate, liquidity, valuation and
information risks 15 -- 25 5 15
Foreign securities Securities issued by
foreign companies, as well as American or
European depository receipts, which are
dollar-denominated securities typically issued
by American or European banks and are based on
ownership of securities issued by
foreign companies. Market, currency,
information, natural event, political risks 35 * 35 l 50
Restricted and illiquid securities Securities
not traded on the open market. May
include illiquid Rule 144A securities
Liquidity, valuation, market risks 10 15 15 15 15
- ------------------------------------------------------------------------------------------------------------------------------------
Leveraged derivative securities
Financial futures and options; securities
and index options Contracts involving
the right or obligation to deliver or
receive assets or money depending on the
performance of one or more assets or an
economic index
o Futures and related options. Interest
rate, currency, market, hedged or
speculative leverage, correlation,
liquidity, opportunity risks * l l -- *
o Options on securities and indices. Interest
rate, currency, market, hedged or
speculative leverage, correlation,
liquidity, credit, opportunity risks 10(1) l l l l
Currency contracts Contracts involving the
right or obligation to buy or sell a given
amount of foreign currency at a specified
price and future date
o Hedged. Currency, hedged leverage,
correlation, liquidity, opportunity risks * -- * -- *
o Speculative. Currency, speculative
leverage, liquidity risks -- -- -- -- --
------------- ------------- -------------
</TABLE>
(1) Applies to purchased options only.
FUND DETAILS 25
<PAGE>
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<PAGE>
[This page intentionally left blank.]
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
growth and income funds:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual/ semiannual report is included in the SAI.
A current SAI has been filed with
the Securities and Exchange
Commission and is incorporated
by reference (is legally a part of this prospectus).
To request a free copy of the current annual/semiannual report or SAI, please
write or call:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
Internet: www.jhancock.com/funds
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
John Hancock(R)
Financial Services
(C) 1996 John Hancock Funds, Inc.
GINPN 12/97
<PAGE>
JOHN HANCOCK INDEPENDENCE
EQUITY FUND
Class A and B Shares
Statement of Additional Information
May 1, 1997 as revised December 8, 1997
This Statement of Additional Information provides information about John Hancock
Independence Equity Fund (the "Fund"), in addition to the information that is
contained in the combined Growth and Income Funds' Prospectus, dated May 1, 1997
as revised December 8, 1997 (the "Prospectus"). The Fund is a diversified series
of John Hancock Capital Series (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
1-(800)-225-5291
TABLE OF CONTENTS
Page
----
Organization of the Fund ................................................... 2
Investment Objective and Policies .......................................... 2
Investment Restrictions .................................................... 11
Those Responsible for Management ........................................... 13
Investment Advisory and Other Services ..................................... 22
Distribution Contracts ..................................................... 25
Net Asset Value ............................................................ 27
Initial Sales Charge on Class A Shares ..................................... 28
Deferred Sales Charge on Class B Shares .................................... 30
Special Redemptions ........................................................ 33
Additional Services and Programs ........................................... 34
Description of the Fund's Shares ........................................... 36
Tax Status ................................................................. 37
Calculation of Performance ................................................. 41
Brokerage Allocation ....................................................... 42
Transfer Agent Services .................................................... 44
Custody of Portfolio ....................................................... 44
Independent Auditors ....................................................... 45
Appendix A - Description of Bond Ratings ................................... A-1
Financial Statements ....................................................... F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a series of the Trust, an open-end investment management company
organized as a Massachusetts business trust in 1984 under the laws of The
Commonwealth of Massachusetts. The Fund was established in 1991.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect, wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862 with national headquarters at John Hancock Place, Boston,
Massachusetts .
On October 1, 1992, the Fund changed its name from John Hancock Growth and
Income Fund to John Hancock Diversified Core Equity Fund, and on July 1, 1993,
from John Hancock Diversified Core Equity Fund to John Hancock Independence
Diversified Core Equity Fund. On June 3, 1996, the Fund changed its name from
John Hancock Independence Diversified Core Equity Fund to John Hancock
Independence Equity Fund, the Fund's current name.
The Fund has one sub-adviser: Independent Investment Associates, Inc. ("IIA"
or "Sub-Adviser") which is a subsidiary of the Life Company.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus.
The investment objective of the Fund is to seek above-average total return,
consisting of capital appreciation and income. The Fund will diversify its
investments to create a portfolio with a risk profile and characteristics
similar to the Standard & Poor's 500 Stock Index. Consequently, the Fund will
invest in a number of industry groups without concentration in any particular
industry. The Fund's investments will be subject to the market fluctuation and
risks inherent in all securities. There is no assurance that the Fund will
achieve its investment objective.
Under normal conditions, the Fund invests principally (at least 65% of its
assets) in common stocks. The Fund will focus on securities of companies which
the Fund's management believes offer outstanding capital growth and/or income
potential over both the intermediate and long term. The Fund's management
considers stocks which combine value and improving fundamentals to be attractive
investments for the Fund. In determining what constitutes "value," the Fund's
management seeks stocks with the following attributes: high growth relative to
price/earnings ratio, rising dividend stream, and high asset value. To determine
whether a company's stock exhibits improving fundamentals, the Fund's management
looks for accelerating earnings growth, positive earnings surprises when
compared to the market's expectations and favorable cyclical timing.
The Sub-Adviser also uses a quantitative, multifactor proprietary stock-ranking
model called "Cybercode." "Cybercode" is fueled by estimates generated by the
Sub-Adviser's in-house team of professional securities analysts. All of the
firm's analysts are focused on tasks that are important for the Cybercode
ranking system: projecting current year and next year's earnings and cash
2
<PAGE>
flows; developing five-year growth forecasts; and understanding the strategic
plan of the companies they follow, and how this plan might affect capital
expenditures and stock dividends. The Sub-Adviser's research analysts
concentrate on 500 stocks, a closely followed subset of the firm's unbiased
3,000 stock universe. The macroeconomic assumptions needed to forecast
individual company progress are determined by senior investment professionals
and worked into the approach by the research analysts. This distinguishes the
Sub-Adviser's process as a bottom-up, stock picking approach.
Using the analysts' inputs, the ranking model (Cybercode) evaluates each stock
in the stock selection universe on discrete criteria and scores each for how
cheap they are and how much their fundamentals are improving. The result is a
listing of the selection universe from most attractive to least attractive. The
top stock on the ranked list exhibits the most favorable combination of
cheapness and improving fundamentals; the bottom stock the least favorable.
Through this process, the Sub-Adviser seeks to avoid bad stocks when
constructing diversified core equity portfolios.
The Sub-Adviser uses an investment strategy it calls NIXDEX. To produce NIXDEX
portfolios, the Sub-Adviser generally excludes from consideration the bottom two
quintiles of its ranked selection universe and optimizes the remaining stocks to
market-like risk exposures. NIXDEX portfolios have a risk profile like that of
the S&P 500, but by "nixing" the bad stocks at the time of the Fund's purchase,
the Sub-Adviser seeks to produce consistent excess returns in most types of
market environments. The Sub-Adviser reserves the right to purchase from the
bottom two quintiles under unusual market conditions when needed for
diversification.
Ratings as Investment Criteria. In general, the ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") represent
the opinions of these agencies as to the quality of the securities which they
rate. It should be emphasized, however, that such ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Fund as initial criteria for the selection of portfolio securities. Among
the factors which will be considered are the long-term ability of the issuer to
pay principal and interest and general economic trends. Appendix A contains
further information concerning the ratings of Moody's and S&P and their
significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund.
Fixed Income Securities. Under normal market conditions, the Fund may invest in
fixed income securities (including debt securities and preferred stocks) that
are rated Baa or better by Moody's or BBB or better by S&P or, if unrated,
determined to be of comparable quality by the Adviser and the Sub-Adviser
("investment grade debt securities"). The value of fixed income securities
varies inversely with changes in the prevailing levels of interest rates. In
addition, debt securities rated BBB or Baa and unrated debt securities of
comparable quality are considered medium grade obligations and have speculative
characteristics. Adverse changes in economic conditions or other circumstances
are more likely to lead to weakened capacity to make principal and interest
payment than in the case of higher grade obligations.
For temporary defensive purposes, the Fund may invest up to 100% of its assets
in investment grade debt securities of any type or maturity.
3
<PAGE>
Investment in Foreign Securities. The Fund may invest in the securities of
foreign issuers in the form of sponsored and unsponsored American Depository
Receipts ("ADRs") and U.S. dollar-denominated securities of foreign issuers
traded on U.S. exchanges. ADRs (sponsored and unsponsored) are receipts,
typically issued by U.S. banks, which evidence ownership of underlying
securities issued by a foreign corporation. ADRs are publicly traded on a U.S.
stock exchange or in the over-the-counter market. An investment in foreign
securities including ADRs may be affected by changes in currency rates and in
exchange control regulations. Issuers of unsponsored ADRs are not contractually
obligated to disclose material information including financial information, in
the United States and, therefore, there may not be a correlation between such
information and the market value of the unsponsored ADR. Foreign companies may
not be subject to accounting standards or government supervision comparable to
U.S. companies, and there is often less publicly available information about
their operations. Foreign companies may also be affected by political or
financial inability abroad. These risk considerations may be intensified in the
case of investments in ADRs of foreign companies that are located in emerging
market countries. ADRs of companies located in these countries may have limited
marketability and may be subject to more abrupt or erratic price movements.
Repurchase Agreements. In a repurchase agreement the Fund buys a security for a
relatively short period (usually not more than 7 days) subject to the obligation
to sell it back to the issuer at a fixed time and price, plus accrued interest.
The Fund will enter into repurchase agreements only with member banks of the
Federal Reserve System and with "primary dealers" in U.S. Government securities.
The Adviser will continuously monitor the creditworthiness of the parties with
whom the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities and could experience losses, including the
possible decline in the value of the underlying securities during the period in
which the Fund seeks to enforce its rights thereto, possible subnormal levels of
income, 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 require those securities
upon effecting their repurchase. To minimize various risks associated with
reverse repurchase agreements, the Fund will establish and maintain with the
Fund's custodian a separate account consisting of liquid securities, of any type
or maturity, in an amount at least equal to the repurchase prices of the
securities (plus any accrued interest thereon) under such agreements. In
addition, the Fund will not enter into reverse repurchase agreements or borrow
money, except from banks as a temporary measure for extraordinary emergency
purposes in amounts not to exceed 33 1/3% of the value of the Fund's total
assets (including the amount borrowed) taken at market value. The Fund will not
4
<PAGE>
leverage to attempt to increase income. The Fund will not purchase securities
while outstanding borrowings exceed 5% of the Fund's total assets. The Fund will
enter into reverse repurchase agreements only with federally insured banks or
savings and loan associations which are approved in advance as being
creditworthy by the Trustees. Under procedures established by the Trustees, the
Adviser will monitor the creditworthiness of the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. However, the Fund will not invest more than 15% of its
net assets in illiquid investments. If the Trustees determine, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Options on Securities and Securities Indices. The Fund may purchase and write
(sell) call and put options on securities in which it may invest or on any
securities index based on securities in which it may invest. These options may
be listed on national domestic securities exchanges or traded in the
over-the-counter market. The Fund may write covered put and call options and
purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by the Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position. A written call option on
securities is typically covered by maintaining the securities that are subject
to the option in a segregated account. The Fund may cover call options
5
<PAGE>
on a securities index by owning securities whose price changes are expected to
be similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. Put options may
also be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
6
<PAGE>
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates or securities prices, the Fund
may purchase and sell various kinds of futures contracts and purchase and write
call and put options on these futures contracts. The Fund may also enter into
closing purchase and sale transactions with respect to any of these contracts
and options. The futures contracts may be based on various securities (such as
U.S. Government securities), securities indices and any other financial
instruments and indices. All futures contracts entered into by the Fund are
traded on U.S. exchanges or boards of trade that are licensed, regulated or
approved by the Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire. When
interest rates are rising or securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, the Fund, through
7
<PAGE>
the purchase of futures contracts, can attempt to secure better rates or prices
than might later be available in the market when it effects anticipated
purchases.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities, to alter the
investment characteristics of portfolio securities or to gain or increase its
exposure to a particular securities market.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
8
<PAGE>
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish with
the custodian a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily
9
<PAGE>
illiquid and difficult to price. Commodity exchanges may also establish daily
limits on the amount that the price of a futures contract or related option can
vary from the previous day's settlement price. Once the daily limit is reached,
no trades may be made that day at a price beyond the limit. This may prevent the
Fund from closing out positions and limiting its losses
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers and financial institutions if the loan is collateralized by cash or U.S.
Government securities according to applicable regulatory requirements. The Fund
may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrant and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
Short Sales. The Fund may engage in short sales "against the box". In a short
sale against the box, the Fund agrees to sell at a future date a security that
it either contemporaneously owns or has the right to acquire at no extra cost.
If the price of the security has declined at the time the Fund is required to
deliver the security, the Fund will benefit from the difference in the price. If
the price of the security has increased, the Fund will be required to pay the
difference.
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, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at
10
<PAGE>
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.
Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments or to take advantage of yield disparities between various fixed
income securities in order to realize capital gains or improve income.
Short-term trading may have the effect of increasing portfolio turnover rate. A
high rate of portfolio turnover (100% or greater) involves correspondingly
greater brokerage expenses. The Fund's portfolio turnover rate is set forth in
the table under the caption "Financial Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of a majority of the Fund's outstanding voting
securities which, as used in the Prospectus and this Statement of Additional
Information, means approval by the lesser of (1) the holders of 67% or more of
the Fund's shares represented at a meeting if more than 50% of the Fund's
outstanding shares are present in person or by proxy at that meeting or (2) more
than 50% of the Fund's outstanding shares.
The Fund may not:
(1) Issue senior securities, except as permitted by paragraphs (2), (6) and
(7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts, forward commitments and repurchase agreements
entered into in accordance with the Fund's investment policies, and the
pledge, mortgage or hypothecation of the Fund's assets within the meaning
of paragraph (3) below, are not deemed to be senior securities.
(2) Borrow money, except from banks as a temporary measure for extraordinary
emergency purposes in amounts not to exceed 33 1/3% of the value of the
Fund's total assets (including the amount borrowed) taken at market value.
The Fund will not leverage to attempt to increase income. The Fund will
not purchase securities while outstanding borrowings exceed 5% of the
Fund's total assets.
(3) Pledge, mortgage or hypothecate its assets, except to secure indebtedness
permitted by paragraph (2) above and then only if such pledging,
mortgaging or hypothecating does not exceed 33 1/3% of the Fund's total
assets taken at market value.
(4) Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the 1933 Act.
(5) Purchase or sell real estate or any interest therein, except that the Fund
may invest in securities of corporate or governmental entities secured by
real estate or marketable interests therein or securities issued by
companies that invest in real estate or interests therein.
11
<PAGE>
(6) Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of publicly distributed debt
securities, bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether or
not the purchase is made upon the original issuance of the securities.
(7) Invest in commodities or in commodity contracts or in puts, calls, or
combinations of both, except options on securities, securities indices and
currency, futures contracts on securities, securities indices and currency
and options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
(8) Purchase the securities of issuers conducting their principal 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 such investment. This limitation does not
apply to investments in obligations of the U.S. Government or any of its
agencies or instrumentalities.
(9) Purchase securities of an issuer (other than the U.S. Government, its
agencies or instrumentalities), if
(a) such purchase would cause more than 5% of the Fund's total
assets taken at market value to be invested in the securities of
such issuer, or
(b) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund.
In connection with the lending of portfolio securities under paragraph (6)
above, such loans must at all times be fully collateralized and the Fund's
custodian must take possession of the collateral either physically or in book
entry form. Securities used as collateral must be marked to market daily.
Non-Fundamental Investment Restrictions. The following restrictions are
designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
The Fund may not:
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the management
of the Adviser or Sub-Adviser to save commissions or to average prices
among them is not deemed to result in a joint securities trading account.
(b) Purchase securities on margin or make short sales, except in connection
with arbitrage transactions or unless, by virtue of its ownership of other
securities, the Fund has the right to obtain securities equivalent in kind
and amount to the securities sold and, if the right is conditional, the
sale is made upon the same conditions, except that the Fund may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities.
12
<PAGE>
(c) 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.
(d) Invests more than 15% of its net assets in illiquid securities.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by the Trustees of the Trust who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Trust are also Officers or Directors of the Adviser, or Officers
or Directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
13
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Edward J. Boudreau, Jr. * Trustee, Chairman and Chairman, Director and
101 Huntington Avenue Chief Executive Officer Chief Executive Officer,
Boston, MA 02199 (1, 2) the Adviser; Chairman,
October 1944 Trustee and Chief
Executive Officer, The
Berkeley Financial Group
("The Berkeley Group");
Chairman and Director, NM
Capital Management, Inc.
("NM Capital"), John
Hancock Advisers
International Limited
("Advisers International")
and Sovereign Asset
Management Corporation
("SAMCorp"); Chairman,
Chief Executive Officer
and President, John
Hancock Funds, Inc. ("John
Hancock Funds"); Chairman,
First Signature Bank and
Trust Company; Director,
John Hancock Insurance
Agency, Inc. ("Insurance
Agency, Inc."), John
Hancock Advisers
International (Ireland)
Limited ("International
Ireland"), John Hancock
Capital Corporation and
New England/Canada
Business Council; Member,
Investment Company
Institute Board of
Governors; Director, Asia
Strategic Growth Fund,
Inc.; Trustee, Museum of
Science; Director, John
Hancock Freedom Securities
Corporation (until
September 1996); Director,
John Hancock Signature
Services, Inc. ("Signature
Services") (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may
generally exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
14
<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,
1216 Falls Boulevard Emeritus, Boston
Fort Lauderdale, FL 33327 University School of Law
June 1931 (until 1997); Trustee,
Brookline Savings Bank.
Richard P. Chapman, Jr. Trustee (1, 3) President, Brookline
160 Washington Street Savings Bank; Director,
Brookline, MA 02147 Federal Home Loan Bank
February 1935 of Boston (lending);
Director, Lumber
Insurance Companies
(fire and casualty
insurance); Trustee,
Northeastern University
(education); Director,
Depositors Insurance
Fund, Inc. (insurance).
William J. Cosgrove Trustee (3) Vice President, Senior
20 Buttonwood Place Banker and Senior Credit
Saddle River, NJ 07458 Officer, Citibank, N.A.
January 1933 (retired September
1991); Executive Vice
President, Citadel Group
Representatives, Inc.;
EVP Resource Evaluation,
Inc. (consulting) (until
October 1993); Trustee,
the Hudson City Savings
Bank (since 1995).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may
generally exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
15
<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
RR2 Box 480 the Board and
Woodstock, VT 05091 Distinguished Senior
July 1939 Fellow, Institute for
Sustainable Communities,
Montpelier, Vermont (since
1991); Dean Vermont Law
School (until 1991);
Director, Air and Water
Technologies Corporation
(environmental services
and equipment), Niagara
Mohawk Power Company
(electric services) and
Mitretek Systems
(governmental consulting
services).
Leland O. Erdahl Trustee (3) Director, Santa Fe
8046 Mackenzie Court Ingredients Company of
Las Vegas, NV 89129 California, Inc. and
December 1928 Santa Fe Ingredients
Company, Inc. (private
food processing
companies), Uranium
Resources, Inc.;
President, Stolar, Inc.
(1987-1991); President,
Albuquerque Uranium
Corporation (1985-1992);
Director,
Freeport-McMoRan Copper
& Gold Company, Inc.,
Hecla Mining Company,
Canyon Resources
Corporation and Original
Sixteen to One Mines,
Inc. (1984-1987 and
1991-1995) (management
consultant).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may
generally exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
16
<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,
Venture Capital Partners Healer & Co., (venture
160 Federal Street capital management firm)
23rd Floor (since 1980); Prior to
Boston, MA 02110 1980, headed the venture
November 1932 capital group at Bank of
Boston Corporation.
Gail D. Fosler Trustee (3) Vice President and Chief
3054 So. Abingdon Street Economist, The
Arlington, VA 22206 Conference Board
December 1947 (non-profit economic and
business research);
Director, Unisys Corp.;
and H.B. Fuller Company.
William F. Glavin Trustee (3) President, Babson
120 Paget Court - John's College (until 1997);
Island Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June
March 1932 1989); Director, Caldor
Inc., Reebok, Ltd.
(since 1994) and Inco
Ltd.
Anne C. Hodsdon * Trustee and President President, Chief
101 Huntington Avenue (1,2) Operating Officer and
Boston, MA 02199 Director, the Adviser;
April 1953 Trustee, The Berkeley
Group; Director, John
Hancock Funds, Advisers
International, Insurance
Agency, Inc. and
International Ireland;
President and Director,
SAMCorp. and NM Capital;
Executive Vice
President, the Adviser
(until December 1994);
Director, Signature
Services (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may
generally exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
Dr. John A. Moore Trustee (3) President and Chief
Institute for Evaluating Executive Officer,
Health Risks Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since
Washington, DC 20006-1602 September 1989).
February 1939
Patti McGill Peterson Trustee (3) Cornell Institute of
Cornell University Public Affairs, Cornell
Institute of Public University (since August
Affairs 1996); President
364 Upson Hall Emeritus of Wells
Ithica, NY 14853 College and St. Lawrence
May 1943 University; Director,
Niagara Mohawk Power
Corporation (electric
utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee (3) Professor of Business
2 Gray Gardens East Administration at
Cambridge, MA 02138 Harvard University
September 1931 Graduate School of
Business Administration
(since 1961).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may
generally exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
Richard S. Scipione * Trustee (1) General Counsel, John
John Hancock Place Hancock Life Company;
P.O. Box 111 Director, the Adviser,
Boston, MA 02117 Advisers International,
August 1937 John Hancock Funds, John
Hancock Distributors,
Inc., Insurance Agency,
Inc., John Hancock
Subsidiaries, Inc.,
SAMCorp. and NM Capital;
Trustee, The Berkeley
Group; Director, JH
Networking Insurance
Agency, Inc.; Director,
Signature Services
(until January 1997).
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat
259C Commercial Bld. Marwick LLP (retired
Lauderdale, FL 33308 June 1990).
November 1932
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief
101 Huntington Avenue Investment Officer (2) Investment Officer, the
Boston, MA 02199 Adviser; Director, the
July 1938 Adviser, Advisers
International, John
Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank
Fund and NM Capital;
Senior Vice President, The
Berkeley Group; President,
the Adviser (until
December 1994); Director,
Signature Services (until
January 1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may
generally exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Senior Vice President,
101 Huntington Avenue Chief Financial Officer the Adviser, The
Boston, MA 02199 Berkeley Group, John
February 1935 Hancock Funds.
John A. Morin Vice President Vice President and
101 Huntington Avenue Secretary, the Adviser,
Boston, MA 02199 The Berkeley Group,
July 1950 Signature Services and
John Hancock Funds;
Secretary, NM Capital and
SAMCorp.; Clerk, Insurance
Agency, Inc.; Counsel,
John Hancock Mutual Life
Insurance Company (until
February 1996), and Vice
President of John Hancock
Distributors, Inc. (until
April 1994).
Susan S. Newton Vice President and Vice President, the
101 Huntington Avenue Secretary Adviser; John Hancock
Boston, MA 02199 Funds, Signature
March 1950 Services and The
Berkeley Group; Vice
President, John Hancock
Distributors, Inc.
(until April 1994).
James J. Stokowski Vice President and Vice President, the
101 Huntington Avenue Treasurer Adviser.
Boston, MA 02199
November 1946
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may
generally exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
20
<PAGE>
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of March 28, 1997, the officers and Trustees of the Trust as a group owned
less than 1% of the outstanding shares of the Fund. To the knowledge of the
Trust, only the following persons owned of record or beneficially 5% or more of
any class of the Fund's outstanding securities:
<TABLE>
<CAPTION>
Percentage of
Number of Shares Total Outstanding
Name and Address of of Beneficial Shares of the
Shareholders Class of Shares Interest Owned Class of the Fund
- ------------ --------------- -------------- -----------------
<S> <C> <C> <C>
MLPF&S For The A 232,514 9.93%
Sole Benefit Of Its Customers
Attn Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-6484
MLPF&S For The B 260,624 7.75%
Sole Benefit Of Its Customers
Attn Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Boudreau, Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and
receive no compensation from the Fund for their services.
21
<PAGE>
Total Compensation From All
Aggregate Compensation Funds in John Hancock Fund
Independent Trustees From the Fund(*) Complex to Trustees(**)
- -------------------- ---------------- -----------------------
Dennis S. Aronowitz $ 40 $ 72,450
Richard P. Chapman, Jr.+ $ 43 $ 75,200
William J. Cosgrove+ $ 40 $ 72,450
Douglas M. Costle $ 43 $ 75,350
Leland O. Erdahl $ 40 $ 72,350
Richard A. Farrell $ 43 $ 75,350
Gail D. Fosler $ 40 $ 68,450
William F. Glavin+ $ 40 $ 72,250
Bayard Henry*** $ -- $ 23,700
Dr. John A. Moore $ 40 $ 68,350
Patti McGill Peterson $ 40 $ 72,100
John W. Pratt $ 40 $ 72,350
Edward J. Spellman $ 43 $ 73,950
------ ---------
Total $ 492 $ 894,300
* Compensation made for the seven months from June 1, 1996 to December 31, 1996.
** Total compensation paid by the John Hancock Fund Complex to the Independent
Trustees is as of the calendar year ended December 31, 1996. As of this date,
there were sixty-seven funds in the John Hancock Fund Complex of which each of
these independent trustees served on thirty-five of the funds.
*** Mr. Henry retired from his position as a Trustee effective April 26,
1996.
+ As of December 31, 1996, the value of the aggregate deferred compensation from
all funds in the John Hancock Fund Complex for Mr. Chapman was $63,164, for Mr.
Cosgrove was $131,317 and for Mr. Glavin was $109,059 under the John Hancock
Deferred Compensation Plan for Independent Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and more than $22 billion in assets under management in
its capacity as investment adviser to the Fund and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over 1,080,000 shareholders. The Adviser is an affiliate of
the Life Company, one of the most recognized and respected financial
institutions in the nation. With total assets under management of more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries a high rating from Standard & Poor's and A. M.
Best's. Founded in 1862, the Life Company has been serving clients for over 130
years.
The Sub-Adviser, located at 53 State Street, Boston, Massachusetts 02109, was
organized in 1982 and currently manages over $17 billion in assets for primarily
institutional clients. The Sub-Adviser is a wholly-owned indirect subsidiary of
the Life Company.
22
<PAGE>
The Fund has entered into an investment management contract with the Adviser
(the "Advisory Agreement") which was approved by the Fund's shareholders. As
manager and investment adviser, the Adviser will: (a) furnish continuously an
investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The 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 overall 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.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund; the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser an investment monthly a fee based on a stated percentage of the average
of the daily net assets of the Fund as follows:
Net Asset Value Annual Rate
--------------- -----------
First $750,000,000 0.75%
Amount over $750,000,000 0.70%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser, the Sub-Adviser or their respective
affiliates provide investment advice. Because of different investment objectives
or other factors, a particular security may be bought for one or more funds or
clients when one or more are selling the same security. If opportunities for
purchase or sale of securities by the Adviser or Sub-Adviser for the Fund or for
other funds or clients for which the Adviser or Sub-Adviser renders investment
advice arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds or
clients in a manner deemed equitable to all of them. To the extent that
23
<PAGE>
transactions on behalf of more than one client of the Adviser, the Sub-Adviser
or their respective affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
Pursuant to the investment management contract and sub-investment management
contract, the Adviser and Sub-Adviser are not liable for any error of judgment
or mistake of law or for any loss suffered by the Fund in connection with the
matters to which their respective contract relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser or
Sub-Adviser in the performance of their duties or from their reckless disregard
of the obligations and duties under the applicable contract.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If the investment management contract is no longer in effect,
the Fund (to the extent that it lawfully can) will cease to use such name or any
other name indicating that it is advised by or otherwise connected with the
Adviser. In addition, the Adviser or the Life Company may grant the nonexclusive
right to use the name "John Hancock" or any similar name to any other
corporation or entity, including but not limited to any investment company of
which the Life Company or any subsidiary or affiliate thereof or any successor
to the business of any subsidiary or affiliate thereof shall be the investment
adviser.
Under the subadvisory contract, the Fund may use the name "Independence" or any
name derived from or similar to it only for so long as the sub-investment
management contract or any extension, renewal or amendment thereof remains in
effect. If the sub-investment management contract is no longer in effect, the
Fund (to the extent that it lawfully can) will cease to use such name or any
other name indicating that it is advised by or otherwise connected with the
Sub-Adviser. In addition, the Sub-Adviser or the Life Company may grant the
nonexclusive right to use the name "Independence" or any similar name to any
other corporation or entity, including but not limited to any investment company
of which the Sub-Adviser or any subsidiary or affiliate thereof or any successor
to the business of any subsidiary or affiliate thereof shall be the investment
adviser.
The continuation of the Advisory Agreement was approved by all Trustees. The
Advisory Agreement and sub-investment management contract discussed below, will
continue in effect from year to year, provided that its continuance is approved
annually both by (i) by the holders of a majority of the outstanding voting
securities of the Trust or by the Trustees, and (ii) by a majority of the
Trustees who are not parties to the Agreement or "interested persons" of any
such parties. Both agreements may be terminated on 60 days written notice by any
party or by a vote of a majority of the outstanding voting securities of the
Fund and will terminate automatically if it is assigned. The sub-investment
management contract terminates automatically upon the termination of the
investment management contract.
As provided in the sub-investment management contract, the Adviser (not the
Fund) pays the Sub-Adviser a quarterly subadvisory fee at the annual rate of 55%
of the management fee paid by the Fund to the Adviser for the preceding three
months. Prior to September 1, 1995, the Sub-Adviser provided services pursuant
to a contract that provided for different compensation. Effective July 1, 1995,
the Sub-Adviser had agreed to reduce its fee to zero. Effective March 1, 1997,
the sub-advisory fee was reinstated in full. For the fiscal years ended May 31,
1994, 1995 and 1996, the Sub-Adviser received subadvisory fees from the Adviser
of $88,486, $290,249 and $20,808, respectively. For the period from June 1, 1996
to December 31, 1996, the Sub-Adviser received subadvisory fees from the Adviser
of $0. These subadvisory fee figures reflect the different subadvisory fee that
was in effect before September 1, 1995.
24
<PAGE>
Effective September 1, 1995, the Adviser voluntarily limited the Fund's total
expenses to 1.30% for Class A shares and to 2.00% for Class B shares. Effective
March 1, 1997, the Adviser terminated this limitation. Prior to September 1,
1995, a different expense limitation was in effect. For the fiscal years ended
May 31, 1994, 1995 and 1996, the Adviser received fees of $162,875, $457,613 and
$104,018, respectively. For the period from June 1, 1996 to December 31, 1996,
the Adviser received fees of $216,753. After expense reductions by the Adviser,
the Adviser's management fees for the fiscal years ended May 31, 1994, 1995 and
1996 were $14,863, $423,315 and $0. After expense reduction by the Adviser the
Adviser's management fee for the period from June 1, 1996 to December 31, 1996
was $92,396. These management fee figures reflect the different management fee
that was in effect before September 1, 1995.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the period from June 1, 1996 to December 31, 1996, the
Fund paid the Adviser $5,419 for services under this agreement.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. John Hancock Funds accepts orders for the
purchase of the shares of the Fund which are continually offered at net asset
value next determined, plus any applicable sales charge, if any. In connection
with the sale of Class A or Class B shares, John Hancock Funds and Selling
Brokers receive compensation from a sales charge imposed, in the case of Class A
shares, at the time of sale or, in the case of Class B shares, on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
The Fund's Trustees adopted Distribution Plans with respect to Class A and Class
B shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act
of 1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% and 1.00%, respectively, of the Fund's
average daily net assets attributable to shares of that class. However, the
service fees 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 and others for providing personal and
account maintenance services
25
<PAGE>
to shareholders. In the event that John Hancock Funds is not fully reimbursed
for payments or expenses it incurs under the Class A Plan, these expenses will
not be carried beyond twelve months from the date they were incurred.
Unreimbursed expenses under the Class B Plan will be carried forward together
with interest on the balance of these unreimbursed expenses. The Fund does not
treat unreimbursed expenses under the Class B Plan as a liability of the Fund
because the Trustees may terminate the Class B Plan at any time. For the fiscal
year ended December 31, 1996, an aggregate of $345,426 of distribution expenses
or 1.30% of the average net assets of the Fund's Class B shares was not
reimbursed or recovered by John Hancock Funds through the receipt of deferred
sales charges or Rule 12b-1 fees in prior periods.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plan and the purpose for
which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty (a) by a vote of a majority of the Independent Trustees, (b) by a vote
of a majority of the Fund's outstanding shares of the applicable class upon 60
days' written notice to John Hancock Funds, and (c) automatically in the event
of assignment. The Plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to the Plan. Each Plan provides that
no material amendment to the Plan will be effective unless it is approved by a
vote of a majority of the Trustees and the Independent Trustees of the Fund. The
holders of Class A 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 the Plans will benefit the holders of the applicable class of
shares of the Fund.
Amounts paid to the John Hancock Funds by any class of shares of the Fund will
not be used to pay the expenses incurred with respect to any other class of
shares of the Fund; provided, however, that expenses attributable to the Fund as
a whole will be allocated, to the extent permitted by law, according to the
formula based upon gross sales dollars and/or average daily net assets of each
such class, as may be approved from time to time by vote of a majority of the
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
During the period from June 1, 1996 to December 31, 1996, the Fund paid John
Hancock Funds the following amounts of expenses in connection with their
services for the Fund:
26
<PAGE>
Expense Items
<TABLE>
<CAPTION>
Printing and
Mailing of Compensa- Expenses of Interest
Prospectus to tion to John Carrying or
New Selling Hancock Other Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A Shares $11,814 $1,571 $ 4,919 $21,611 $ --
Class B Shares $46,164 $6,396 $12,007 $83,880 $7,505
</TABLE>
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 quotation
are not readily available, or the value has been materially affected by the
events occurring after the closing of a foreign market, assets are valued by a
method that the Trustees believe accurately reflects fair value.
The NAV of each Fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing the a class's net assets by the number of it shares
outstanding. On any day an international market is closed and the New York Stock
Exchange is open, any foreign securities will be valued at the prior day's close
with the current day's exchange rate. Trading of foreign securities may take
place on Saturdays and U.S. business holidays on which the Fund's NAV is not
calculated. Consequently, the Fund's portfolio securities may trade and the NAV
of the
27
<PAGE>
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive a Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares of the Fund, the
investor is entitled to cumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund, or if John
Hancock Signature Services, Inc. ("Signature Services") is notified by the
investor's dealer or the investor at the time of the purchase, the cost of the
Class A shares owned.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSCs to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.*
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.*
o A Trustee or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandchildren, 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.
28
<PAGE>
o Retirement plans participating in Merrill Lynch servicing programs, if the
Plan has more than $3 million in assets or 500 eligible employees at the
date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement. See your Merrill Lynch financial consultant for further
information.
o 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, for each Fund, if the
shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC RATE
--------------- ---------
$1 to $4,999,000 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
*For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
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 of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
29
<PAGE>
Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "LOI"), which should be read
carefully prior to its execution by an investor. The Fund offers two options
regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty-eight (48) month period. These qualified
retirement plans include IRA, SEP, SARSEP, 401(k), 403(b) (including TSAs) and
Section 457 plans. Such an investment (including accumulations and combinations)
must aggregate $50,000 or more invested during the specified period from the
date of the LOI or from a date within ninety (90) days prior thereto, upon
written request to Signature Services. The sales charge applicable to all
amounts invested under the LOI is computed as if the aggregate amount intended
to be invested had been invested immediately. If such aggregate amount is not
actually invested, the difference in the sales charge actually paid and the
sales charge payable had the LOI not been in effect is due from the investor.
However, for the purchases actually made within the specified period (either 13
or 48 months) the sales charge applicable will not be higher than that which
would have applied (including accumulations and combinations) had the LOI been
for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Signature Services to act as his attorney-in-fact
to redeem any escrowed Class A shares and adjust the sales charge, if necessary.
A LOI does not constitute a binding commitment by an investor to purchase, or by
the Fund to sell, any additional Class A shares and may be terminated at any
time.
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 the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. No CDSC will be imposed on increases in account value
above the initial purchase prices, including all shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution plans
administered by Signature Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
30
<PAGE>
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the shares you have held
the longest during the six-year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price. However, you cannot redeem appreciation value only in order to avoid a
CDSC.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) - 80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to 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.
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 a CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
31
<PAGE>
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Signature Services.
(Please note that this waiver does not apply to periodic withdrawal plan
redemptions of Class A shares that are subject to a CDSC).
* Redemptions by Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has less than $3 million in assets or 500 eligible
employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
For Retirement Accounts (such as IRA, SIMPLE, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under Section 401(a) of the Code
(such as 401(k), Money Purchase Pension Plan, Profit Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA accounts that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
32
<PAGE>
CDSC Waiver Matrix for Class B Funds.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-
Distribution (401(k), MPP, Rollover Retirement
PSP)
- ---------------------------------------------------------------------------------------
Death or Waived Waived Waived Waived Waived
Disability
- ---------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually
account in
value periodic
annually in payments
periodic
payments.
- ---------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually
account in
value periodic
annually in payments
periodic
payments.
- ---------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account
payments payments payments value
(72t) or (72t) or 12% (72t) or annually
12% of of account 12% of in
account value account periodic
value annually in value payments
annually in periodic annually in
periodic payments. periodic
payments. payments.
- ---------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ---------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ---------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ---------------------------------------------------------------------------------------
Return of Excess Waived Waived Waived Waived N/A
- ---------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must
33
<PAGE>
redeem its shares for cash except to the extent that the redemption payments to
any shareholder during any 90-day period would exceed the lesser of $250,000 or
1% of the Fund's net asset value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of the 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 such 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 Signature Services.
34
<PAGE>
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the nonpayment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the due date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
35
<PAGE>
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. As of the date of this Statement of Additional
Information, the Trustees have authorized shares of the Fund and two other
series: John Hancock Utilities Fund and John Hancock Special Value Fund.
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 new series of the Trust, into one or more classes. As of the date of this
Statement of Additional Information, the Trustees have authorized the issuance
of two classes of shares of the Fund, designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
Class A 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 and
Class B shares will bear any class expenses properly allocable to that class of
shares, subject to the conditions the Internal Revenue Service imposes with
respect to the multiple-class structures. Similarly, the net asset value per
share may vary depending on whether Class A or Class B shares are purchased. No
interest will be paid on uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts, obligations or affairs of the Fund. The
Declaration of Trust also provides for indemnification out of the Fund's assets
for all losses and expenses of any shareholder held personally liable by reason
of being or
36
<PAGE>
having been a shareholder. The Declaration of Trust also provides that no series
of the Trust shall be liable for the liabilities of any other series.
Furthermore, no fund included in this Fund's prospectus shall be liable for the
liabilities of any other John Hancock fund. Liability is therefore limited to
circumstances in which the Fund itself would be unable to meet its obligations,
and the possibility of this occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept credit card checks. Use of information provided on
the account application may be used by the Fund to verify the accuracy of the
information or for background or financial history purposes. A joint account
will be administered as a joint tenancy with right of survivorship, unless the
joint owners notify Signature Services of a different intent. A shareholder's
account is governed by the laws of The Commonwealth of Massachusetts.
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate entity
for tax purposes. The Fund has qualified and elected to be treated as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), and intends to continue to so qualify for each
taxable year. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions and
the diversification of its assets, the Fund will not be subject to Federal
income tax on its taxable income (including net short-term and long-term capital
gains) which is distributed to shareholders in accordance with the timing
requirements of the Code.
The Fund will be subject to a 4% 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.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
If the Fund invests in stock of certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital
37
<PAGE>
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 adverse tax consequences, but any such election
would require the Fund to recognize taxable income or gain without the
concurrent receipt of cash. The Fund may limit and/or manage its holdings in
passive foreign investment companies to minimize its tax liability or maximize
its return from these investments.
The 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 United States may reduce or eliminate such
taxes. The Fund does not expect to qualify to pass such taxes through to its
shareholders, who consequently will not take such taxes into account on their
own tax returns. However, the Fund will deduct such taxes in determining the
amount it has available for distribution to shareholders.
The amount of the Fund's net short-term and long-term capital gains, if any, in
any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities 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 attributed to realized or unrealized appreciation in the Fund's
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions from such appreciation or income may be taxable to such investor
even if the net asset value of the investor's shares is, as a result of the
distributions, reduced below the investor's cost for such shares, and the
distributions (or portions thereof) in reality represent a return of a portion
of the purchase price.
Upon a redemption of shares (including by exercise of the exchange privilege) a
shareholder will ordinarily realize a taxable gain or loss depending upon the
amount of the proceeds and the investor's basis in his shares. Such gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long-term or short-term, depending upon the
shareholder's tax holding period for the shares and subject to the special rules
described below. A sales charge paid in purchasing Class A shares of the Fund
cannot be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to the
extent Class A shares of the Fund or another John Hancock fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. 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 to the extent the
shares disposed of are replaced with other shares of the Fund within a period of
61 days beginning 30 days before and ending 30 days after the shares are
disposed of, such as pursuant to an election to reinvest dividends in additional
shares. In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net long-term capital gains realized in any
year to the
38
<PAGE>
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain income in his 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.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset net capital gains, if any, during the eight
years following the year of the loss. To the extent subsequent net capital gains
are offset by such losses, they would not result in Federal income tax liability
to the Fund and, as noted above, would not be distributed as such to
shareholders. Presently, there are no realized capital loss carryforwards
available to offset future net realized capital gains.
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 shares may be reduced, for Federal income tax purposes, by
reason of "extraordinary dividends" received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of the
shares.
The Fund is required to accrue income on any debt securities that have more than
a de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and forward contracts may also
require the Fund to recognize income or gain without a concurrent receipt of
cash. However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting
39
<PAGE>
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. A 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.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into foreign currency positions and
foreign currency forward contracts.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Dividends, capital gain distributions and ownership of or gains
realized on the redemption (including an exchange) of shares of the Fund may
also be subject to state and local taxes. Shareholders should consult their own
tax advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their Fund
investment is effectively connected will be subject to U.S. Federal income tax
treatment that is different from that described above. These investors may be
subject to 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.
40
<PAGE>
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
Provided that the Fund qualifies as a regulated investment company under the
Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
The average annual total return on Class A shares of the Fund for the 1 year, 5
year and life-of-fund periods ended December 31, 1996 was 15.21% and 14.54%,
respectively. The average annual total return on Class B shares of the Fund for
the 1 year period and from commencement of operations on September 7, 1995 to
December 31, 1996 was 15.35% and 19.27%, respectively.
Total return is computed by finding the average annual compounded rate of return
over the one-year and life-of-fund periods that would equate the initial amount
invested to the ending redeemable value according to the following formula:
[GRAPHIC OMITTED]
T =
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 1st year and life-of-fund periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of Class A or Class B shares, this
calculation assumes the maximum sales charge is included in the initial
investment or the CDSC is applied at the end of the period, respectively. This
calculation assumes that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the period. The "distribution rate"
is determined by annualizing the result of dividing the declared dividends of
the Fund during the period stated by the maximum offering price or net asset
value at the end of the period. Excluding the Fund's sales charge from the
distribution rate produces a higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding the Fund's sales charge on
Class A shares and the CDSC on Class B shares from a total return calculation
produces a higher total return figure.
The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per
41
<PAGE>
share (which includes the full sales charge, if applicable) on the last day of
the period, according to the following standard formula:
Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1)
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during the period
that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period (NAV
where applicable).
From time to time, in reports and promotional literature, the Fund's total
return and/or yield will be compared to indices of mutual funds such as Lipper
Analytical Services, Inc.'s "Lipper-Mutual Performance Analysis," a monthly
publication which tracks net assets, total return, and yield on 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 Fund's promotional and sales literature may make reference to the
Fund's "beta". Beta is a reflection of the market related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Sub-Adviser, or the Adviser
pursuant to recommendations made by an investment committee, which consists of
officers and directors of the Adviser and officers and Trustees of the Trust 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 officers of the Fund, will
offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer and transactions with dealers serving as market
maker reflect a "spread." Debt securities are generally traded on a net basis
through dealers acting for their own account as principals and not as brokers;
no brokerage commissions are payable on such transactions.
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In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. Ion other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
The 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 such other policies as the Trustees may determine, the Adviser and
Sub-Adviser may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and, to a
lesser extent, statistical assistance furnished to the Adviser and Sub-Adviser
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 and Sub-Adviser. The receipt of research
information is not expected to reduce significantly the expenses of the Adviser
and Sub-Adviser. The research information and statistical assistance furnished
by brokers and dealers may benefit the Life Company or other advisory clients of
the Adviser, and, conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser may result in research information and
statistical assistance beneficial to the Fund. Similarly, research information
and assistance provided to the Sub-Adviser by brokers and dealers may benefit
other advisory clients or affiliates of the Sub-Adviser, and, conversely,
brokerage commissions and spreads paid by other advisory clients of the
Sub-Adviser may result in research information and statistical assistance
beneficial to the Fund. The Fund will make no commitment to allocate portfolio
transactions upon any prescribed basis. While the Adviser, in conjunction with
the Sub-Adviser, will be primarily responsible for the allocation of the Fund's
brokerage business, the policies and practices of the Adviser in this regard
must be consistent with the foregoing and will at all times be subject to review
by the Trustees. For the years ended in May 31, 1996, 1995, and 1994, the Fund
paid negotiated brokerage commissions in the amount of $15,976, $130,973, and
$58,663, respectively. For the period from June 1, 1996 to December 31, 1996,
the Fund paid negotiated brokerage commission in the amount of $40,242.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. For the period from June 1, 1996 to
December 31, 1996, the Fund directed no commissions to compensate brokers for
research services such as industry, economic and company reviews and evaluations
of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc., a broker-dealer ("Distributors"
or "Affiliated Brokers"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net
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results the Fund may execute portfolio transaction with or through Affiliated
Brokers. During the period from June 1, 1996 to December 31, 1996, brokerage
commissions in the amount of $240 were paid to Tucker Anthony, which was
affiliated with the Adviser until November, 1996.
Distributors may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers except for accounts for which the Affiliated Broker
acts as 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, the Sub-Adviser or the Affiliated Broker. Because
the Adviser, which is affiliated with the Affiliated Brokers, and the
Sub-Adviser have, as investment advisers to the Fund, the obligation to provide
investment management services, which includes elements of research and related
investment skills, such research and related skills will not be used by the
Affiliated Broker as a basis for negotiating commissions at a rate higher than
that determined in accordance with the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
Massachusetts 02217-1000, a wholly-owned indirect subsidiary of the Life
Company, is the transfer and dividend paying agent for the Fund. The Fund pays
Signature Services an annual fee of $19.00 for each Class A shareholder and
$21.50 for each Class B shareholder, plus certain out-of-pocket expenses. These
expenses are aggregated and charged to the Fund allocated to each class on the
basis of their relative net asset value.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
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INDEPENDENT AUDITORS
The independent auditors of the Fund are Price Waterhouse LLP. Price Waterhouse
LLP audits and renders an opinion on the Fund's annual financial statements and
reviews the Fund's annual Federal income tax return.
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APPENDIX A
RATINGS
Bonds.
Standard & Poor's Bond Ratings
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.
To provide more detailed indications of credit quality, the ratings AA to BBB
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
A provisional rating, indicated by "p" following a rating, is sometimes used by
Standard & Poor's. It assumes the successful completion of the project being
financed by the issuance of the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion.
Moody's Bond Ratings
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. Generally speaking, the safety of
obligations of this class is so absolute that with the occasional exception of
oversupply in a few specific instances, characteristically, their market value
is affected solely by money market fluctuations.
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 fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities. The market
value of Aa bonds is virtually immune to all but money market influences, with
the occasional exception of oversupply in a few specific instances.
A-1
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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 sometime 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.
Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier
1 indicates that the security ranks at the high end, 2 in the mid-range, and 3
nearer the low end, of the generic category. These modifiers of rating symbols
Aa, A and Baa are to give investors a more precise indication of relative debt
quality in each of the historically defined categories.
Conditional ratings, indicated by "Con", are sometimes given when the security
for the bond depends upon the completion of some act or the fulfillment of some
condition. Such bonds, are given a conditional rating that denotes their
probably credit statute upon completion of that act or fulfillment of that
condition.
Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier
1 indicates that the security ranks at the high end, 2 in the mid-range, and 3
nearer the low end, of the generic category. These modifiers are to give
investors a more precise indication of relative debt quality in each of the
historically defined categories.
A-2
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FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK SPECIAL VALUE FUND
Class A and B Shares
Statement of Additional Information
May 1, 1997 as revised December 8, 1997
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
May 1, 1997 as revised December 8, 1997. The Fund is a diversified series of
John Hancock Capital Series (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund................................................... 2
Investment Objective and Policies.......................................... 2
Investment Restrictions.................................................... 13
Those Responsible for Management........................................... 15
Investment Advisory and Other Services..................................... 24
Distribution Contracts..................................................... 26
Net Asset Value............................................................ 27
Initial Sales Charge on Class A Shares..................................... 28
Deferred Sales Charge on Class B Shares.................................... 30
Special Redemptions........................................................ 33
Additional Services and Programs........................................... 34
Description of the Fund's Shares........................................... 35
Tax Status............................................................... 37
Calculation of Performance................................................. 41
Brokerage Allocation....................................................... 42
Transfer Agent Services.................................................... 43
Custody of Portfolio....................................................... 43
Independent Auditors....................................................... 43
Appendix- Description of Bond Ratings...................................... A-1
Financial Statements....................................................... F-1
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ORGANIZATION OF THE FUND
The Fund is a series of the Trust, an open-end investment management company
organized as a Massachusetts business trust. Prior to October 1, 1993 the Trust
was known as "John Hancock Growth Fund."
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the prospectus.
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.
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 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.
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
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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.
Ratings as Investment Criteria. In general, the ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") represent
the opinions of these agencies as to the quality of the securities which they
rate. It should be emphasized, however, that such ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Fund as initial criteria for the selection of portfolio securities. Among
the factors which will be considered are the long-term ability of the issuer to
pay principal and interest and general economic trends.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund, but the Adviser will consider the event in its determination of whether
the Fund should continue to hold the securities.
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. Appendix A contains further information concerning the rating of
Moody's and S&P and their significance.
Securities rated lower than Baa by Moody's or BBB by S&P 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 S&P, such as those
ratings described here, may not be changed by Moody's and S&P 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
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invest in zero coupon bonds, which have a determined interest rate, but payment
of the interest is deferred until maturity of the bonds. Both types of bonds may
be more speculative and subject to greater fluctuations in value than securities
which pay interest periodically and in cash, due to changes in interest rates.
The market value of debt securities which carry no equity participation usually
reflects yields generally available on securities of similar quality and type.
When such yields decline, the market value of a portfolio already invested at
higher yields can be expected to rise if such securities are protected against
early call. In general, in selecting securities for its portfolio, the Fund
intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Investments in Foreign Securities. The Fund may invest up to 50% of its total
assets in the securities of foreign issuers, including securities in the form of
sponsored or unsponsored American Depository Receipts (ADRs), European
Depository Receipts (EDRs) or other securities convertible into securities of
foreign issuers. ADRs are receipts typically issued by an American bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Issuers of unsponsored ADRs are not contractually
obligated to disclose material information, including financial information, in
the United States. Generally, ADRs are designed for use in the United States
securities markets and EDRs are designed for use in European securities markets.
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 exchange contracts to enhance return, to
hedge against fluctuations in currency exchange rates affecting a particular
transaction or portfolio position, or as a substitute for the purchase or sale
of a currency or assets denominated in that currency. Forward contracts are
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 contracts with respect to specific
receivables or payables of the Fund accruing in connection with the purchase and
sale of its portfolio securities quoted or denominated in the same or related
foreign currencies. Portfolio hedging is the use of forward foreign currency
contracts to offset portfolio security positions denominated or quoted in the
same or related foreign currencies. The Fund may elect to hedge less than all of
its foreign portfolio positions deemed appropriate by the Adviser and
Sub-Advisers.
If the Fund purchases a forward contract or sells a forward contract for
non-hedging purposes, its custodian will segregate cash or liquid securities, of
any type or maturity, 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. The assets in the segregated account will be valued at market
daily and if the value of the securities in the separate account declines,
additional cash or securities 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
4
<PAGE>
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.
Risks of Foreign Securities. Investments in foreign securities may involve a
greater degree of risk than those in domestic securities. There is generally
less publicly available information about foreign companies in the form of
reports and ratings similar to those that are published about issuers in the
United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market, whether
through over-the-counter markets or exchanges located in the countries where
principal offices of the issuers are located. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States' economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends, in some cases capital gains and interest payable on certain of
the Fund's foreign portfolio securities, may be subject to foreign withholding
or other foreign taxes, thus reducing the net amount of income or gains
available for distribution to the Fund's shareholders.
Repurchase Agreements. In a repurchase agreement the Fund buys a security for a
relatively short period (usually not more than 7 days) subject to the obligation
to sell it back to the issuer at a fixed time and price plus accrued interest.
The Fund will enter into repurchase agreements only with member banks of the
Federal Reserve System and with "primary dealers" in U.S. Government securities.
The Advisers will continuously monitor the creditworthiness of the parties with
whom the Fund enters into repurchase agreements.
5
<PAGE>
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income decline in
value of the underlying securities or lack of access to income during this
period 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. To minimize various risks associated with
reverse repurchase agreements, the Fund will establish and maintain with the
Fund's custodian a separate account consisting of liquid securities, of any type
or maturity, in an amount at least equal to the repurchase prices of the
securities (plus any accrued interest thereon) under such agreements. The Fund
will not enter into reverse repurchase agreements and other borrowings except
from banks as a temporary measure for extraordinary emergency purposes in
amounts not to exceed 33 1/3% of the Fund's total assets (including the amount
borrowed) taken at market value. The Fund will not use leverage to attempt to
increase income. The Fund will not purchase securities while outstanding
borrowings exceed 5% of the Fund's total assets. The Fund will enter into
reverse repurchase agreements only with federally insured banks which are
approved in advance as being creditworthy by the Trustees. Under procedures
established by the 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 commercial paper issued in reliance on Section 4(2) of the 1933 act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 15% of its net
assets in illiquid investments. If the Trustees determines, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments. 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.
Options on Securities, Securities Indices and Currency. The Fund may purchase
and write (sell) call and put options on any securities in which it may invest,
on any securities index based on securities in which it may invest or on any
currency in which Fund investments may be denominated. These options may be
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. The Fund may write covered put and
call options and purchase put and call options to enhance total return, as a
substitute for the purchase or sale of securities or currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
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Writing Covered Options. A call option on securities or currency written by the
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by the Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive the Fund of the opportunity to profit from an increase in the market
price of the securities or foreign currency assets in its portfolio. Writing
covered put options may deprive the Fund of the opportunity to profit from a
decrease in the market price of the securities or foreign currency assets to be
acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account maintained by the Fund's custodian with a value at least equal to the
Fund's obligation under the option, (ii) entering into an offsetting forward
commitment and/or (iii) purchasing an offsetting option or any other option
which, by virtue of its exercise price or otherwise, reduces the Fund's net
exposure on its written option position. A written call option on securities is
typically covered by maintaining the securities that are subject to the option
in a segregated account. The Fund may cover call options on a securities index
by owning securities whose price changes are expected to be similar to those of
the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. The Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by
the Fund for the purpose of affirmatively benefiting from a decline in the price
of securities or currencies which it does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities or currency decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses
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on the purchase of put options may be offset by countervailing changes in the
value of the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on these futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. The futures contracts may be
8
<PAGE>
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and any other financial instruments and indices. All
futures contracts entered into by the Fund are traded on U.S. or foreign
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire or the
exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, the Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. The Fund may
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the Fund or securities with characteristics similar to those of the
Fund's portfolio securities. Similarly, the Fund may sell futures contracts on
any currencies in which its portfolio securities are quoted or denominated or in
one currency to hedge against fluctuations in the value of securities
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On
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<PAGE>
the other hand, any unanticipated appreciation in the value of the Fund's
portfolio securities would be substantially offset by a decline in the value of
the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available. The Fund
may also purchase futures contracts as a substitute for transactions in
securities or foreign currency, to alter the investment characteristics of or
currency exposure associated with portfolio securities or to gain or increase
its exposure to a particular securities market or currency.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
they are quoted or denominated) that the Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the currency in which they are quoted or denominated) it intends to purchase.
The Fund will determine that the price fluctuations in the futures contracts and
options on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of its hedging intent, the Fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities (or assets denominated in the related currency) in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
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To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualifications as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Fund than if
it had not entered into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities, securities indices and foreign currencies. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers and financial institutions if the loan is collateralized by cash or U.S.
Government securities according to applicable regulatory requirements. The Fund
may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the loaned securities. As a result, the Fund may
incur a loss or, in the event of the borrower's bankruptcy, may be delayed in or
prevented from liquidating the collateral. It is a fundamental policy of the
Fund not to lend portfolio securities having a total value in excess of 33 1/3%
of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price subject to the Fund's Investment
Restriction. Generally, warrants and stock purchase rights do
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<PAGE>
not carry with them the right to receive dividends or exercise voting rights
with respect to the underlying securities, and they do not represent any rights
in the assets of the issuer. As a result, an investment in warrants and rights
may be considered to entail greater investment risk than certain other types of
investments. In addition, the value of warrant and rights does not necessarily
change with the value of the underlying securities, and they cease to have value
if they are not exercised on or prior to their expiration date. Investment in
warrants and rights increases the potential profit or loss to be realized from
the investment of a given amount of the Fund's assets as compared with investing
the same amount in the underlying stock.
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.
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.
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 securities, of any type or maturity 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
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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.
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, of any type or maturity, 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.
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 correspondingly higher brokerage expenses. It is
anticipated that, under normal market conditions, the Fund's annual portfolio
turnover rate will be less than 100%. The Fund's portfolio turnover rate is set
forth in the table under the caption "Financial Highlights" in the prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of a majority of the Fund's outstanding voting
securities which, as used in the Prospectus and this Statement of Additional
Information means approval by the lesser of (1) the holders of 67% or more of
the Fund's shares represented at a meeting if more than 50% of the Fund's
outstanding shares are present in person or by proxy at that meeting or (2) more
than 50% of the Fund's outstanding shares.
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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.
(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.
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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:
(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) invest for the purpose of exercising control over or management of any
company.
(c ) 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.
(d) Invest more than 15% of its net assets in illiquid securities.
(e) 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.
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 of the Trust who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Trust are also Officers and Directors of the Adviser or Officers
and Directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
15
<PAGE>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Edward J. Boudreau, Jr.* Trustee, Chairman and Chairman, Director and
101 Huntington Avenue Chief Executive Officer Chief Executive Officer,
Boston, MA 02199 (1, 2) the Adviser; Chairman,
October 1944 Trustee and Chief
Executive Officer, The
Berkeley Financial Group
("The Berkeley Group");
Chairman and Director, NM
Capital Management, Inc.
("NM Capital"), John
Hancock Advisers
International Limited
("Advisers International")
and Sovereign Asset
Management Corporation
("SAMCorp"); Chairman,
Chief Executive Officer
and President, John
Hancock Funds, Inc. ("John
Hancock Funds"); Chairman,
First Signature Bank and
Trust Company; Director,
John Hancock Insurance
Agency, Inc. ("Insurance
Agency, Inc."), John
Hancock Advisers
International (Ireland)
Limited ("International
Ireland"), John Hancock
Capital Corporation and
New England/Canada
Business Council; Member,
Investment Company
Institute Board of
Governors; Director, Asia
Strategic Growth Fund,
Inc.; Trustee, Museum of
Science; Director, John
Hancock Freedom Securities
Corporation (until
September 1996); Director,
John Hancock Signature
Services, Inc. ("Signature
Services") (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
16
<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,
1216 Falls Boulevard Emeritus, Boston
Fort Lauderdale, FL 33327 University School of Law
June 1931 (until 1997); Trustee,
Brookline Savings Bank.
Richard P. Chapman, Jr. Trustee (1, 3) President, Brookline
160 Washington Street Savings Bank; Director,
Brookline, MA 02147 Federal Home Loan Bank
February 1935 of Boston (lending);
Director, Lumber
Insurance Companies
(fire and casualty
insurance); Trustee,
Northeastern University
(education); Director,
Depositors Insurance
Fund, Inc. (insurance).
William J. Cosgrove Trustee (3) Vice President, Senior
20 Buttonwood Place Banker and Senior Credit
Saddle River, NJ 07458 Officer, Citibank, N.A.
January 1933 (retired September
1991); Executive Vice
President, Citadel Group
Representatives, Inc.;
EVP Resource Evaluation,
Inc. (consulting) (until
October 1993); Trustee,
the Hudson City Savings
Bank (since 1995).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
Douglas M. Costle Trustee (1, 3) Director, Chairman of
RR2 Box 480 the Board and
Woodstock, VT 05091 Distinguished Senior
July 1939 Fellow, Institute for
Sustainable Communities,
Montpelier, Vermont (since
1991); Dean Vermont Law
School (until 1991);
Director, Air and Water
Technologies Corporation
(environmental services
and equipment), Niagara
Mohawk Power Company
(electric services) and
Mitretek Systems
(governmental consulting
services).
Leland O. Erdahl Trustee (3) Director, Santa Fe
8046 Mackenzie Court Ingredients Company of
Las Vegas, NV 89129 California, Inc. and
December 1928 Santa Fe Ingredients
Company, Inc. (private
food processing
companies), Uranium
Resources, Inc.;
President, Stolar, Inc.
(1987-1991); President,
Albuquerque Uranium
Corporation (1985-1992);
Director,
Freeport-McMoRan Copper
& Gold Company, Inc.,
Hecla Mining Company,
Canyon Resources
Corporation and Original
Sixteen to One Mines,
Inc. (1984-1987 and
1991-1995) (management
consultant).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
Richard A. Farrell Trustee(3) President of Farrell,
Venture Capital Partners Healer & Co., (venture
160 Federal Street capital management firm)
23rd Floor (since 1980); Prior to
Boston, MA 02110 1980, headed the venture
November 1932 capital group at Bank of
Boston Corporation.
Gail D. Fosler Trustee (3) Vice President and Chief
3054 So. Abingdon Street Economist, The
Arlington, VA 22206 Conference Board
December 1947 (non-profit economic and
business research);
Director, Unisys Corp.;
and H.B. Fuller Company.
William F. Glavin Trustee (3) President, Babson
120 Paget Court - John's College (until 1997);
Island Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June
March 1932 1989); Director, Caldor
Inc., Reebok, Ltd.
(since 1994) and Inco
Ltd.
Anne C. Hodsdon * Trustee and President President, Chief
101 Huntington Avenue (1,2) Operating Officer and
Boston, MA 02199 Director, the Adviser;
April 1953 Trustee, The Berkeley
Group; Director, John
Hancock Funds, Advisers
International, Insurance
Agency, Inc. and
International Ireland;
President and Director,
SAMCorp. and NM Capital;
Executive Vice
President, the Adviser
(until December 1994);
Director, Signature
Services (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
Dr. John A. Moore Trustee (3) President and Chief
Institute for Evaluating Executive Officer,
Health Risks Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since
Washington, DC 20006-1602 September 1989).
February 1939
Patti McGill Peterson Trustee (3) Cornell Institute of
Cornell University Public Affairs, Cornell
Institute of Public University (since August
Affairs 1996); President
364 Upson Hall Emeritus of Wells
Ithica, NY 14853 College and St. Lawrence
May 1943 University; Director,
Niagara Mohawk Power
Corporation (electric
utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee (3) Professor of Business
2 Gray Gardens East Administration at
Cambridge, MA 02138 Harvard University
September 1931 Graduate School of
Business Administration
(since 1961).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
Richard S. Scipione * Trustee (1) General Counsel, John
John Hancock Place Hancock Life Company;
P.O. Box 111 Director, the Adviser,
Boston, MA 02117 Advisers International,
August 1937 John Hancock Funds, John
Hancock Distributors,
Inc., Insurance Agency,
Inc., John Hancock
Subsidiaries, Inc.,
SAMCorp. and NM Capital;
Trustee, The Berkeley
Group; Director, JH
Networking Insurance
Agency, Inc.; Director,
Signature Services
(until January 1997).
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat
259C Commercial Bld. Marwick LLP (retired
Lauderdale, FL 33308 June 1990).
November 1932
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief
101 Huntington Avenue Investment Officer (2) Investment Officer, the
Boston, MA 02199 Adviser; Director, the
July 1938 Adviser, Advisers
International, John
Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank
Fund and NM Capital;
Senior Vice President, The
Berkeley Group; President,
the Adviser (until
December 1994); Director,
Signature Services (until
January 1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(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
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Senior Vice President,
101 Huntington Avenue Chief Financial Officer the Adviser, The
Boston, MA 02199 Berkeley Group, John
February 1935 Hancock Funds.
John A. Morin Vice President Vice President and
101 Huntington Avenue Secretary, the Adviser,
Boston, MA 02199 The Berkeley Group,
July 1950 Signature Services and
John Hancock Funds;
Secretary, NM Capital and
SAMCorp.; Clerk, Insurance
Agency, Inc.; Counsel,
John Hancock Mutual Life
Insurance Company (until
February 1996), and Vice
President of John Hancock
Distributors, Inc. (until
April 1994).
Susan S. Newton Vice President and Vice President, the
101 Huntington Avenue Secretary Adviser; John Hancock
Boston, MA 02199 Funds, Signature
March 1950 Services and The
Berkeley Group; Vice
President, John Hancock
Distributors, Inc.
(until April 1994).
James J. Stokowski Vice President and Vice President, the
101 Huntington Avenue Treasurer Adviser.
Boston, MA 02199
November 1946
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
22
<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.
As of March 27, 1997, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares.
As of March 27, 1997 the following shareholders beneficially owned 5% or more of
the outstanding shares of the Fund listed below:
Number of Percentage of
shares of total outstanding
Name and Address of beneficial shares of the
Shareholder Class of Shares Interest Owned Class of the Fund
- ----------- --------------- -------------- -----------------
Merrill Lynch Pierce Class B Shares 159,690 7.71%
Fenner & Smith, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
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 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.
Total Compensation From
Aggregate Compensation All Funds in John Hancock
Independent Trustees From the Fund(1) Fund Complex to Trustees(2)
- -------------------- ---------------- ---------------------------
Dennis S. Aronowitz $ 415 $72,450
Richard P. Chapman, Jr.* 429 75,200
William J. Cosgrove* 415 72,450
Douglas M. Costle++ 35 75,350
Leland O. Erdahl++ 30 72,350
Richard A. Farrell++ 35 75,350
Gail D. Fosler 392 68,450
William F. Glavin*++ 29 72,250
Bayard Henry** 141 23,700
John A. Moore++ 30 68,350
Patti McGill Peterson++ 30 72,100
John W. Pratt++ 30 72,350
Edward J. Spellman 421 73,950
--- ------
Total $2,432 $894,300
(1) Compensation made for the year ended December 31, 1996.
(2) Total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is for the calendar year ended December 31, 1996. As
of this date, there were sixty-seven funds in the John Hancock Fund
Complex of which each of these independent trustees served on thirty-five
funds.
* On December 31, 1996, the value of the aggregate deferred compensation
from all funds in the John Hancock Fund Complex for Mr. Chapman was $
63,164 and for Mr. Cosgrove was $131,317 and for Mr. Glavin was $ 109,059.
23
<PAGE>
** Mr. Henry retired from his position as a Trustee of the Fund effective
April 26, 1996.
++ Became Trustees of the Trust on June 26, 1996.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603
was organized in 1968 and has more than $22 billion in assets under management
in its capacity as investment adviser to the Fund and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over 1,080,000 shareholders. The Adviser is an affiliate of
the Life Company, one of the most recognized and respected financial
institutions in the nation. With total assets under management of more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries a high rating from Standard & Poor's and A.M.
Best's. Founded in 1862, the Life Company has been serving clients for over 130
years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies, expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund; the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association membership; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays a
monthly an fee, which is accrued daily, of 0.70% of the average of the daily net
assets of the Fund.
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.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
For the year ended December 31, 1996, 1995 and the period ended December 31,
1994, the Adviser's management fee was $241,086, $140,122 and $18,489
respectively, prior to expense
24
<PAGE>
reduction. After expense reduction by the Adviser, the Adviser's management fees
for the periods ended December 31, 1994, 1995 and 1996 were zero.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more other funds or clients are selling the same security. If opportunities for
purchase or sale of securities by the Adviser for the Fund or for other funds or
clients for which 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 the Adviser or its affiliates may increase the demand
for securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
Pursuant to the investment management contract, the Adviser is not liable to the
Fund for any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which its contract relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of their its duties or from its reckless
disregard of their obligations and duties under the contract.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Company may grant the 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 continuation of the Advisory Agreement was approved by all of the Trustees.
The Advisory Agreement and the Distribution Agreement discussed below, will
continue in effect from year to year, provided that its continuance is approved
annually both (i) by the holders of a majority of the outstanding voting
securities of the Trust or by the Trustees, and (ii) by a majority of the
Trustees who are not parties to the Agreement or "interested persons" of any
such parties. Both Agreements may be terminated on 60 days written notice by
either party or by vote of a majority of the outstanding voting securities of
the Fund and will terminate automatically if assigned.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year ended December 31, 1996, the Fund paid
the Adviser $6,458 for the services under this agreement.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
25
<PAGE>
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of 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 from 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. John
Hancock Funds may pay extra compensation to financial services firms selling
large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
The Fund's Trustees adopted Distribution Plans 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 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 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 and others for providing personal and
account maintenance services to shareholders. In the event that John Hancock
Funds is not fully reimbursed for payments it makes or expenses it incurs under
the Class A Plan, these expenses will not be carried beyond one year from the
date 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, 1996 an aggregate of $964,684 of distribution expenses
or 4.81% 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 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 to determine their continued appropriateness.
The Plans provide that they continue in effect only so long as their continuance
is approved at least annually by a majority of both the Trustees and the
Independent Trustees. The Plans provide that they may be terminated without
penalty (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority of the Fund's outstanding shares of the applicable class in each case
upon 60 days' written notice to John Hancock Funds and (c) automatically in the
event of
26
<PAGE>
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 the Trustees and the
Independent Trustees of the Fund. The holders of Class A shares and Class B
shares have exclusive voting rights with respect to the Plan applicable to their
respective class of shares. In adopting the Plans, the Trustees concluded that,
in their judgment, there is a reasonable likelihood that each Plan will benefit
the holders of the applicable class of shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time, the Fund may participate in joint
distribution activities with other Funds and the costs of those activities will
be borne by each Fund in proportion to the relative net asset value of the
participating Funds.
During the fiscal year ended December 31, 1996, 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:
Expense Items
-------------
Printing
and Mailing Interest
of Expenses Carrying
Prospectus Compensation of John or Other
to New to Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
Class A Shares $10,721 $4,828 $11,821 $15,805 None
Class B Shares $28,340 $16,078 $40,861 $40,599 $74,612
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.
27
<PAGE>
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Trustees believe accurately reflects fair value.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net assets by the number of its shares outstanding.
On any day an international market is closed 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
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive the Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares of the Fund, the
investor is entitled to accumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund, or if John
Hancock Signature Services, Inc. ("Signature Services") is notified by the
investor's dealer or the investor at the time of the purchase, the cost of the
Class A shares owned.
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 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,
grandchildren, 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.
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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 Retirement plans participating in Merrill Lynch servicing programs, if the
Plan has more than $3 million in assets or 500 eligible employees at the
date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement. See your Merrill Lynch financial consultant for further
information.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception
of the Fund account, may purchase Class A shares with no initial sales
charge. However, if the shares are redeemed within 12 months after the end
of the calendar year in which the purchase was made, a CDSC will be
imposed at the following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts to $10 million and over 0.25%
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.
* For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
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 account value of the Class A shares of all
John Hancock funds which carry a sales charge already held by such person. Class
A shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares.
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<PAGE>
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. The reduced sales charges are also applicable to
investments 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 IRAs, 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 Signature Services. The sales charge applicable to all
amounts invested under the LOI is computed as if the aggregate amount intended
to be invested had been invested immediately. If such aggregate amount is not
actually invested, the difference in the sales charge actually paid and the
sales charge payable had the LOI not been in effect is due from the investor.
However, for the purchases actually made within the specified period (either 13
or 48 months) the sales charge applicable will not be higher than that which
would have applied (including accumulations and combinations) had the LOI been
for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Signature Services to act as his attorney-in-fact
to redeem any escrowed shares and adjust the sales charge, if necessary. A LOI
does not constitute a binding commitment by an investor to purchase, or by the
Fund to sell, any additional shares and may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. No CDSC will be imposed on increases in account value
above the initial purchase prices, including all shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution plans
administered by Signature Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
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<PAGE>
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. However, you cannot redeem appreciation value only in order to avoid a
CDSC.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* 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.
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.
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<PAGE>
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account
value, including reinvested dividends, at the time you established
your periodic withdrawal plan and 12% of the value of subsequent
investments (less redemptions) in that account at the time you notify
Signature Services. (Please note, this waiver does not apply to
periodic withdrawal plan redemptions of Class A shares that are subject
to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has less than $3 million in assets or 500 eligible
employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
For Retirement Accounts (such as IRA, SIMPLE, 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.
Please see matrix for reference.
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<PAGE>
CDSC Waiver Matrix for Class B Funds.
- -------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-Retirement
Distribution (401(k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distribution value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Between 59 Waived Waived Waived Waived for 12% of
1/2 and Life account
70 1/2 Expectancy value
or 12% of annually
account in
value periodic
annually payments
in
periodic
payments.
- --------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for Waived for Waived for 12% of
annuity annuity annuity account
payments payments payments value
(72t) or (72t) or (72t) or annually
12% of 12% of 12% of in
account account account periodic
value value value payments
annually annually annually
in in in
periodic periodic periodic
payments. payments. payments.
- --------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- --------------------------------------------------------------------------------
Termination Not Waived Not Waived Not Waived Not Waived N/A
of Plan
- --------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- --------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- --------------------------------------------------------------------------------
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder were to sell
portfolio securities received in this fashion the shareholder 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
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<PAGE>
rule, the Fund must redeem its shares for cash except to the extent that the
redemption payments to any shareholder during any 90-day period would exceed the
lesser of $250,000 or 1% of the Fund's net asset value at the beginning of such
period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of the
Fund for shares of the same class in any other John Hancock fund offering that
class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may changed or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares. Since the redemption price of the Fund shares may be
more or less than the shareholder's cost, 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 such 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 a Systematic Withdrawal Plan is in effect. The Fund reserves
the right to modify or discontinue the Systematic Withdrawal Plan of any
shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
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<PAGE>
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the due date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS".
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
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
35
<PAGE>
classify and reclassify the shares of the Fund, or new series of the Trust, into
one or more classes. As of the date of this Statement of Additional Information,
the Trustees have authorized the issuance of two classes of shares of the Fund,
designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
Class A shares and Class B shares have certain exclusive voting rights on
matters relating to their respective distribution plans. The different classes
of the Fund may bear different expenses relating to the cost of holding
shareholder meetings necessitated by the exclusive voting rights of any class of
shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to Class A and Class B shares will be
borne exclusively by that class, (ii) Class B shares will pay higher
distribution and service fees than Class A shares and (iii) each of Class A
shares and Class B shares will bear any class expenses properly allocable to
such class of shares, subject to the conditions the Internal Revenue Service
imposes with respect to the multiple-class structures. Similarly, the net asset
value per share may vary depending on whether Class A shares or Class B shares
are purchased. No interest will be paid on uncashed dividend or redemption
checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the 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.
Unless otherwise required by the Investment Company Act of 1940 or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund shareholders may remove a Trustee by the affirmative vote of
at least two-thirds of the Trust's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, Declaration of Trust contains an express disclaimer of
shareholder liability for acts, obligations or affairs of the Fund. The
Declaration of Trust also provides for indemnification out of the Fund's assets
for all losses and expenses of any shareholder held personally liable by reason
of being or having been a shareholder. The Declaration of Trust also provides
that no series of the Trust shall be liable for the liabilities of any other
series. Furthermore, no fund included in this Fund's Prospectus shall be liable
for the liabilities of any other John Hancock fund. Liability is therefore
limited to circumstances in which the Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept credit card checks. Use of information provided on
the account application may be used by the Fund to verify the accuracy of the
information or for background or financial history purposes. A joint account
will be administered as a joint tenancy with right of survivorship unless the
joint owners notify Signature Services of a different intent. A shareholder's
account is governed by the laws of The Commonwealth of Massachusetts.
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<PAGE>
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.
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
37
<PAGE>
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 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
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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.
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 available 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
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elects to include market discount in income currently) prior to the receipt of
the corresponding cash payments. The mark to market rules applicable to certain
options, futures contracts, and forward contracts may also require the Fund to
recognize income or gain without a concurrent receipt of cash. However, the Fund
must distribute to shareholders for each taxable year substantially all of its
net income and net capital gains, including such income or gain, to qualify as a
regulated investment company and avoid liability for any Federal income or
excise tax. Therefore, the Fund may have to dispose of its portfolio securities
under disadvantageous circumstances to generate cash, or may have to leverage
itself by borrowing the cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. The Fund will not seek to satisfy any
threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
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
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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.
CALCULATION OF PERFORMANCE
The average annual total return of the Class A shares of the Fund, for the one
year period ended December 31, 1996 and since commencement of operations,
January 3, 1994 was 7.23% and 11.64%, respectively.
The average annual total return of the Class B shares of the fund for the one
year period ended December 31, 1996 and since commencement of operations,
January 3, 1994 was 7.14% and 11.94%, 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:
T = ((ERV/P)^(1/n)) - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the 1 year, 5 year and 10 year periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of Class A or Class B shares, this
calculation assumes the maximum sales charge is included in the initial
investment or the CDSC 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. Excluding the Fund's sales
charge from the distribution rate produces a higher rate. The "distribution
rate" is determined by annualizing the result of dividing the declared dividends
of the Fund during the period stated by the maximum offering price or net asset
value at the end of the period. Excluding the Fund's sales charge from the
distribution rate produces a higher rate.
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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.
The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per share (which includes the full sales charge, if
applicable) on the last day of the period, according to the following standard
formula:
Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1)
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during the
period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(NAV where applicable).
From time to time, in reports and promotional literature, the Fund's total
return /or yield will be compared to indices of mutual funds such as Lipper
Analytical Services, Inc.'s "Lipper-Mutual Performance Analysis," a monthly
publication which tracks net assets, total return and yield on equity mutual
funds in the United States. Ibottson and Associates, CDA Weisenberger and F.C.
Towers are also used for comparison purposes, as well as the Russell and
Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S may also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta". Beta is a reflection of the market related risks of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Advisers pursuant to
recommendations made by an investment
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committee, which consists of officers and directors of the Adviser and
affiliates and officers and Trustees who are interested persons of the Fund.
Orders for purchases and sales of securities are placed in a manner which, in
the opinion of the 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 sucthese transactions.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and other policies that the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser 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 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,
1996, 1995 and 1994, the Fund paid negotiated brokerage commissions of $121,042,
$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, 1996, 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 Company, is the indirect sole
shareholder of John Hancock Distributors, Inc., a broker-dealer ("Distributors"
or "Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the
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Fund may execute portfolio transactions with or through Affiliated Brokers. For
the fiscal year ended December 31, 1994 and 1995, the Fund paid no brokerage
commissions to any Affiliated Broker and for the fiscal year ended 1996, the
Fund paid brokerage commissions of $1,239 to Affiliated Brokers.
Distributors may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers except for accounts for which the Affiliated Broker
acts as 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.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly owned indirect subsidiary of the Life Insurance Company,
is the transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee for Class A shares of $19.00 per shareholder and for
Class B shares of $21.50 per shareholder, 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
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
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.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represented obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
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.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
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FINANCIAL STATEMENTS
F-1
