JOHN HANCOCK
Growth
Funds
[LOGO]
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Prospectus
June 1, 1998*
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.
* March 1, 1998 for Financial Industries Fund, Regional Bank Fund and Special
Equities Fund.
Emerging Growth Fund
Financial Industries Fund
Growth Fund
Regional Bank Fund
Special Equities Fund
Special Opportunities 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, Emerging Growth Fund 4
strategies, risks, expenses
and financial history. Financial Industries Fund 6
Growth Fund 8
Regional Bank Fund 10
Special Equities Fund 12
Special Opportunities Fund 14
Policies and instructions for Your account
opening, maintaining and Choosing a share class 16
closing an account in any How sales charges are calculated 16
growth fund. Sales charge reductions and waivers 17
Opening an account 18
Buying shares 19
Selling shares 20
Transaction policies 22
Dividends and account policies 22
Additional investor services 23
Details that apply to the Fund details
growth funds as a group. Business structure 24
Sales compensation 25
More about risk 27
For more information back cover
<PAGE>
Overview
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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.
GOAL OF THE GROWTH FUNDS
John Hancock growth funds seek long-term growth by investing primarily in common
stocks. Each fund has its own strategy and its own 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 have longer time horizons
o are willing to accept higher short-term risk along with higher potential
long-term returns
o want to diversify their portfolios
o are seeking funds for the growth portion of an asset
allocation portfolio
o are investing for retirement or other goals that are many years in the future
Growth funds may NOT be appropriate if you:
o are investing with a shorter time horizon in mind
o are uncomfortable with an investment that will go up and down in value
THE MANAGEMENT FIRM
All John Hancock growth funds are managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Mutual Life Insurance Company and manages more than $30 billion in assets.
<PAGE>
Emerging Growth Fund
REGISTRANT NAME: JOHN HANCOCK SERIES TRUST
TICKER SYMBOL CLASS A: TAEMX CLASS B: TSEGX CLASS C: N/A
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GOAL AND STRATEGY
[Clip Art] The fund seeks long-term capital appreciation. To pursue this goal,
the fund invests in emerging companies (market capitalization of less than $1
billion). Under normal circumstances, the fund invests at least 80% of assets in
a diversified portfolio of these companies. The fund looks for companies that
show rapid growth but are not yet widely recognized. The fund also may invest in
established companies that, because of new management, products or
opportunities, offer the possibility of accelerating earnings. The fund does not
invest for income.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in the common stocks of U.S. and foreign
emerging growth companies, although it may invest up to 20% of assets in other
types of companies. The fund may also invest in warrants, preferred stocks and
investment-grade convertible debt securities.
For liquidity and flexibility, the fund may place up to 20% of assets in cash or
in investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Stocks of emerging growth companies carry
higher risks than stocks of larger companies. This is because emerging growth
companies:
o may be in the early stages of development
o may be dependent on a small number of products or services
o may lack substantial capital reserves
o do not have proven track records
In addition, stocks of emerging companies are often traded in low volumes, which
can increase market and liquidity risks. Before you invest, please read "More
about risk" starting on page 27.
PORTFOLIO MANAGEMENT
[Clip Art] Bernice S. Behar, CFA, leads the fund's portfolio management team.
Other team members are managers Laura Allen, CFA, Anurag Pandit, CFA, and Andrew
Slabin. Ms. Behar, senior vice president, has been in the investment business
since 1986 and has managed the fund since 1996. Ms. Allen, senior vice
president, has been in the investment business since 1991 and joined the fund's
management team in 1998. Mr. Pandit, second vice president, has been in the
investment business since 1984 and a member of the fund's team since 1996. Mr.
Slabin has been with John Hancock Funds since 1993 and joined the team in 1996.
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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. Because no Class C shares were outstanding during the past year, Class
C expenses are based on Class B expenses. Future expenses may be greater or
less.
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Shareholder transaction expenses Class A Class B Class C
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Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none none
Maximum sales charge imposed on
reinvested dividends none none none
Maximum deferred sales charge none(1) 5.00% 1.00%
Redemption fee(2) none none none
Exchange fee none none none
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Annual fund operating expenses (as a % of average net assets)
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Management fee 0.75% 0.75% 0.75%
12b-1 fee(3) 0.25% 1.00% 1.00%
Other expenses 0.29% 0.29% 0.29%
Total fund operating expenses 1.29% 2.04% 2.04%
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 $117 $198
Class B shares
Assuming redemption
at end of period $71 $94 $130 $217
Assuming no redemption $21 $64 $110 $217
Class C shares
Assuming redemption
at end of period $31 $64 $110 $237
Assuming no redemption $21 $64 $110 $237
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) 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 EMERGING GROWTH FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
These figures reflect the fund's
4-1 stock split on May 1, 1998
[The following table was originally a bar chart in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 33.59 27.40 (11.82) 73.78 6.19 24.53 2.80 33.60 12.48 22.44
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
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Class A - period ended: 10/91(1) 10/92 10/93 10/94 10/95(2) 10/96 10/97
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<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $4.53 $4.82 $5.15 $6.47 $6.71 $9.02 $10.22
Net investment income (loss)(3) (0.01) (0.05) (0.04) (0.04) (0.07) (0.09) (0.07)
Net realized and unrealized gain (loss) on investments 0.30 0.40 1.36 0.28 2.38 1.29 2.41
Total from investment operations 0.29 0.35 1.32 0.24 2.31 1.20 2.34
Less distributions:
Distributions from net realized gain on investments sold -- (0.02) -- -- -- -- (0.21)
Total distributions -- (0.02) -- -- -- -- (0.21)
Net asset value, end of period $4.82 $5.15 $6.47 $6.71 $9.02 $10.22 $12.35
Total investment return at net asset value(4) (%) 6.29 7.32 25.68 3.59 34.56 13.27 23.35
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 38,859 46,137 81,263 131,053 179,481 218,497 209,384
Ratio of expenses to average net assets (%) 0.33 1.67 1.40 1.44 1.38 1.32 1.29(5)
Ratio of net investment income (loss) to average net assets (%) (0.15) (1.03) (0.70) (0.71) (0.83) (0.86) (0.57)
Portfolio turnover rate (%) 66 48 29 25 23 44 96
Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A 0.0669 0.0694
<CAPTION>
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Class B - period ended: 10/88 10/89 10/90 10/91 10/92 10/93
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<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.97 $2.64 $3.19 $2.77 $4.81 $5.09
Net investment income (loss)(3) 0.03 (0.02) (0.05) (0.08) (0.09) (0.09)
Net realized and unrealized gain (loss) on investments 0.64 0.71 (0.31) 2.12 0.39 1.33
Total from investment operations 0.67 0.69 (0.36) 2.04 0.30 1.24
Less distributions:
Dividends from net investment income -- (0.01) -- -- -- --
Distributions from net realized gain on investments sold -- (0.13) (0.06) -- (0.02) --
Total distributions -- (0.14) (0.06) -- (0.02) --
Net asset value, end of period $2.64 $3.19 $2.77 $4.81 $5.09 $6.33
Total investment return at net asset value(4) (%) 33.59 27.40 (11.82) 73.78 6.19 24.53
Total adjusted investment return at net asset value(4,7) (%) 31.00 27.37 -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,232 7,877 11,668 52,743 86,923 219,484
Ratio of expenses to average net assets (%) 3.05 3.48 3.11 2.85 2.64 2.28
Ratio of adjusted expenses to average net assets(8) (%) 5.64 3.51 -- -- -- --
Ratio of net investment income (loss) to average net assets (%) 0.81 (0.67) (1.64) (1.83) (1.99) (1.58)
Ratio of adjusted net investment income (loss) to
average net assets(8) (%) (1.78) (0.70) -- -- -- --
Portfolio turnover rate (%) 252 90 82 66 48 29
Fee reduction per share ($) 0.073 0.001 -- -- -- --
Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
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Class B - period ended: 10/94 10/95(2) 10/96 10/97
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<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $6.33 $6.51 $8.70 $9.78
Net investment income (loss)(3) (0.09) (0.11) (0.15) (0.14)
Net realized and unrealized gain (loss) on investments 0.27 2.30 1.23 2.29
Total from investment operations 0.18 2.19 1.08 2.15
Less distributions:
Dividends from net investment income -- -- -- --
Distributions from net realized gain on investments sold -- -- -- (0.21)
Total distributions -- -- -- (0.21)
Net asset value, end of period $6.51 $8.70 $9.78 $11.72
Total investment return at net asset value(4) (%) 2.80 33.60 12.48 22.44
Total adjusted investment return at net asset value(4,7) (%) -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 283,435 393,478 451,268 472,594
Ratio of expenses to average net assets (%) 2.19 2.11 2.05 2.02(5)
Ratio of adjusted expenses to average net assets(8) (%) -- -- -- --
Ratio of net investment income (loss) to average net assets (%) (1.46) (1.55) (1.59) (1.30)
Ratio of adjusted net investment income (loss) to
average net assets(8) (%) -- -- -- --
Portfolio turnover rate (%) 25 23 44 96
Fee reduction per share ($) -- -- -- --
Average brokerage commission rate(6) ($) N/A N/A 0.0669 0.0694
</TABLE>
(1) Class A shares commenced operations on August 22, 1991. (Not annualized.)
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(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) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 per share.
(6) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(7) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(8) Unreimbursed, without fee reduction.
EMERGING GROWTH FUND 5
<PAGE>
Financial Industries Fund
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST II
TICKER SYMBOL CLASS A: FIDAX CLASS B: FIDBX
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GOAL AND STRATEGY
[Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund
invests in U.S. and foreign financial services companies. These include banks,
thrifts, finance companies, brokerage and advisory firms, real estate-related
firms and insurance companies.
Under normal circumstances, the fund invests at least 65% of assets in these
companies.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in the common stocks of U.S. and foreign
companies. It may also invest in warrants, preferred stocks and debt securities.
The fund may invest up to 5% of net assets in junk bonds.
For liquidity and flexibility, the fund may place up to 15% of net assets in
cash or in investment-grade short-term securities. In abnormal market
conditions, it may invest up to 80% in these securities as a defensive tactic.
The fund may also invest in certain higher-risk securities, and may engage in
other investment practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates in a single
sector, its performance is largely dependent on the sector's performance, which
may differ from that of the overall stock market. Falling interest rates or
deteriorating economic conditions can adversely affect the performance of
financial services companies' stocks, while rising interest rates will cause a
decline in the value of any debt securities the fund holds. Before you invest,
please read "More about risk" starting on page 27.
PORTFOLIO MANAGEMENT
[Clip Art] James K. Schmidt, CFA, leads the fund's management team. Mr. Schmidt,
executive vice president, has been in the investment business since 1979 and has
served as the fund's portfolio manager since 1985. Other portfolio managers on
the team are Thomas Finucane, vice president, who has been in the investment
business since joining the adviser in 1990 and Thomas Goggins, senior vice
president, who has been in the investment business since 1986 and joined the
adviser in 1995.
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INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below are based on estimated 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
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
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Annual fund operating expenses (as a % of average net assets)
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Management fee 0.79% 0.79%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.38% 0.38%
Total fund operating expenses 1.47% 2.17%
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 $64 $94 $126 $217
Class B shares
Assuming redemption
at end of period $72 $98 $136 $232
Assuming no redemption $22 $68 $116 $232
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) 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 FINANCIAL INDUSTRIES 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 following table was originally a bar chart in the printed materials.]
<TABLE>
<S> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 29.76(4) 37.19
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
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Class A - period ended: 10/96(1) 10/97
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<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $11.03
Net investment income (loss)(2) 0.02 0.14
Net realized and unrealized gain (loss) on investments 2.51 3.77
Total from investment operations 2.53 3.91
Less distributions:
Dividends from net investment income -- (0.03)
Distributions from net realized gain on investments sold -- (0.65)
Total distributions -- (0.68)
Net asset value, end of period $11.03 $14.26
Total investment return at net asset value(3) (%) 29.76(4) 37.19
Total adjusted investment return at net asset value(3,5) (%) 26.04(4) 36.92
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 895 416,698
Ratio of expenses to average net assets (%) 1.20(6) 1.20
Ratio of adjusted expenses to average net assets(7) (%) 7.07(6) 1.47
Ratio of net investment income (loss) to average net assets (%) 0.37(6) 1.10
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (5.50)(6) 0.83
Portfolio turnover rate (%) 31 6
Fee reduction per share(2) ($) 0.38 0.03
Average brokerage commission rate(8) ($) 0.0649 0.0661
<CAPTION>
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Class B - period ended: 10/97(1)
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<S> <C>
Per share operating performance
Net asset value, beginning of period $11.43
Net investment income (loss)(2) 0.04
Net realized and unrealized gain (loss) on investments 2.71
Total from investment operations 2.75
Less distributions:
Dividends from net investment income --
Distributions from net realized gain on investments sold --
Total distributions --
Net asset value, end of period $14.18
Total investment return at net asset value(3) (%) 24.06(4)
Total adjusted investment return at net asset value(3,5) (%) 23.85(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,308,946
Ratio of expenses to average net assets (%) 1.90(6)
Ratio of adjusted expenses to average net assets(7) (%) 2.17(6)
Ratio of net investment income (loss) to average net assets (%) 0.40(6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) 0.13(6)
Portfolio turnover rate (%) 6
Fee reduction per share(2) ($) 0.03
Average brokerage commission rate(8) ($) 0.0661
</TABLE>
(1) Class A and Class B shares commenced operations on March 14, 1996 and
January 14, 1997, respectively.
(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 no 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.
FINANCIAL INDUSTRIES FUND 7
<PAGE>
Growth Fund
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST III
TICKER SYMBOL CLASS A: JHNGX CLASS B: JHGBX CLASS C: N/A
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GOAL AND STRATEGY
[Clip Art] The fund seeks long-term capital appreciation. To pursue this goal,
the fund invests in stocks that are diversified with regard to industries and
issuers. The fund favors stocks of companies whose operating earnings and
revenues have grown more than twice as fast as the gross domestic product over
the past five years, although not all stocks in the fund's portfolio will meet
this criterion.
PORTFOLIO SECURITIES
[Clip Art] The portfolio invests primarily in the common stocks of U.S.
companies. It may also invest in warrants, preferred stocks and convertible debt
securities.
For liquidity and flexibility, the fund may invest up to 35% of net assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more than 35% in these securities as a defensive tactic. The fund may
also invest in certain higher-risk securities, and may engage in other
investment practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock 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 27.
PORTFOLIO MANAGEMENT
[Clip Art] Benjamin A. Hock, Jr., CFA, has led the fund's portfolio management
team since May 1998. A senior vice president of the adviser since 1994, Mr. Hock
has been in the investment business for over 25 years.
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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. Because no Class C shares were outstanding during the past year, Class
C expenses are based on Class B expenses. Future expenses may be greater or
less.
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Shareholder transaction expenses Class A Class B Class C
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Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none none
Maximum sales charge imposed on reinvested
dividends none none none
Maximum deferred sales charge none(1) 5.00% 1.00%
Redemption fee(2) none none none
Exchange fee none none none
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Annual fund operating expenses (as a % of average net assets)
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Management fee 0.75% 0.75% 0.75%
12b-1 fee(3) 0.30% 1.00% 1.00%
Other expenses 0.35% 0.35% 0.35%
Total fund operating expenses 1.40% 2.10% 2.10%
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 $64 $92 $123 $210
Class B shares
Assuming redemption
at end of period $71 $96 $133 $225
Assuming no redemption $21 $66 $113 $225
Class C shares
Assuming redemption
at end of period $31 $66 $113 $243
Assuming no redemption $21 $66 $113 $243
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) 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 GROWTH FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The following table was originally a bar chart in the printed materials.]
<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 (%) 6.03 11.23 30.96 (8.34) 41.68 6.06 13.03 (7.50) 27.17 19.32(4) 16.05
(scale varies from fund to fund) ten
months
</TABLE>
<TABLE>
<CAPTION>
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Class A - period ended: 12/87 12/88 12/89 12/90 12/91 12/92
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<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.03 $12.34 $13.33 $15.18 $12.93 $17.48
Net investment income (loss) 0.22 0.23 0.28 0.16 0.04 (0.06)
Net realized and unrealized gain (loss)
on investments 0.64 1.16 3.81 (1.47) 5.36 1.10
Total from investment operations 0.86 1.39 4.09 (1.31) 5.40 1.04
Less distributions:
Dividends from net investment income (0.28) (0.23) (0.29) (0.16) (0.04) --
Distributions from net realized gain
on investments sold (2.27) (0.17) (1.95) (0.78) (0.81) (1.20)
Total distributions (2.55) (0.40) (2.24) (0.94) (0.85) (1.20)
Net asset value, end of period $12.34 $13.33 $15.18 $12.93 $17.48 $17.32
Total investment return at net asset
value(3) (%) 6.03 11.23 30.96 (8.34) 41.68 6.06
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 86,426 101,497 105,014 102,416 145,287 153,057
Ratio of expenses to average net assets (%) 1.00 1.06 0.96 1.46 1.44 1.60
Ratio of net investment income (loss)
to average net assets (%) 1.41 1.76 1.73 1.12 0.27 (0.36)
Portfolio turnover rate (%) 68 47 61 102 82 71
Average brokerage commission rate(7) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
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Class A - period ended: 12/93 12/94 12/95 10/96(1) 10/97
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<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $17.32 $17.40 $15.89 $19.51 $23.28
Net investment income (loss) (0.11) (0.10) (0.09)(2) (0.13)(2) (0.12)(2)
Net realized and unrealized gain (loss)
on investments 2.33 (1.21) 4.40 3.90 3.49
Total from investment operations 2.22 (1.31) 4.31 3.77 3.37
Less distributions:
Dividends from net investment income -- -- -- -- (2.28)
Distributions from net realized gain
on investments sold (2.14) (0.20) (0.69) -- --
Total distributions (2.14) (0.20) (0.69) -- --
Net asset value, end of period $17.40 $15.89 $19.51 $23.28 $24.37
Total investment return at net asset
value(3) (%) 13.03 (7.50) 27.17 19.32(4) 16.05
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 162,937 146,466 241,700 279,425 303,067
Ratio of expenses to average net assets (%) 1.56 1.65 1.48 1.48(5) 1.44
Ratio of net investment income (loss)
to average net assets (%) (0.67) (0.64) (0.46) (0.73)(5) (0.51)
Portfolio turnover rate (%) 68 52 68(6) 59 133
Average brokerage commission rate(7) ($) N/A N/A N/A 0.0695 0.0697
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(8) 12/95 10/96(1) 10/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $17.16 $15.83 $19.25 $22.83
Net investment income (loss) (2) (0.20) (0.26) (0.26) (0.27)
Net realized and unrealized gain (loss) on
investments (0.93) 4.37 3.84 3.42
Total from investment operations (1.13) 4.11 3.58 3.15
Less distributions:
Distributions from net realized gain on
investments sold (0.20) (0.69) -- (2.28)
Net asset value, end of period $15.83 $19.25 $22.83 $23.70
Total investment return at net asset value(3) (%) (6.56)(4) 26.01 18.60(4) 15.33
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,807 15,913 25,474 36,430
Ratio of expenses to average net assets (%) 2.38(5) 2.31 2.18(5) 2.13
Ratio of net investment income (loss) to
average net assets (%) (1.25)(5) (1.39) (1.42)(5) (1.20)
Portfolio turnover rate (%) 52 68(6) 59 133
Average brokerage commission rate(7) ($) N/A N/A 0.0695 0.0697
</TABLE>
(1) Effective October 31, 1996, the fiscal year end changed from December 31 to
October 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) Excludes merger activity.
(7) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(8) Class B shares commenced operations on January 3, 1994.
GROWTH FUND 9
<PAGE>
Regional Bank Fund
This fund is temporarily closed to new investments except for existing accounts
(see the statement of additional information).
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST II
TICKER SYMBOL CLASS A: FRBAX CLASS B: FRBFX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term capital appreciation. To pursue this goal,
the fund invests in regional banks and lending institutions, including:
o commercial and industrial banks
o savings and loan associations
o bank holding companies
These financial institutions provide full-service banking, have primarily
domestic assets and are typically based outside of New York City and Chicago.
They may or may not be members of the Federal Reserve, and their deposits may or
may not be FDIC-insured.
Under normal circumstances, the fund invests at least 65% of assets in these
companies; it may invest up to 35% of assets in other financial services
companies, including lending companies and money center banks. The fund may
invest up to 5% of net assets in stocks of non-financial services companies and
up to 5% in junk bonds issued by banks.
Because regional banks typically pay regular dividends, moderate income is an
investment goal.
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 investment-grade convertible
debt securities, as well as foreign stocks.
For liquidity and flexibility, the fund may place up to 15% of net assets in
cash or in investment-grade short-term securities. In abnormal market
conditions, it may invest up to 80% in these securities as a defensive tactic.
The fund may also invest in certain higher-risk securities, and may engage in
other investment practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates in a single
industry, its performance is largely dependent on the industry's performance,
which may differ in direction and degree from that of the overall stock market.
Falling interest rates or deteriorating economic conditions can adversely affect
the performance of bank stocks, while rising interest rates will cause a decline
in the value of any debt securities the fund holds. Before you invest, please
read "More about risk" starting on page 27.
PORTFOLIO MANAGEMENT
[Clip Art] James K. Schmidt, CFA, leads the fund's management team. Mr. Schmidt,
executive vice president, has been in the investment business since 1979 and has
served as the fund's portfolio manager since 1985. Other portfolio managers on
the team are Thomas Finucane, vice president, who has been in the investment
business since joining the adviser in 1990 and Thomas Goggins, senior vice
president, who has been in the investment business since 1986 and joined the
adviser in 1995.
- --------------------------------------------------------------------------------
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 0.75% 0.75%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.25% 0.25%
Total fund operating expenses 1.30% 2.00%
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 $63 $89 $118 $199
Class B shares
Assuming redemption
at end of period $70 $93 $128 $214
Assuming no redemption $20 $63 $108 $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) 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 REGIONAL BANK FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was originally a bar chart in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 36.89 20.46 (32.29) 75.35 37.20 36.71 5.69 30.11 27.89 45.78
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/92(1) 10/93 10/94 10/95 10/96 10/97
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $13.47 $17.47 $21.62 $21.52 $27.14 $33.99
Net investment income (loss) 0.21 0.26(2) 0.39(2) 0.52(2) 0.63(2) 0.64(2)
Net realized and unrealized gain (loss) on
investment 3.98 5.84 0.91 5.92 7.04 15.02
Total from investment operations 4.19 6.10 1.30 6.44 7.67 15.66
Less distributions:
Dividends from net investment income (0.19) (0.26) (0.34) (0.48) (0.60) (0.61)
Distributions from net realized gain on
investments sold -- (1.69) (1.06) (0.34) (0.22) (0.31)
Total distributions (0.19) (1.95) (1.40) (0.82) (0.82) (0.92)
Net asset value, end of period $17.47 $21.62 $21.52 $27.14 $33.99 $48.73
Total investment return at net asset
value(3) (%) 31.26(4) 37.45 6.44 31.00 28.78 46.79
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 31,306 94,158 216,978 486,631 860,843 1,596,836
Ratio of expenses to average net assets (%) 1.41(5) 1.35 1.34 1.39 1.36 1.30
Ratio of net investment income to average
net assets (%) 1.64(5) 1.29 1.78 2.23 2.13 1.55
Portfolio turnover rate (%) 53 35 13 14 8 5
Average brokerage commission rate(6) ($) N/A N/A N/A N/A 0.0694 0.0694
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/88 10/89 10/90 10/91 10/92
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.02 $11.89 $13.00 $8.13 $13.76
Net investment income (loss) 0.16 0.20 0.30 0.29 0.18
Net realized and unrealized gain (loss) on investments 3.12 2.02 (4.19) 5.68 4.56
Total from investment operations 3.28 2.22 (3.89) 5.97 4.74
Less distributions:
Dividends from net investment income (0.15) (0.16) (0.19) (0.34) (0.28)
Distributions from net realized gain on
investments sold (1.26) (0.95) (0.76) -- (0.78)
Distributions from capital paid-in -- -- (0.03) -- --
Total distributions (1.41) (1.11) (0.98) (0.34) (1.06)
Net asset value, end of period $11.89 $13.00 $8.13 $13.76 $17.44
Total investment return at net asset value(3) (%) 36.89 20.46 (32.29) 75.35 37.20
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 50,965 81,167 38,992 52,098 56,016
Ratio of expenses to average net assets (%) 2.17 1.99 1.99 2.04 1.96
Ratio of net investment income (loss) to average
net assets (%) 1.50 1.67 2.51 2.65 1.21
Portfolio turnover rate (%) 87 85 56 75 53
Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95 10/96 10/97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $17.44 $21.56 $21.43 $27.02 $33.83
Net investment income (loss) 0.15(2) 0.23(2) 0.36(2) 0.42(2) 0.35(2)
Net realized and unrealized gain (loss) on
investments 5.83 0.91 5.89 7.01 14.95
Total from investment operations 5.98 1.14 6.25 7.43 15.30
Less distributions:
Dividends from net investment income (0.17) (0.21) (0.32) (0.40) (0.34)
Distributions from net realized gain on
investments sold (1.69) (1.06) (0.34) (0.22) (0.31)
Distributions from capital paid-in -- -- -- -- --
Total distributions (1.86) (1.27) (0.66) (0.62) (0.65)
Net asset value, end of period $21.56 $21.43 $27.02 $33.83 $48.48
Total investment return at net asset value(3) (%) 36.71 5.69 30.11 27.89 45.78
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 171,808 522,207 1,236,447 2,408,514 4,847,755
Ratio of expenses to average net assets (%) 1.88 2.06 2.09 2.07 2.00
Ratio of net investment income (loss) to average
net assets (%) 0.76 1.07 1.53 1.42 0.84
Portfolio turnover rate (%) 35 13 14 8 5
Average brokerage commission rate(6) ($) N/A N/A N/A 0.0694 0.0694
</TABLE>
(1) Class A shares commenced operations on January 3, 1992.
(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.
REGIONAL BANK FUND 11
<PAGE>
Special Equities Fund
REGISTRANT NAME: JOHN HANCOCK SPECIAL EQUITIES FUND
TICKER SYMBOL CLASS A: JHNSX CLASS B: SPQBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term capital appreciation. To pursue this goal,
the fund invests in small-capitalization companies and companies in situations
offering unusual or non-recurring opportunities. Under normal circumstances, the
fund invests at least 65% of assets in a diversified portfolio of these
companies. The fund looks for companies that dominate an emerging industry or
hold a growing market share in a fragmented industry, and that have demonstrated
annual earnings and revenue growth of at least 25%, self-financing capabilities
and strong management. The fund does not invest for income.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in the common stocks of U.S. and foreign
companies. It may also invest in warrants, preferred stocks and investment-grade
convertible debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in cash or
in investment-grade short-term securities. In abnormal market conditions, it may
invest more than 35% in these securities as a defensive tactic. The fund also
may invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Stocks of small-capitalization and
special-situation companies carry higher risks than stocks of larger companies.
This is because these companies:
o may lack proven track records
o may be dependent on a small number of products or services
o may be undercapitalized
o may have highly priced stocks that are sensitive to adverse news
In addition, stocks of these companies are often traded in low volumes, which
can increase market and liquidity risks. Before you invest, please read "More
about risk" starting on page 27.
MANAGEMENT/SUBADVISER
[Clip Art] Michael P. DiCarlo is responsible for the fund's day-to-day
investment management. He has served as the fund's portfolio manager since
January 1988, and has been in the investment business since 1984. He is
currently one of three principals in DFS Advisors LLC, which was founded in 1996
and serves as subadviser to the fund.
This fund will be closed to new investors at the end of the day its total assets
reach $2.5 billion. Further investments will be limited to existing accounts.
- --------------------------------------------------------------------------------
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) 0.81% 0.81%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.32% 0.38%
Total fund operating expenses 1.43% 2.19%
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 $64 $93 $124 $213
Class B shares
Assuming redemption
at end of period $72 $99 $137 $233
Assuming no redemption $22 $69 $117 $233
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) Includes a subadviser fee equal to 0.25% of the fund's net assets.
(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 EQUITIES FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Ernst & Young LLP.
[The following table was originally a bar chart in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 13.72 31.82 (21.89) 95.37 20.25 47.83 (0.12) 37.49 12.96 7.30
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/88 10/89 10/90 10/91 10/92
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $4.30 $4.89 $6.38 $4.97 $9.71
Net investment income (loss) 0.04 0.01 (0.12) (0.10) (0.19)(1)
Net realized and unrealized gain (loss) on investments 0.55 1.53 (1.27) 4.84 2.14
Total from investment operations 0.59 1.54 (1.39) 4.74 1.95
Less distributions:
Dividends from net investment income -- (0.05) (0.02) -- --
Distributions from net realized gain on investments
sold -- -- -- -- (0.67)
Total distributions -- (0.05) (0.02) -- (0.67)
Net asset value, end of period $4.89 $6.38 $4.97 $9.71 $10.99
Total investment return at net asset value(2) (%) 13.72 31.82 (21.89) 95.37 20.25
Total adjusted investment return at net asset value (2,3) 12.28 30.75 (22.21) 95.33 --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 11,714 12,285 8,166 19,713 44,665
Ratio of expenses to average net assets (%) 1.50 1.50 2.63 2.75 2.24
Ratio of adjusted expenses to average net assets(4) (%) 2.94 2.57 2.95 2.79 --
Ratio of net investment income (loss) to average net
assets (%) 0.82 0.47 (1.58) (2.12) (1.91)
Ratio of adjusted net investment income (loss) to
average net assets(4) (%) (0.62) (0.60) (1.90) (2.16) --
Portfolio turnover rate (%) 91 115 113 163 114
Fee reduction per share ($) 0.07 0.03 0.02 0.002 --
Average brokerage commission rate(5) ($) N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/93 10/94 10/95 10/96 10/97
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.99 $16.13 $16.11 $22.15 $24.53
Net investment income (loss) (0.20)(1) (0.21)(1) (0.18)(1) (0.22)(1) (0.29)(1)
Net realized and unrealized gain (loss) on investments 5.43 0.19 6.22 3.06 2.08
Total from investment operations 5.23 (0.02) 6.04 2.84 1.79
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized gain on investments
sold (0.09) -- -- (0.46) --
Total distributions (0.09) -- -- (0.46) --
Net asset value, end of period $16.13 $16.11 $22.15 $24.53 $26.32
Total investment return at net asset value(2) (%) 47.83 (0.12) 37.49 12.96 7.30
Total adjusted investment return at net asset value(2,3) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 296,793 310,625 555,655 972,312 807,371
Ratio of expenses to average net assets (%) 1.84 1.62 1.48 1.42 1.43
Ratio of adjusted expenses to average net assets(4) (%) -- -- -- -- --
Ratio of net investment income (loss) to average net
assets (%) (1.49) (1.40) (0.97) (0.89) (1.18)
Ratio of adjusted net investment income (loss) to
average net assets(4) (%) -- -- -- -- --
Portfolio turnover rate (%) 33 66 82 59 41
Fee reduction per share ($) -- -- -- -- --
Average brokerage commission rate(5) ($) N/A N/A N/A 0.0677 0.0649
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93(6) 10/94 10/95 10/96 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $12.30 $16.08 $15.97 $21.81 $23.96
Net investment income (loss)(1) (0.18) (0.30) (0.31) (0.40) (0.46)
Net realized and unrealized gain (loss) on investments 3.96 0.19 6.15 3.01 2.02
Total from investment operations 3.78 (0.11) 5.84 2.61 1.56
Less distributions:
Distributions from net realized gain on investments sold -- -- -- (0.46) --
Net asset value, end of period $16.08 $15.97 $21.81 $23.96 $25.52
Total investment return at net asset value(2) (%) 30.73(7) (0.68) 36.57 12.09 6.51
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 158,281 191,979 454,934 956,374 951,449
Ratio of expenses to average net assets (%) 2.34(8) 2.25 2.20 2.16 2.19
Ratio of net investment income (loss) to average net
assets (%) (2.03)(8) (2.02) (1.69) (1.65) (1.95)
Portfolio turnover rate (%) 33 66 82 59 41
Average brokerage commission rate(5) ($) N/A N/A N/A 0.0677 0.0649
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(4) Unreimbursed, without fee reduction.
(5) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(6) Class B shares commenced operations on March 1, 1993.
(7) Not annualized.
(8) Annualized.
SPECIAL EQUITIES FUND 13
<PAGE>
Special Opportunities Fund
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST III
TICKER SYMBOL CLASS A: SPOAX CLASS B: SPOBX CLASS C: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term capital appreciation. To pursue this goal,
the fund invests in those economic sectors that appear to have a higher than
average earning potential.
Under normal circumstances, at least 75% of the fund's equity securities is
invested within five or fewer sectors (e.g., financial services, energy,
technology). At times, the fund may focus on a single sector. The fund first
determines the inclusion and weighting of sectors, using macroeconomic as well
as other factors, then selects portfolio securities by seeking the most
attractive companies. The fund may add or drop sectors.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in common stocks of U.S. and foreign
companies of any size. It may also invest in warrants, preferred stocks,
convertible debt securities, U.S. Government securities and corporate bonds
rated at least BBB/Baa or equivalent, and may invest in certain higher-risk
securities. The fund also may make short sales of securities, and may engage in
other investment practices.
For liquidity and flexibility, the fund may place assets in cash or invest in
investment-grade short-term securities.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. By focusing on a relatively small number
of sectors or issuers, the fund runs the risk that any factor influencing those
sectors or issuers will have a major effect on performance. The fund may invest
in companies with smaller market capitalizations, which represent higher
near-term risks than larger capitalization companies. These factors make the
fund likely to experience higher volatility than most other types of growth
funds. Before you invest, please read "More about risk" starting on page 27.
PORTFOLIO MANAGEMENT
[Clip Art] Barbara C. Friedman, CFA, is leader of the fund's portfolio
management team. A senior vice president of the adviser, Ms. Friedman has been a
member of the management team since joining John Hancock Funds in January 1998.
Ms. Friedman has been in the investment business since 1973.
- --------------------------------------------------------------------------------
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. Because no Class C shares were outstanding during the past year, Class
C expenses are based on Class B expenses. Future expenses may be greater or
less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none none
Maximum sales charge imposed on reinvested
dividends none none none
Maximum deferred sales charge none(1) 5.00% 1.00%
Redemption fee(2) none none none
Exchange fee none none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.80% 0.80% 0.80%
12b-1 fee(3) 0.30% 1.00% 1.00%
Other expenses 0.49% 0.49% 0.49%
Total fund operating expenses 1.59% 2.29% 2.29%
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 $65 $98 $132 $229
Class B shares
Assuming redemption
at end of period $73 $102 $143 $245
Assuming no redemption $23 $72 $123 $245
Class C shares
Assuming redemption
at end of period $33 $72 $123 $263
Assuming no redemption $23 $72 $123 $263
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) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
14 SPECIAL OPPORTUNITIES FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was originally a bar chart in the printed materials.]
Volatility, as indicated by Class A
year-by-year total investment return (%) (6.71) 17.53 36.15 8.79
(scale varies from fund to fund)
<TABLE>
<CAPTION>
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Class A - period ended: 10/94(1) 10/95 10/96 10/97
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<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $7.93 $9.32 $10.92
Net investment income (loss)(2) (0.03) (0.07) (0.11) (0.06)
Net realized and unrealized gain (loss) on investments (0.54) 1.46 3.34 1.00
Total from investment operations (0.57) 1.39 3.23 0.94
Less distributions:
Distributions from net realized gain on investments sold -- -- (1.63) (0.46)
Net asset value, end of period $7.93 $9.32 $10.92 $11.40
Total investment return at net asset value(3) (%) (6.71) 17.53 36.15 8.79
Total adjusted investment return at net asset value(3,4) (%) (6.83) -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 92,325 101,562 156,578 141,997
Ratio of expenses to average net assets (%) 1.50 1.59 1.59 1.59
Ratio of adjusted expenses to average net assets(5) (%) 1.62 -- -- --
Ratio of net investment income (loss) to average net assets (%) (0.41) (0.87) (1.00) (0.57)
Ratio of adjusted net investment (loss) to average net assets(5) (%) (0.53) -- -- --
Portfolio turnover rate (%) 57 155 240 317
Fee reduction per share ($) 0.01(2) -- -- --
Average brokerage commission rate(6) ($) N/A N/A 0.0600 0.0645
<CAPTION>
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Class B - period ended: 10/94(1) 10/95 10/96 10/97
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<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $7.87 $9.19 $10.67
Net investment income (loss)(2) (0.09) (0.13) (0.18) (0.13)
Net realized and unrealized gain (loss) on investments (0.54) 1.45 3.29 0.95
Total from investment operations (0.63) 1.32 3.11 0.82
Less distributions:
Distributions from net realized gain on investments sold -- -- (1.63) (0.46)
Net asset value, end of period $7.87 $9.19 $10.67 $11.03
Total investment return at net asset value(3) (%) (7.41) 16.77 35.34 7.84
Total adjusted investment return at net asset value(3,4) (%) (7.53) -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 131,983 137,363 238,901 204,812
Ratio of expenses to average net assets (%) 2.22 2.30 2.29 2.28
Ratio of adjusted expenses to average net assets(5) (%) 2.34 -- -- --
Ratio of net investment income (loss) to average net assets (%) (1.13) (1.55) (1.70) (1.25)
Ratio of adjusted net investment (loss) to average net assets(5) (%) (1.25) -- -- --
Portfolio turnover rate (%) 57 155 240 317
Fee reduction per share ($) 0.01(2) -- -- --
Average brokerage commission rate(6) ($) N/A N/A 0.0600 0.0645
</TABLE>
(1) Class A and B shares commenced operations on November 1, 1993.
(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) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
SPECIAL OPPORTUNITIES FUND 15
<PAGE>
Your account
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CHOOSING A SHARE CLASS
All John Hancock growth funds offer two classes of shares, Class A and Class B.
In addition, Class C shares are available for Emerging Growth Fund, Growth Fund
and Special Opportunities Fund. Each class has its own cost structure, as
outlined below, allowing you to choose the one that best meets your
requirements. For more details, see "How sales charges are calculated." Your
financial representative can help you decide which share class is best for
you.
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Class A - for all funds
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o Front-end sales charges. There are several ways to reduce these charges,
described under "Sales charge reductions and waivers" on the following
page.
o Lower annual expenses than Class B and Class C shares.
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Class B - for all funds
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o No front-end sales charge; all your money goes to work for you right away.
o Higher annual expenses than Class A shares.
o A contingent deferred sales charge that declines from 5% over six years.
o Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses.
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Class C - for selected funds
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Applies to Emerging Growth Fund, Growth Fund and Special Opportunities Fund.
o No front-end sales charge; all your money goes to work for you right away.
o Higher annual expenses than Class A shares.
o A 1% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so the fund's annual expenses
continue at the same level throughout the life of your investment.
For actual past expenses of Class A and Class B shares, see the fund-by-fund
information earlier in this prospectus.
Special Equities Fund offers Class Y shares, which have their own expense
structure and are available to financial institutions only. Call Signature
Services for more information (see back cover of this prospectus).
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
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Class A sales charges
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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:
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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.
16 YOUR ACCOUNT
<PAGE>
Class B Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) on shares you sell within 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:
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Class B deferred charges
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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.
Class C Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) of 1% on shares you sell within one year of purchase. 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.
CDSC calculations are based on the number of shares involved, not on the value
of your account. Each time you place a request to sell shares we will first sell
any shares in your account that carry no CDSC.
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.
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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. Retirement plans investing $1 million in Class
B shares may add that value to Class A purchases to calculate sales charges.
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, contact your
financial representative or Signature Services, or consult the SAI (see the back
cover of this prospectus).
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 account 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 this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for each 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
o to purchase a John Hancock Declaration annuity
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
YOUR ACCOUNT 17
<PAGE>
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 selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed 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 with John
Hancock Funds into an individual account in a John Hancock fund
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
Signature Services, or consult the SAI.
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OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest
at least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion in
John Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges 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.
18 YOUR ACCOUNT
<PAGE>
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Buying shares
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Opening an account Adding to an account
By check
[Clip Art] o Make out a check for o Make out a check for the
the investment amount, investment amount payable to
payable to "John Hancock "John Hancock Signature
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 slip
representative, or mail is available, include a note
them to Signature Services specifying the fund name, your
(address on next page). 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, investment to:
or 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)
Services. in which the account is
registered. Your bank may
o Instruct your bank to wire charge a fee to wire funds.
the 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 o Verify that your bank or credit
exchange." 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."
YOUR ACCOUNT 19
<PAGE>
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Selling shares
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Designed for To sell some or all of your shares
By letter
[Clip Art] o Accounts of any type. o Write a letter of instruction
or complete a stock power
o Sales of any amount. indicating the fund name, your
share class, your account
number, the name(s) in which the
account is registered and the
dollar value or number of shares
you wish to sell.
o Include all signatures and any
additional documents that may be
required (see next page).
o Mail the materials to Signature
Services.
o A check will be mailed to the
name(s) and address in which the
account is registered, or
otherwise according to your
letter of instruction.
By phone
[Clip Art] o Most accounts. o For automated service 24 hours
a day using your touch-tone
o Sales of up to $100,000. phone, call the EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most business
days.
By wire or electronic funds transfer (EFT)
[Clip Art] o Requests by letter to o Fill out the "Telephone
sell any amount (accounts Redemption" section of your new
of any type). account application.
o Requests by phone to sell o To verify that the telephone
up to $100,000 (accounts redemption privilege is in place
with telephone redemption on an account, or to request the
privileges). forms to add it to an existing
account, call Signature
Services.
o Amounts of $1,000 or more will
be wired on the next business
day. A $4 fee will be deducted
from your account.
o Amounts of less than $1,000 may
be sent by EFT or by check.
Funds from EFT transactions are
generally available by the
second business day. Your bank
may charge a fee for this
service.
By exchange
[Clip Art] o Accounts of any type. o Obtain a current prospectus for
the fund into which you are
o Sales of any amount. exchanging by calling your
financial representative or
Signature Services.
o Call your financial
representative or Signature
Services to request an exchange.
--------------------------------
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."
20 YOUR ACCOUNT
<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)
The signature guarantee must be from a member of the Signature Guarantee
Medallion Program (generally, a broker or securities dealer). We may refuse any
other source. A notary public CANNOT provide a signature guarantee.
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Seller Requirements for written requests
[Clip Art]
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Owners of individual, joint, sole o Letter of instruction.
proprietorship, UGMA/UTMA (custodial
accounts for minors) or general partner o On the letter, the signatures and
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 association o Letter of instruction.
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.
YOUR ACCOUNT 21
<PAGE>
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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 and class
C 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.
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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. Any capital gains are distributed annually. Regional Bank
Fund typically pays income dividends quarterly and Financial Industries Fund
typically pays income dividends annually. The other funds do not usually pay
income dividends.
22 YOUR ACCOUNT
<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.
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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 retirement plans,
including Traditional and Roth IRAs, SIMPLE IRAs, SIMPLE 401(k)s, SEPs, 401(k)s,
money purchase 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.
YOUR ACCOUNT 23
<PAGE>
Fund details
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BUSINESS STRUCTURE
How the funds are organized Each John Hancock growth 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 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").
-----------------
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
---------------------------
Subadviser
DFS Advisers LLC
75 State Street
Boston, MA 02109
Provides portfolio management
services to Special Equities Fund.
-----------------------------------------
------------------------------------
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.
------------------------------------
24 FUND DETAILS
<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 Emerging Growth Fund, Financial Industries Fund and
Special Opportunities Fund, each fund's investment goal is fundamental and may
only be changed with shareholder approval.
Diversification All of the growth 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 and Class C
shares, interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
Emerging Growth $ 12,476,287 2.75%
Financial Industries $ 7,546,464 1.29%
Growth $ 162,442 0.51%
Regional Bank $ 58,931,361 1.55%
Special Equities $ 4,156,261 0.45%
Special Opportunities $ 7,659,598 3.39%
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
Class C Class C shares began operations after the 1997 fiscal year. Therefore,
there are no unreimbursed expenses to report.
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.
FUND DETAILS 25
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A investments
- ---------------------------------------------------------------------------------------------------------------------------
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total 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
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 3.75% 0.25% 4.00%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class C investments
- ---------------------------------------------------------------------------------------------------------------------------
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 0.75% 0.25% 1.00%
</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.
26 FUND DETAILS
<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. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. 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 fund will be positive over any period of time -- days, months or
years. However, stock funds as a category have historically performed better
over the long term than bond or money market funds.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks.
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. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency denominated investments and may widen any losses.
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. The seller may
have to lower the price, sell other securities instead or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
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. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. 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 attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
Year 2000 risk The risk that the funds' operations could be disupted by year
2000-related computer system problems. Although the adviser and the funds'
service providers are taking steps to address this issue, there may still be
some risk of adverse effects. Common to all mutual funds.
FUND DETAILS 27
<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
o Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
Emerging Financial Growth Regional Special Special
Growth Industries Bank Equities Opportunities
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <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 33.3 5 33.3 33.3
Repurchase agreements The purchase of a
security that must later be sold back
to the seller 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. 30 33.3 33.3 -- 33.3 33.3
Short sales The selling of securities which
have been borrowed on the expectation that
the market price will drop.
o Hedged. Hedged leverage, market,
correlation, liquidity, opportunity risks. o o o -- o *
o Speculative. Speculative leverage, market,
liquidity risks. -- o o -- o 5
Short-term trading Selling a security soon
after purchase. A portfolio engaging 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 securities Securities
rated below BBB/Baa are considered
junk bonds. Credit, market, interest rate,
liquidity, valuation, information risks. 10 5 5 5 -- --
Foreign equities
o Stocks issued by foreign companies.
Market, currency, information, natural
event, political risks. * * 15 o * *
o 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. * * 15 o * *
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 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. * o o -- o *
o Options on securities and indices.
Interest rate, currency, market, hedged or
speculative leverage, correlation,
liquidity, credit, opportunity risks. * o o o o *
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 * -- o *
o Speculative. Currency, speculative
leverage, liquidity risks. -- o -- -- o --
</TABLE>
28 FUND DETAILS
<PAGE>
<PAGE>
<PAGE>
<PAGE>
For more information
- ---------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
growth 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). You may visit
the Securities and Exchange Commission's Internet website (www.sec.gov) to view
the SAI, material incorporated by reference and other information.
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)
(C) 1996 John Hancock Funds, Inc.
GROPN 6/98
<PAGE>
JOHN HANCOCK
International/
Global Funds
[LOGO]
- --------------------------------------------------------------------------------
Prospectus
June 1, 1998*
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)
Short-Term Strategic Income Fund may invest up to 67% in junk bonds; read risk
information carefully.
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.
*March 1, 1998 for European Equity Fund, Global Rx Fund, Global Technology Fund
and Pacific Basin Equities Fund.
Growth
European Equity Fund
Global Fund
Global Rx Fund
Global Technology Fund
International Fund
Pacific Basin Equities Fund
Income
Short-Term Strategic Income Fund
World Bond Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
- --------------------------------------------------------------------------------
A fund-by-fund look at o Growth
goals, strategies,
risks, expenses and European Equity Fund 4
financial history. Global Fund 6
Global Rx Fund 8
Global Technology Fund 10
International Fund 12
Pacific Basin Equities Fund 14
o Income
Short-Term Strategic Income Fund 16
World Bond Fund 18
Policies and instructions Your account
for opening, maintaining
and closing an account in any Choosing a share class 20
international/global fund. How sales charges are calculated 20
Sales charge reductions and waivers 21
Opening an account 22
Buying shares 23
Selling shares 24
Transaction policies 26
Dividends and account policies 26
Additional investor services 27
Details that apply to the Fund details
international/global funds
as a group. Business structure 28
Sales compensation 29
More about risk 31
For more information back cover
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] 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.
GOAL OF THE INTERNATIONAL/GLOBAL FUNDS
John Hancock international/global funds invest in foreign and U.S. securities.
Most of the funds invest primarily in stocks and seek long-term growth of
capital. Two funds invest primarily in bonds and seek current income or maximum
total return. Each fund has its own strategy and own 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 seeking to diversify a portfolio of domestic investments
o are seeking access to markets that can be less accessible to individual
investors
o are seeking funds for the growth or income portion of an asset allocation
portfolio
o are investing for goals that are many years in the future
International/global funds may NOT be appropriate if you:
o are investing with a shorter time horizon in mind
o are uncomfortable with an investment whose value may vary substantially
o want to limit your exposure to foreign securities
THE MANAGEMENT FIRM
All John Hancock international/global funds are managed by John Hancock
Advisers, Inc. Founded in 1968, John Hancock Advisers is a wholly owned
subsidiary of John Hancock Mutual Life Insurance Company and manages more than
$30 billion in assets.
<PAGE>
European Equity Fund
REGISTRANT NAME:
JOHN HANCOCK WORLD FUND TICKER SYMBOL CLASS A: N/A CLASS B: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in stocks of European companies. Under normal
circumstances, the fund invests at least 80% of assets in companies that earn
more than half of their revenue from European operations, are organized under
European law or are principally traded on European stock exchanges.
The fund has not established limitations on the allocation of investments among
the European countries. However, the fund will invest principally in countries
with established economies and securities markets.
The fund may also invest in stocks of European companies that are traded on
emerging market stock exchanges.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in common stock, warrants and convertible
securities. The fund may also invest in investment-grade debt securities issued
by European or U.S. companies and governments.
For liquidity and flexibility, the fund may place up to 20% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities and engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates on one
region, investors should expect above-average volatility.
Also, because the fund invests internationally, it carries additional risks,
including currency, natural event, information and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are described in "More about risk" starting on page 31. The risks of
international investing may be higher in emerging markets, a category that
includes some European countries.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
MANAGEMENT/SUBADVISER
[Clip Art] Under the supervision of John Hancock Advisers, Inc., a team of
portfolio managers at Indocam International Investment Services, the fund's
subadviser, is responsible for the fund's day-to-day investment management.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show estimated expenses for the fiscal year ending October 31,
1998. Actual 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) 0.81% 0.81%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.79% 0.79%
Total fund operating expenses (after limitation)(3) 1.90% 2.60%
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 $68 $107 $148 $261
Class B shares
Assuming redemption
at end of period $76 $111 $158 $276
Assuming no redemption $26 $81 $138 $276
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. Without this
limitation, management fees would be 0.90% for each class and total fund
operating expenses would be 1.99% for Class A and 2.69% 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.
4 GROWTH - EUROPEAN EQUITY FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below cover the period from the commencement of
operations on March 2, 1998 to April 30, 1998 for Class A shares. These figures
are unaudited.
[The following table was represented by a bar graph in the printed materials.]
Volatility, as indicated by Class A 7.10(4)
year-by-year total investment return (%) two
(scale varies from fund to fund) months
- --------------------------------------------------------------------------------
Class A - period ended: 4/98(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $10.00
Net investment income(2) 0.01
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.70
Total from investment operations 0.71
Net asset value, end of period $10.71
Total investment return at net asset value(3)(%) 7.10(4)
Total adjusted investment return at net asset value(3,5)(%) 6.79(4)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,478
Ratio of expenses to average net assets (%) 1.90(6)
Ratio of adjusted expenses to average net assets(7)(%) 3.83(6)
Ratio of net investment income to average net assets (%) 0.49(6)
Ratio of adjusted net investment (loss) to
average net assets(7)(%) (1.44)(6)
Portfolio turnover rate (%) 4
Fee reduction per share(2)($) 0.03
Average brokerage commission rate ($) 0.0239
- --------------------------------------------------------------------------------
Class B - period ended: 4/98(1)
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period --
Net investment income --
Net realized and unrealized gain (loss) on
investments and foreign currency transactions --
Total from investment operations --
Net asset value, end of period --
Total investment return at net asset value (%) --
Total adjusted investment return at net asset value (%) --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) --
Ratio of expenses to average net assets (%) --
Ratio of adjusted expenses to average net assets (%) --
Ratio of net investment income to average net assets (%) --
Ratio of adjusted net investment income to
average net assets (%) --
Portfolio turnover rate (%) --
Fee reduction per share ($) --
Average brokerage commission rate ($) --
(1) Class A shares commenced operations on March 2, 1998. There were no Class B
shares outstanding during the period ended April 30, 1998.
(2) Based on the average of 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.
GROWTH - EUROPEAN EQUITY FUND 5
<PAGE>
Global Fund
REGISTRANT NAME:
JOHN HANCOCK INVESTMENT TRUST III TICKER SYMBOL CLASS A: JHGAX CLASS B: FGLOX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in common stocks of foreign and U.S. companies. The fund
maintains a diversified portfolio of company and government securities from
around the world. Under normal circumstances, the fund expects to invest in the
securities markets of at least three countries at any one time, potentially
including the U.S.
The fund does not maintain a fixed allocation of assets, either with respect to
securities type or to geography.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests at least 65% of assets
in common stocks and convertible securities, but may invest in virtually any
type of security, foreign or domestic, including preferred and convertible
securities, warrants and investment-grade debt securities. Not counting
short-term securities, the fund generally expects that no more than 5% of assets
will be invested in debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements.
Because it invests internationally, the fund carries additional risks, including
currency, information, natural event and political risks. These risks, which may
make the fund more volatile than a comparable domestic growth fund, are defined
in "More about risk" starting on page 31. The risks of international investing
are higher in emerging markets such as those of Latin America, Southeast Asia
and Eastern Europe.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
MANAGEMENT/SUBADVISER
[Clip Art] Miren Etcheverry, John L.F. Wills, and Gerardo J. Espinoza lead the
portfolio management team. Ms. Etcheverry and Mr. Espinoza are senior vice
presidents and joined John Hancock Funds in December 1996, having been in the
investment business since 1978 and 1979, respectively. Mr. Wills is a senior
vice president of the adviser and managing director of the subadviser, John
Hancock Advisers International Limited. He joined John Hancock Funds in 1987 and
has been in the investment business since 1969.
- --------------------------------------------------------------------------------
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) 0.88% 0.88%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.56% 0.56%
Total fund operating expenses 1.74% 2.44%
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 $67 $102 $140 $245
Class B shares
Assuming redemption
at end of period $75 $106 $150 $260
Assuming no redemption $25 $76 $130 $260
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) Includes a subadviser fee equal to 0.70% of the fund's net assets.
(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 GROWTH - GLOBAL FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented by a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 7.05 30.22 (10.42) 14.04 (3.85) 34.95 7.97 (1.01) 9.10 8.67
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/92(1) 10/93 10/94 10/95 10/96 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $11.31 $10.55 $14.30 $14.16 $12.67 $12.97
Net investment income (loss)(2) (0.04) (0.10) (0.07) (0.03) (0.02) (0.05)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.72) 3.85 1.24 (0.13) 1.20 1.21
Total from investment operations (0.76) 3.75 1.17 (0.16) 1.18 1.16
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions -- -- (1.31) (1.33) (0.88) (1.19)
Net asset value, end of period $10.55 $14.30 $14.16 $12.67 $12.97 $12.94
Total investment return at net asset value(3) (%) (6.72)(4) 35.55 8.64 (0.37) 9.87 9.36
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 76,980 90,787 100,973 93,597 94,746 92,127
Ratio of expenses to average net assets (%) 2.47(5) 2.12 1.98 1.87 1.88 1.81(6)
Ratio of net investment income (loss) to average
net assets (%) (0.60)(5) (0.86) (0.54) (0.23) (0.19) (0.36)
Portfolio turnover rate (%) 69 108 61 60 98 81
Average brokerage commission rate(7) ($) N/A N/A N/A N/A 0.0221 0.0216
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/88 10/89 10/90 10/91 10/92 10/93
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.42 $10.67 $13.58 $9.94 $10.92 $10.50
Net investment income (loss) 0.01 (0.10) (0.02) (0.01)(2) (0.12)(2) (0.15)(2)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.69 3.25 (1.12) 1.35 (0.30) 3.82
Total from investment operations 0.70 3.15 (1.14) 1.34 (0.42) 3.67
Less distributions:
Distributions from net investment income -- (0.01) -- -- -- --
Distributions from net realized gain on investments
sold and foreign currency transactions (0.45) (0.23) (2.50) (0.36) -- --
Total distributions (0.45) (0.24) (2.50) (0.36) -- --
Net asset value, end of period $10.67 $13.58 $9.94 $10.92 $10.50 $14.17
Total investment return at net asset value(3) (%) 7.05 30.22 (10.42) 14.04 (3.85) 34.95
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 34,380 35,596 33,281 28,686 11,475 19,340
Ratio of expenses to average net assets (%) 2.55 2.30 2.46 2.60 2.68 2.49
Ratio of net investment income (loss) to average
net assets (%) 0.09 (0.47) (0.59) (0.12) (1.03) (1.25)
Portfolio turnover rate (%) 142 138 58 106 69 108
Average brokerage commission rate(7) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94 10/95 10/96 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.17 $13.93 $12.36 $12.54
Net investment income (loss) (0.15)(2) (0.11)(2) (0.10)(2) (0.14)(2)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.22 (0.13) 1.16 1.18
Total from investment operations 1.07 (0.24) 1.06 1.04
Less distributions:
Distributions from net investment income -- -- -- --
Distributions from net realized gain on investments
sold and foreign currency transactions (1.31) (1.33) (0.88) (1.19)
Total distributions (1.31) (1.33) (0.88) (1.19)
Net asset value, end of period $13.93 $12.36 $12.54 $12.39
Total investment return at net asset value(3) (%) 7.97 (1.01) 9.10 8.67
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 31,822 24,570 27,599 28,007
Ratio of expenses to average net assets (%) 2.59 2.57 2.54 2.49(6)
Ratio of net investment income (loss) to average
net assets (%) (1.12) (0.89) (0.83) (1.04)
Portfolio turnover rate (%) 61 60 98 81
Average brokerage commission rate(7) ($) N/A N/A 0.0221 0.0216
</TABLE>
(1) Class A shares commenced operations on January 3, 1992.
(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) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 per share.
(7) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
GROWTH - GLOBAL FUND 7
<PAGE>
Global Rx Fund
REGISTRANT NAME: JOHN HANCOCK WORLD FUND
TICKER SYMBOL CLASS A: JHGRX CLASS B: JHRBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in stocks of foreign and U.S. health care companies. The
fund defines health care companies as those deriving at least half of their
gross revenues, or committing at least half of their gross assets, to health
care-related activities. Under normal circumstances, the fund invests at least
65% of assets in these companies, including small- and medium-sized companies.
The fund expects to invest in the securities markets of at least three countries
at any one time, potentially including the U.S. Because the fund is
non-diversified, it may invest more than 5% of assets in securities of a single
issuer.
The fund has an independent advisory board composed of scientific and medical
experts to provide advice and consultation on health care developments.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in foreign and domestic common stocks, and
may invest in warrants, preferred stocks and convertible debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates on a single
sector (health care), and because this sector has historically been volatile,
investors should expect above-average volatility.
Also, because the fund invests internationally, it carries additional risks,
including currency, information, natural event and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are defined in "More about risk" starting on page 31.
To the extent that the fund invests in smaller-capitalization companies or
utilizes higher-risk securities and practices, it takes on further risks that
could adversely affect its performance. Please read "More about risk" carefully
before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Linda I. Miller, CFA, leader of the fund's portfolio management team
since January 1996, is a vice president of the adviser. She joined John Hancock
Funds in November 1995 and has been in the investment business with a focus on
the health care industry since 1980.
- --------------------------------------------------------------------------------
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 0.80% 0.80%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.58% 0.58%
Total fund operating expenses 1.68% 2.38%
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 $66 $100 $137 $239
Class B shares
Assuming redemption
at end of period $74 $104 $147 $254
Assuming no redemption $24 $74 $127 $254
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) 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 GROWTH - GLOBAL RX FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class A
year-by-year total investment return (%) 33.40(5) 0.30 23.39 30.89 18.39 (1.26)(5) 26.63
(scale varies from fund to fund) two months
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/92(1) 8/93 8/94 8/95
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $13.34 $13.38 $16.51
Net investment income (loss) (0.03) (0.23) (0.32) (0.36)(3)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 3.37 0.27 3.45 5.46
Total from investment operations 3.34 0.04 3.13 5.10
Less distributions:
Distributions from net realized gain on investments sold and
foreign currency transactions -- -- -- --
Net asset value, end of period $13.34 $13.38 $16.51 $21.61
Total investment return at net asset value(4) (%) 33.40(5) 0.30 23.39 30.89
Total adjusted investment return at net asset value(4,6) (%) 32.11(5) 0.04 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 14,702 15,647 18,643 24,394
Ratio of expenses to average net assets (%) 1.98(7) 2.50 2.55 2.56
Ratio of adjusted expenses to average net assets(8) (%) 3.39(7) 2.76 -- --
Ratio of net investment income (loss) to average net assets (%) (0.51)(7) (1.67) (2.01) (1.99)
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) (1.92)(7) (1.93) -- --
Portfolio turnover rate (%) 48 93 52 38
Fee reduction per share ($) 0.085 0.035 -- --
Average brokerage commission rate(9) ($) N/A N/A N/A N/A
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/96 10/96(2) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $21.61 $25.43 $25.11
Net investment income (loss) (0.19)(3) (0.05)(3) (0.19)(3)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 4.15 (0.27) 6.56
Total from investment operations 3.96 (0.32) 6.37
Less distributions:
Distributions from net realized gain on investments sold and
foreign currency transactions (0.14) -- (1.23)
Net asset value, end of period $25.43 $25.11 $30.25
Total investment return at net asset value(4) (%) 18.39 (1.26)(5) 26.63
Total adjusted investment return at net asset value(4,6) (%) -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 42,405 42,618 53,122
Ratio of expenses to average net assets (%) 1.80 1.92(7) 1.68
Ratio of adjusted expenses to average net assets(8) (%) -- -- --
Ratio of net investment income (loss) to average net assets (%) (0.75) (1.04)(7) (0.71)
Ratio of adjusted net investment income (loss) to average
net assets(8) (%) -- -- --
Portfolio turnover rate (%) 68 24 57
Fee reduction per share ($) -- -- --
Average brokerage commission rate(9) ($) 0.0181 0.0726 0.0749
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/94(1) 8/95 8/96 10/96(2) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $17.29 $16.46 $21.35 $24.94 $24.60
Net investment income (loss)(3) (0.17) (0.55) (0.34) (0.08) (0.37)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.66) 5.44 4.07 (0.26) 6.40
Total from investment operations (0.83) 4.89 3.73 (0.34) 6.03
Less distributions:
Distributions from net realized gain on investments sold and
foreign currency transactions -- -- (0.14) -- (1.23)
Net asset value, end of period $16.46 $21.35 $24.94 $24.60 $29.40
Total investment return at net asset value(4) (%) (4.80)(5) 29.71 17.53 (1.36)(5) 25.76
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 1,071 6,333 36,591 37,521 53,436
Ratio of expenses to average net assets (%) 3.34(7) 3.45 2.42 2.62(7) 2.38
Ratio of net investment income (loss) to average net assets (%) (2.65)(7) (2.91) (1.33) (1.74)(7) (1.41)
Portfolio turnover rate (%) 52 38 68 24 57
Average brokerage commission rate(9) ($) N/A N/A 0.0181 0.0726 0.0749
</TABLE>
(1) Class A and Class B shares commenced operations on October 1, 1991 and
March 7, 1994, respectively.
(2) Effective October 31, 1996, the fiscal year end changed from August 31 to
October 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.
GROWTH - GLOBAL RX FUND 9
<PAGE>
Global Technology Fund
REGISTRANT NAME: JOHN HANCOCK SERIES TRUST
TICKER SYMBOL CLASS A: NTTFX CLASS B: FGTBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in stocks of foreign and U.S. companies that rely
extensively on technology in their product development or operations. Under
normal circumstances, the fund invests at least 65% of assets in these
companies, and expects to invest in the securities markets of at least three
countries at any one time, potentially including the U.S. Income is a secondary
goal.
PORTFOLIO SECURITIES
[Clip Art] The fund invests primarily in foreign and domestic common stocks, and
may invest in warrants, preferred stocks and convertible debt securities. The
fund may invest up to 10% of assets in debt securities of any maturity. These
may include securities rated as low as CC/Ca and their unrated equivalents.
Bonds rated lower than BBB/Baa are considered junk bonds.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, including restricted securities, and
may engage in other investment practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates on a single
sector (technology), and because this sector has historically been volatile,
investors should expect above-average volatility.
Also, because the fund invests internationally, it carries additional risks,
including currency, information, natural event and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are defined in "More about risk" starting on page 31. The risks of international
investing are higher in emerging markets such as those of Latin America, Asia
and Eastern Europe. To the extent that the fund invests in
smaller-capitalization companies or junk bonds, it further increases the chances
for fluctuations in share price and total return. Please read "More about risk"
carefully before investing.
MANAGEMENT/SUBADVISER
[Clip Art] Barry J. Gordon and Marc H. Klee lead the fund's management team, as
they have since the fund's inception in 1983. They are principals of American
Fund Advisors, Inc. (AFA), which was the fund's adviser until 1991. Since 1991,
AFA has been the fund's subadviser.
- --------------------------------------------------------------------------------
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) 0.79% 0.79%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.42% 0.42%
Total fund operating expenses 1.51% 2.21%
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 $65 $95 $128 $221
Class B shares
Assuming redemption
at end of period $72 $99 $138 $237
Assuming no redemption $22 $69 $118 $237
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) Includes a subadviser fee that will not exceed 0.35% of the fund's net
assets.
(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 GROWTH - GLOBAL TECHNOLOGY FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below for the one-year period ended October 31, 1997 have
been audited by the fund's independent auditors, Ernst & Young LLP. Figures for
previous years were audited by another independent auditor.
[The following table was represented as a bar graph in the printed materials.]
<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 (%) 2.84 10.48 16.61 (18.46) 33.05 5.70 32.06 9.62 46.53 5.22(4) 21.90
(scale varies from fund to fund) ten months
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/87 12/88 12/89 12/90 12/91 12/92
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $13.80 $13.98 $15.31 $16.93 $12.44 $15.60
Net investment income (loss) 0.15 0.15 0.10 (0.04) 0.05 (0.15)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.26 1.32 2.43 (3.09) 4.11 1.00
Total from investment operations 0.41 1.47 2.53 (3.13) 4.16 0.85
Less distributions:
Dividends from net investment income (0.23) (0.14) (0.13) -- (0.04) --
Distributions from net realized gain on
investments and foreign currency transactions -- -- (0.78) (1.36) (0.96) (1.51)
Total distributions (0.23) (0.14) (0.91) (1.36) (1.00) (1.51)
Net asset value, end of period $13.98 $15.31 $16.93 $12.44 $15.60 $14.94
Total investment return at net asset value(3) (%) 2.84 10.48 16.61 (18.46) 33.05 5.70
Total adjusted investment return at net asset value(3,5) -- -- -- -- -- 5.53
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 44,224 38,594 40,341 28,864 31,580 32,094
Ratio of expenses to average net assets (%) 1.63 1.75 1.90 2.36 2.32 2.05
Ratio of adjusted expenses to average net assets(7) (%) -- -- -- -- -- 2.22
Ratio of net investment income (loss) to average
net assets (%) 0.75 0.89 0.60 (0.28) 0.34 (0.88)
Ratio of adjusted net investment income (loss) to
average net assets(7) (%) -- -- -- -- -- (1.05)
Portfolio turnover rate (%) 9 12 30 38 67 76
Fee reduction per share ($) -- -- -- -- -- 0.03
Average brokerage commission rate(8) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94 12/95 10/96(1) 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $14.94 $17.45 $17.84 $24.51 $25.79
Net investment income (loss) (0.21) (0.22)(2) (0.22)(2) (0.14)(2) (0.27)(2)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 4.92 1.87 8.53 1.42 5.76
Total from investment operations 4.71 1.65 8.31 1.28 5.49
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized gain on
investments and foreign currency transactions (2.20) (1.26) (1.64) -- (1.23)
Total distributions (2.20) (1.26) (1.64) -- (1.23)
Net asset value, end of period $17.45 $17.84 $24.51 $25.79 $30.05
Total investment return at net asset value(3) (%) 32.06 9.62 46.53 5.22(4) 21.90
Total adjusted investment return at net asset value(3,5) -- -- 46.41 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 41,749 52,193 155,001 166,010 184,048
Ratio of expenses to average net assets (%) 2.10 2.16 1.67 1.57(6) 1.51
Ratio of adjusted expenses to average net assets(7) (%) -- -- 1.79 -- --
Ratio of net investment income (loss) to average
net assets (%) (1.49) (1.25) (0.89) (0.68)(6) (0.95)
Ratio of adjusted net investment income (loss) to
average net assets(7) (%) -- -- (1.01) -- --
Portfolio turnover rate (%) 86 67 70 64 104
Fee reduction per share ($) -- -- 0.02(2) -- --
Average brokerage commission rate(8) ($) N/A N/A N/A 0.0685 0.0628
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/94(9) 12/95 10/96(1) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $17.24 $17.68 $24.08 $25.20
Net investment income (loss)(2) (0.35) (0.39) (0.28) (0.45)
Net realized and unrealized gain (loss) on investments 2.05 8.43 1.40 5.60
Total from investment operations 1.70 8.04 1.12 5.15
Less distributions:
Distributions from net realized gain on investments sold (1.26) (1.64) -- (1.23)
Net asset value, end of period $17.68 $24.08 $25.20 $29.12
Total investment return at net asset value(3) (%) 10.02 45.42 4.65(4) 21.04
Total adjusted investment return at net asset value(3,5) -- 45.30 -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 9,324 35,754 50,949 65,851
Ratio of expenses to average net assets (%) 2.90(6) 2.41 2.27(6) 2.21
Ratio of adjusted expenses to average net assets(7) (%) -- 2.53 -- --
Ratio of net investment income (loss) to average net assets (%) (1.98)(6) (1.62) (1.38)(6) (1.65)
Ratio of adjusted net investment income (loss) to
average net assets(7) (%) -- (1.74) -- --
Portfolio turnover rate (%) 67 70 64 104
Fee reduction per share ($) -- 0.03(2) -- --
Average brokerage commission rate(8) ($) N/A N/A 0.0685 0.0628
</TABLE>
(1) Effective October 31, 1996, the fiscal year end changed from December 31
to October 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) 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.
(9) Class B shares commenced operations on January 3, 1994.
GROWTH - GLOBAL TECHNOLOGY FUND 11
<PAGE>
International Fund
REGISTRANT NAME:
JOHN HANCOCK INVESTMENT TRUST III TICKER SYMBOL
CLASS A: FINAX CLASS B: FINBX CLASS C: N/A
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in stocks of foreign companies. Under normal
circumstances, the fund invests at least 65% of assets in these companies. The
fund maintains a diversified portfolio of company and government securities from
around the world, and generally expects that at any one time it will invest in
the securities markets of at least three non-U.S. countries.
The fund does not maintain a fixed allocation of assets, either with respect to
securities type or to geography. The fund looks for companies of any size whose
earnings show strong growth or that appear to be undervalued.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests primarily in common
stocks and other equity securities, but may invest in almost any type of
security, foreign or domestic, including preferred and convertible securities,
warrants and investment-grade debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements.
Because it invests internationally, the fund carries additional risks, including
currency, information, natural event and political risks. These risks, which may
make the fund more volatile than a comparable domestic growth fund, are defined
in "More about risk" starting on page 31. The risks of international investing
are higher in emerging markets such as those of Latin America, Asia and Eastern
Europe.
To the extent that the fund invests in smaller-capitalization companies or
utilizes higher-risk securities and practices, it takes on further risks that
could adversely affect its performance. Please read "More about risk" carefully
before investing.
MANAGEMENT/SUBADVISER
[Clip Art] Miren Etcheverry, John L.F. Wills, and Gerardo J. Espinoza lead the
fund's portfolio management team. Ms. Etcheverry and Mr. Espinoza are senior
vice presidents and joined John Hancock Funds in December 1996, having been in
the investment business since 1978 and 1979, respectively. Mr. Wills is a senior
vice president of the adviser and managing director of the subadviser, John
Hancock Advisers International Limited. He joined John Hancock Funds in 1987 and
has been in the investment business since 1969.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[Clip Art] Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past fiscal year, adjusted to
reflect any changes. Because no Class C shares were outstanding during the past
year, Class C expenses are based on Class B expenses. Future expenses may be
greater or less.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none none
Maximum sales charge imposed on
reinvested dividends none none none
Maximum deferred sales charge none(1) 5.00% 1.00%
Redemption fee(2) none none none
Exchange fee none none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee (after expense
limitation)(3,4) 0.00% 0.00% 0.00%
12b-1 fee(5) 0.30% 1.00% 1.00%
Other expenses (after limitation)(3) 1.43% 1.43% 1.43%
Total fund operating expenses
(after limitation)(3) 1.73% 2.43% 2.43%
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 $67 $102 $139 $244
Class B shares
Assuming redemption
at end of period $75 $106 $150 $259
Assuming no redemption $25 $76 $130 $259
Class C shares
Assuming redemption
at end of period $35 $76 $130 $277
Assuming no redemption $25 $76 $130 $277
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 1.00% for each class, other expenses would be 1.73% for each class and
total fund operating expenses would be 3.03% for Class A and 3.73% for
Class B and Class C. The adviser may terminate this limitation at any
time.
(4) Includes a subadviser fee equal to 0.70% of the fund's net assets.
(5) 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 GROWTH - INTERNATIONAL FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
Volatility, as indicated by Class A
year-by-year total investment return (%) 1.77(4) (4.96) 6.88 (3.22)
(scale varies from fund to fund)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $8.65 $8.14 $8.70
Net investment income (loss) 0.07(2) 0.04 0.06(2) (0.02)(2)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 0.08 (0.47) 0.50 (0.26)
Total from investment operations 0.15 (0.43) 0.56 (0.28)
Less distributions:
Dividends from net investment income -- (0.03) -- (0.01)
Distributions from net realized gain on investments
sold and foreign currency transactions -- (0.05) -- --
Total distributions -- (0.08) -- (0.01)
Net asset value, end of period $8.65 $8.14 $8.70 $8.41
Total investment return at net asset value(3) (%) 1.77(4) (4.96) 6.88 (3.22)
Total adjusted investment return at net asset value(3,5) (%) (0.52)(4) (8.12) 5.33 (4.52)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,426 4,215 5,098 4,965
Ratio of expenses to average net assets (%) 1.50(6) 1.64 1.75 1.73(7)
Ratio of adjusted expenses to average net assets(8) (%) 3.79(6) 4.80 3.30 3.03(7)
Ratio of net investment income (loss) to average net assets (%) 1.02(6) 0.56 0.68 (0.16)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.27)(6) (2.60) (0.87) (1.46)
Portfolio turnover rate (%) 50 69 83 169
Fee reduction per share(2) ($) 0.16 0.25 0.14 0.12
Average brokerage commission rate(9) ($) N/A N/A 0.0192 0.0186
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/94(1) 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.50 $8.61 $8.05 $8.55
Net investment income (loss) 0.02(2) (0.03) 0.00(2,10) (0.08)(2)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 0.09 (0.48) 0.50 (0.25)
Total from investment operations 0.11 (0.51) 0.50 (0.33)
Less distributions:
Distributions from net realized gain on investments
sold and foreign currency transactions -- (0.05) -- --
Net asset value, end of period $8.61 $8.05 $8.55 $8.22
Total investment return at net asset value(3) (%) 1.29(4) (5.89) 6.21 (3.86)
Total adjusted investment return at net asset value(3,5) (%) (1.00)(4) (9.05) 4.66 (5.16)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 3,948 3,990 8,175 8,713
Ratio of expenses to average net assets (%) 2.22(6) 2.52 2.45 2.43(7)
Ratio of adjusted expenses to average net assets(8) (%) 4.51(6) 5.68 4.00 3.73(7)
Ratio of net investment income (loss) to average net assets (%) 0.31(6) (0.37) 0.02 (0.88)
Ratio of adjusted net investment income (loss) to average net assets(8) (%) (1.98)(6) (3.53) (1.53) (2.18)
Portfolio turnover rate (%) 50 69 83 169
Fee reduction per share(2) ($) 0.16 0.25 0.14 0.12
Average brokerage commission rate(9) ($) N/A N/A 0.0192 0.0186
</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) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 cents per share.
(8) Unreimbursed, without fee reduction.
(9) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(10) Less than $0.01 per share.
GROWTH - INTERNATIONAL FUND 13
<PAGE>
Pacific Basin Equities Fund
REGISTRANT NAME: JOHN HANCOCK WORLD FUND
TICKER SYMBOL CLASS A: JHWPX CLASS B: FPBBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund invests primarily in a diversified portfolio of stocks of Pacific Basin
companies. The Pacific Basin includes countries bordering the Pacific Ocean.
Under normal circumstances, the fund invests at least 65% of assets in these
companies, with the balance invested in equities of companies not in the Pacific
Basin countries and in investment-grade debt securities of U.S., Japanese,
Australian and New Zealand issuers.
The fund does not maintain a fixed allocation of assets. The fund may at times
invest less than 65% of assets in Pacific Basin equities.
PORTFOLIO SECURITIES
[Clip Art] Under normal circumstances, the fund invests primarily in common
stocks and other equity securities, but may invest in virtually any type of
security, foreign or domestic, including preferred and convertible securities,
warrants and investment-grade debt securities.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest up to 100% in these securities as a defensive tactic. The fund also may
invest in certain higher-risk securities, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] As with any growth fund, the value of your investment will fluctuate
in response to stock market movements. Because the fund concentrates on one
region, investors should expect above-average volatility.
Also, because the fund invests internationally, it carries additional risks,
including currency, information, natural event and political risks. These risks,
which may make the fund more volatile than a comparable domestic growth fund,
are defined in "More about risk" starting on page 31. The risks of international
investing are higher in emerging markets, a category that includes many Pacific
Basin countries.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
MANAGEMENT/SUBADVISERS
[Clip Art] The fund's management is carried out jointly by the adviser's
international equities portfolio management team and two subadvisers, Indocam
Asia Advisers Limited and John Hancock Advisers International Limited. Indocam
is majority owned by Caisse Nationale de Credit Agricole, a French banking
institution.
- --------------------------------------------------------------------------------
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) 0.80% 0.80%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.96% 0.96%
Total fund operating expenses 2.06% 2.76%
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 $70 $111 $155 $277
Class B shares
Assuming redemption
at end of period $78 $116 $166 $292
Assuming no redemption $28 $86 $146 $292
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) Includes a subadviser fee equal to 0.35% of the fund's net assets.
(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.
14 GROWTH - PACIFIC BASIN EQUITIES FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
<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 (%) (3.61)(6) 18.06 (0.44) (2.15) (1.99) 49.61 22.82 (7.65) 4.47 (1.83)(6) (19.03)
(scale varies from fund to fund) two
months
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/88(1) 8/89 8/90 8/91 8/92 8/93
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $9.61 $11.10 $10.34 $9.05 $8.87
Net investment income (loss) 0.01 (0.02) (0.04) (0.01) (0.07)(3) (0.11)(3)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.37) 1.75 0.11 (0.33) (0.11) 4.51
Total from investment operations (0.36) 1.73 0.07 (0.34) (0.18) 4.40
Less distributions:
Dividends from net investment income (0.03) (0.01) -- -- -- --
Distributions from net realized gain on
investments sold and foreign
currency transactions -- (0.23) (0.83) (0.95) -- --
Total distributions (0.03) (0.24) (0.83) (0.95) -- --
Net asset value, end of period $9.61 $11.10 $10.34 $9.05 $8.87 $13.27
Total investment return at net asset
value(5) (%) (3.61)(6) 18.06 (0.44) (2.15) (1.99) 49.61
Total adjusted investment return at net
asset value(5,7) (%) (8.05)(6) 15.12 (2.86) (5.19) (5.57) 48.31
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,771 5,116 4,578 4,065 3,222 14,568
Ratio of expenses to average net assets (%) 1.75(8) 1.75 2.45 2.75 2.73 2.94
Ratio of adjusted expenses to average
net assets(9) (%) 6.19(8) 4.69 4.89 5.79 6.31 4.24
Ratio of net investment income (loss) to
average net assets (%) 0.04(8) (0.15) (0.28) (0.06) (0.82) (0.98)
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) (4.40)(8) (3.09) (2.70) (3.10) (4.40) (2.28)
Portfolio turnover rate (%) 148 227 154 151 179 171
Fee reduction per share ($) 1.15 0.39 0.31 0.24 0.31(3) 0.14(3)
Average brokerage commission rate(10) ($) N/A N/A N/A N/A N/A N/A
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 8/94 8/95 8/96 10/96(2) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $13.27 $15.88 $14.11 $14.74 $14.47
Net investment income (loss) (0.10)(3) 0.02(3,4) (0.02)(3) (0.02)(3) (0.07)(3)
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 3.12 (1.24) 0.65 (0.25) (2.66)
Total from investment operations 3.02 (1.22) 0.63 (0.27) (2.73)
Less distributions:
Dividends from net investment income -- -- -- -- --
Distributions from net realized gain on
investments sold and foreign
currency transactions (0.41) (0.55) -- -- (0.11)
Total distributions (0.41) (0.55) -- -- (0.11)
Net asset value, end of period $15.88 $14.11 $14.74 $14.47 $11.63
Total investment return at net asset
value(5) (%) 22.82 (7.65) 4.47 (1.83)(6) (19.03)
Total adjusted investment return at net
asset value(5,7) (%) -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 50,261 37,417 41,951 38,694 21,109
Ratio of expenses to average net assets (%) 2.43 2.05 1.97 2.21(8) 2.06
Ratio of adjusted expenses to average
net assets(9) (%) -- -- -- -- --
Ratio of net investment income (loss) to
average net assets (%) (0.66) 0.13(4) (0.15) (0.83)(8) (0.49)
Ratio of adjusted net investment income
(loss) to average net assets(9) (%) -- -- -- -- --
Portfolio turnover rate (%) 68 48 73 15 118
Fee reduction per share ($) -- -- -- -- --
Average brokerage commission rate(10) ($) N/A N/A 0.0183 0.0221 0.0076
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 8/94(1) 8/95 8/96 10/96(2) 10/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $15.11 $15.84 $13.96 $14.49 $14.20
Net investment income (loss) (3) (0.09) (0.09) (0.13) (0.04) (0.18)
Net realized and unrealized gain (loss)
on investments and
foreign currency transactions 0.82 (1.24) 0.66 (0.25) (2.59)
Total from investment operations 0.73 (1.33) 0.53 (0.29) (2.77)
Less distributions:
Distributions from net realized gain on
investments sold and foreign currency
transactions -- (0.55) -- -- (0.11)
Net asset value, end of period $15.84 $13.96 $14.49 $14.20 $11.32
Total investment return at net asset value(5) (%) (4.83)(6) (8.38) 3.80 (2.00)(6) (19.67)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 9,480 14,368 32,342 30,147 17,320
Ratio of expenses to average net assets (%) 3.00(8) 2.77 2.64 2.90(8) 2.76
Ratio of net investment income (loss) to
average net assets (%) (1.40)(8) (0.66) (0.86) (1.52)(8) (1.19)
Portfolio turnover rate (%) 68 48 73 15 118
Average brokerage commission rate(10) ($) N/A N/A 0.0183 0.0221 0.0076
</TABLE>
(1) Class A and Class B shares commenced operations on September 8, 1987 and
March 7, 1994, respectively.
(2) Effective October 31, 1996, the fiscal year end changed from August 31 to
October 31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) May not accord to amounts shown elsewhere in the financial statements due
to the timing of sales and repurchases of fund shares in relation to
fluctuating market values of the investments of the fund.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
GROWTH - PACIFIC BASIN EQUITIES FUND 15
<PAGE>
Short-Term Strategic Income Fund
REGISTRANT NAME:
JOHN HANCOCK INVESTMENT TRUST III TICKER SYMBOL
CLASS A: JHSAX CLASS B: FRSWX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income. To pursue this goal,
the fund invests primarily in debt securities issued or guaranteed by:
o foreign governments and companies including those in emerging markets
o the U.S. Government, its agencies or instrumentalities
o U.S. companies
Under normal circumstances, the fund invests assets in all three of these
sectors, but may invest up to 100% in any one sector. The fund maintains an
average portfolio maturity of three years or less.
PORTFOLIO SECURITIES
[Clip Art] The fund may invest in all types of debt securities. The fund's U.S.
Government securities may include mortgage-backed securities. The fund may
invest up to 67% of assets in securities rated as low as B and their unrated
equivalents. Bonds rated lower than BBB/Baa are considered junk bonds. However,
the fund maintains an average portfolio quality rating of A, which is an
investment-grade rating.
Because the fund is non-diversified, it may invest more than 5% of assets in
securities of a single issuer, but no more than 25% of assets in the securities
of any one foreign government. The fund also may invest in certain other
investments, including derivatives, and may engage in other investment
practices.
RISK FACTORS
[Clip Art] The value of your investment in the fund will fluctuate with changes
in currency exchange rates as well as interest rates. Typically, a rise in
interest rates causes a decline in the market value of fixed-income securities.
International investing, particularly in emerging markets, carries additional
risks, including currency, information, natural event and political risks. Junk
bonds may carry above-average credit and market risks and mortgage-backed
securities may carry extension and prepayment risks. These risks are defined in
"More about risk" starting on page 31.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Anthony A. Goodchild and Lawrence J. Daly lead the portfolio
management team. Messrs. Goodchild and Daly are senior vice presidents and
joined John Hancock Funds in July 1994, having been in the investment business
since 1968 and 1972, respectively.
- --------------------------------------------------------------------------------
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) 3.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 3.00%
Redemption fee(2) none none
Exchange fee none none
- --------------------------------------------------------------------------------
Annual fund operating expenses (as a % of average net assets)
- --------------------------------------------------------------------------------
Management fee 0.65% 0.65%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.48% 0.48%
Total fund operating expenses 1.43% 2.13%
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 $44 $74 $106 $196
Class B shares
Assuming redemption
at end of period $52 $87 $114 $204
Assuming no redemption $22 $67 $114 $204
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) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
16 INCOME - SHORT-TERM STRATEGIC INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 8.85(4) 0.64 5.98 1.93 7.97 7.89 4.83
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/92(1) 10/93 10/94 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $9.86 $9.32 $9.12 $8.47 $8.41 $8.46
Net investment income (loss) 0.65 0.83(2) 0.76(2) 0.77(2) 0.65 0.61(2)
Net realized and unrealized gain (loss) on
investments and
foreign currency transactions (0.55) (0.20) (0.53) (0.06) 0.05 (0.15)
Total from investment operations 0.10 0.63 0.23 0.71 0.70 0.46
Less distributions:
Dividends from net investment income (0.64) (0.83) (0.62) (0.61) (0.57) (0.52)
Distributions in excess of net investment income -- -- (0.04) -- -- (0.08)
Distributions in excess of net realized gain on
investments sold -- -- (0.12) -- -- --
Distributions from capital paid-in -- -- (0.10) (0.16) (0.08) (0.01)
Total distributions (0.64) (0.83) (0.88) (0.77) (0.65) (0.61)
Net asset value, end of period $9.32 $9.12 $8.47 $8.41 $8.46 $8.31
Total investment return at net asset value(3) (%) 1.16(4) 6.78 2.64 8.75 8.60 5.55
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 20,468 11,130 13,091 16,997 49,338 64,059
Ratio of expenses to average net assets (%) 1.37(4) 1.21 1.26 1.33 1.48 1.43
Ratio of net investment income (loss) to average
net assets (%) 8.09(4) 8.59 8.71 9.13 7.59 7.22
Portfolio turnover rate (%) 86 306 150 147 77 71
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/91(1) 10/92 10/93 10/94 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.00 $10.01 $9.31 $9.11 $8.46 $8.40 $8.45
Net investment income (loss) 0.76 0.87 0.75(2) 0.70(2) 0.70(2) 0.59 0.55(2)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.01 (0.80) (0.20) (0.53) (0.06) 0.05 (0.15)
Total from investment operations 0.77 0.07 0.55 0.17 0.64 0.64 0.40
Less distributions:
Dividends from net investment income (0.76) (0.77) (0.75) (0.56) (0.56) (0.52) (0.47)
Distributions in excess of net
investment income -- -- -- (0.04) -- -- (0.07)
Distributions in excess of net realized
gain on investments sold -- -- -- (0.12) -- -- --
Distributions from capital paid-in -- -- -- (0.10) (0.14) (0.07) (0.01)
Total distributions (0.76) (0.77) (0.75) (0.82) (0.70) (0.59) (0.55)
Net asset value, end of period $10.01 $9.31 $9.11 $8.46 $8.40 $8.45 $8.30
Total investment return at net asset
value(3) (%) 8.85(4) 0.64 5.98 1.93 7.97 7.89 4.83
Total adjusted investment return at net
asset value(3,5) (%) 8.81(4) -- -- -- -- -- --
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 218,562 236,059 142,873 98,390 84,601 48,137 25,908
Ratio of expenses to average net assets (%) 1.89(4) 2.07 2.01 1.99 2.07 2.12 2.13
Ratio of adjusted expenses to average net
assets(6) (%) 1.93(4) -- -- -- -- -- --
Ratio of net investment income to average
net assets (%) 8.72(4) 8.69 7.81 8.00 8.40 7.07 6.51
Ratio of adjusted net investment income
to average net assets(6) (%) 8.68(4) -- -- -- -- -- --
Portfolio turnover rate (%) 22 86 306 150 147 77 71
Fee reduction per share ($) 0.0039 -- -- -- -- -- --
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1992 and
December 28, 1990, respectively.
(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) Annualized.
(5) An estimated total return calculation that does not take into
consideration fee reductions by the adviser during the periods shown.
(6) Unreimbursed, without fee reduction.
INCOME - SHORT-TERM STRATEGIC INCOME FUND 17
<PAGE>
World Bond Fund
REGISTRANT NAME:
JOHN HANCOCK INVESTMENT TRUST III TICKER SYMBOL
CLASS A: FGLAX CLASS B: FGLIX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[Clip Art] The fund seeks a high total investment return -- a combination of
current income and capital appreciation. To pursue this goal, the fund invests
at least 65% of assets in debt securities issued or guaranteed by:
o foreign governments and companies including those in emerging markets
o multinational organizations such as the World Bank
o the U.S. Government, its agencies or instrumentalities
Under normal circumstances, the fund expects to invest in the securities markets
of at least three countries at any one time, potentially including the U.S. The
fund does not maintain a fixed allocation of assets.
PORTFOLIO SECURITIES
[Clip Art] The fund may invest in all types of debt securities of any maturity,
including preferred and convertible securities. Less than 35% of assets may be
invested in junk bonds rated as low as CCC/Caa, or equivalent.
Because the fund is non-diversified, it may invest more than 5% of assets in
securities of a single issuer, but no more than 25% of assets in the securities
of any one foreign government.
For liquidity and flexibility, the fund may place up to 35% of assets in
investment-grade short-term securities. In abnormal market conditions, it may
invest more assets in these securities as a defensive tactic. The fund also may
invest in certain other investments, including derivatives, and may engage in
other investment practices.
RISK FACTORS
[Clip Art] As with most bond funds, the value of your investment in the fund
will fluctuate with changes in interest rates. Typically, a rise in interest
rates causes a decline in the market value of fixed income securities.
International investing, particularly in emerging markets, carries additional
risks, including currency, information, natural event and political risks. Junk
bonds may carry above-average credit and market risks and mortgage-backed
securities may carry extension and prepayment risks. These risks are defined in
"More about risk" starting on page 31.
To the extent that the fund utilizes higher-risk securities and practices, it
takes on further risks that could adversely affect its performance. Please read
"More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[Clip Art] Anthony A. Goodchild and Lawrence J. Daly lead the portfolio
management team. Messrs. Goodchild and Daly are senior vice presidents and
joined John Hancock Funds in July 1994, having been in the investment business
since 1968 and 1972, respectively.
- --------------------------------------------------------------------------------
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) 4.50% 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 0.75% 0.75%
12b-1 fee(3) 0.30% 1.00%
Other expenses 0.63% 0.63%
Total fund operating expenses 1.68% 2.38%
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 $96 $132 $235
Class B shares
Assuming redemption
at end of period $74 $104 $147 $254
Assuming no redemption $24 $74 $127 $254
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) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
18 INCOME - WORLD BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[Clip Art] The figures below have been audited by the fund's independent
auditors, Price Waterhouse LLP.
[The following table was represented as a bar graph in the printed materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volatility, as indicated by Class B
year-by-year total investment return (%) 20.09 5.47 11.84 10.44 1.72 6.77 (1.88) 11.51 4.78 2.43
(scale varies from fund to fund)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/92(1) 10/93 10/94 10/95 10/96 10/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.57 $9.76 $9.62 $8.85 $9.30 $9.28
Net investment income (loss) 0.64 0.76 0.64(2) 0.57(2) 0.51(2) 0.53(2)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.74) (0.10) (0.78) 0.48 (0.02) (0.25)
Total from investment operations (0.10) 0.66 (0.14) 1.05 0.49 0.28
Less distributions:
Dividends from net investment income (0.71) (0.38) (0.11) (0.59) (0.50) (0.25)
Distributions in excess of net investment
income -- (0.04) -- -- -- (0.02)
Distributions from capital paid-in -- (0.38) (0.52) (0.01) (0.01) (0.26)
Total distributions (0.71) (0.80) (0.63) (0.60) (0.51) (0.53)
Net asset value, end of period $9.76 $9.62 $8.85 $9.30 $9.28 $9.03
Total investment return at net asset
value(3) (%) (0.88)(4) 7.14 (1.30) 12.25 5.48 3.15
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 12,880 12,882 8,949 35,334 27,537 28,959
Ratio of expenses to average net assets (%) 1.41(4) 1.46 1.59 1.48 1.58 1.68(5)
Ratio of net investment income (loss)
to average net assets (%) 7.64(4) 7.89 7.00 6.43 5.54 5.84
Portfolio turnover rate (%) 476 363 174 263 214 153
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/88 10/89 10/90 10/91 10/92 10/93 10/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $10.32 $10.98 $10.21 $10.38 $10.44 $9.74 $9.62
Net investment income (loss) 0.67 0.83 0.85 0.90 0.78 0.72 0.59(2)
Net realized and unrealized gain
(loss) on investments
and foreign currency transactions 1.31 (0.27) 0.28 0.13 (0.59) (0.09) (0.78)
Total from investment operations 1.98 0.56 1.13 1.03 0.19 0.63 (0.19)
Less distributions:
Dividends from net investment income (0.68) (0.84) (0.85) (0.73) (0.89) (0.33) (0.06)
Distributions from net realized gain
on investments (0.64) (0.49) -- (0.24) -- -- --
Distributions in excess of net
investment income -- -- -- -- -- (0.04) --
Distributions from capital paid-in -- -- (0.11) -- -- (0.38) (0.52)
Total distributions (1.32) (1.33) (0.96) (0.97) (0.89) (0.75) (0.58)
Net asset value, end of period $10.98 $10.21 $10.38 $10.44 $9.74 $9.62 $8.85
Total investment return at net
asset value(3) (%) 20.09 5.47 11.84 10.44 1.72 6.77 (1.88)
Ratios and supplemental data
Net assets, end of period
(000s omitted) ($) 174,833 255,214 186,524 192,687 199,102 197,166 114,656
Ratio of expenses to average net
assets (%) 1.74 1.75 1.82 1.90 1.91 1.91 2.17
Ratio of net investment income
(loss) to average net assets (%) 6.04 8.07 8.67 8.74 7.59 7.45 6.41
Portfolio turnover rate (%) 364 333 186 159 476 363 174
<CAPTION>
- --------------------------------------------------------------------------------
Class B - period ended: 10/95 10/96 10/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.85 $9.30 $9.28
Net investment income (loss) 0.55(2) 0.45(2) 0.47(2)
Net realized and unrealized gain
(loss) on investments
and foreign currency transactions 0.44 (0.02) (0.25)
Total from investment operations 0.99 0.43 0.22
Less distributions:
Dividends from net investment income (0.53) (0.44) (0.23)
Distributions from net realized gain
on investments -- -- --
Distributions in excess of net
investment income -- -- (0.01)
Distributions from capital paid-in (0.01) (0.01) (0.23)
Total distributions (0.54) (0.45) (0.47)
Net asset value, end of period $9.30 $9.28 $9.03
Total investment return at net
asset value(3) (%) 11.51 4.78 2.43
Ratios and supplemental data
Net assets, end of period
(000s omitted) ($) 65,600 45,897 24,082
Ratio of expenses to average net
assets (%) 2.16 2.25 2.38(5)
Ratio of net investment income
(loss) to average net assets (%) 6.03 4.87 5.13
Portfolio turnover rate (%) 263 214 153
</TABLE>
(1) Class A shares commenced operations on January 3, 1992.
(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) Annualized.
(5) Expense ratios do not include interest expense due to bank loans, which
amounted to less than $0.01 per share.
INCOME - WORLD BOND FUND 19
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock international/global funds offer two classes of shares, Class A
and Class B. In addition, Class C shares are available for International Fund.
Each class has its own cost structure as outlined below, allowing you to choose
the one that best meets your requirements. For more details, see "How sales
charges are calculated." Your financial representative can help you decide which
share class is best for you.
- --------------------------------------------------------------------------------
Class A - for all funds
- --------------------------------------------------------------------------------
o Front-end sales charges. There are several ways to reduce these
charges, described under "Sales charge reductions and waivers" on the
following page.
o Lower annual expenses than Class B and Class C shares.
- --------------------------------------------------------------------------------
Class B - for all funds
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right
away.
o Higher annual expenses than Class A shares.
o A contingent deferred sales charge that declines from 5% over six
years (3% over four years for Short-Term Strategic Income Fund).
o Automatic conversion to Class A shares after eight years, thus
reducing future annual expenses.
- --------------------------------------------------------------------------------
Class C - for International Fund
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right
away.
o Higher annual expenses than Class A shares.
o A 1% contingent deferred sales charge on shares sold within one year
of purchase.
o No automatic conversion to Class A shares, so the fund's annual
expenses continue at the same level throughout the life of your
investment.
For actual past expenses of Class A and Class B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges - Short-Term Strategic Income
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 3.00% 3.09%
$100,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Class A sales charges - World Bond
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 2.75% 2.83%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Class A sales charges - growth funds
- --------------------------------------------------------------------------------
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 (all funds)
- --------------------------------------------------------------------------------
Your investment CDSC on shares being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the LAST day of that month.
20 YOUR ACCOUNT
<PAGE>
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, you may be charged a contingent deferred sales
charge (CDSC) on shares you sell within a certain time after you bought them, as
described in the table below. There is no CDSC on shares acquired through
reinvestment of dividends. The CDSC is based on the original purchase cost or
the current market value of the shares being sold, whichever is less. The longer
the time between the purchase and the sale of shares, the lower the rate of the
CDSC:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after CDSC on Short-Term CDSC on all
purchase Strategic Income other fund shares
shares being sold being sold
1st year 3.00% 5.00%
2nd year 2.00% 4.00%
3rd year 2.00% 3.00%
4th year 1.00% 3.00%
5th year None 2.00%
6th year None 1.00%
After 6 years None None
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.
Class C Shares are offered at their net asset value per share, without any
initial sales charge. However, you may be charged a contingent deferred sales
charge (CDSC) of 1% on shares you sell within one year of purchase. 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.
CDSC calculations are based on the number of shares involved, not on the value
of your account. Each time you place a request to sell shares we will first sell
any shares in your account that carry no CDSC.
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.
- --------------------------------------------------------------------------------
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. Retirement plans investing $1 million in
Class B shares may add that value to Class A purchases to calculate sales
charges.
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, contact your
financial representative or Signature Services or consult the SAI (see the back
cover of this prospectus).
Group Investment Program A group may be treated as a single purchase 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 this prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for each 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
o to purchase a John Hancock Declaration annuity
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI.
YOUR ACCOUNT 21
<PAGE>
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 selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed 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 with John
Hancock Funds into an individual account in a John Hancock fund
o certain insurance company contract holders (one-year CDSC usually applies)
o participants in certain retirement plans with at least 100 eligible
employees (one-year CDSC applies)
o clients of AFA, when their funds are transferred directly to Global
Technology Fund from accounts managed by AFA
o certain former shareholders of John Hancock National Aviation & Technology
Fund and Nova Fund (applies to Global Technology Fund only)
To utilize: if you think you may be eligible for a sales charge waiver, contact
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: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges 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.
22 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable
"John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no
mail them to Signature Services slip is available, include
(address below). a note specifying the fund
name, your share class,
your account number and
the name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail
them to Signature Services
(address below).
By exchange
[Clip art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
By wire
[Clip art] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your
representative, or mail investment to:
it to Signature Services. First Signature Bank & Trust
Account # 900000260
o Obtain your account number Routing # 211475000
by calling your financial Specify the fund name, your
representative or share class, your account
Signature Services. number and the name(s)
in which the account is
o Instruct your bank to wire registered. Your bank may
the amount of your investment charge a fee to wire funds.
to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s)
in which the account is
registered. Your bank may charge
a fee to wire funds.
By phone
[Clip art] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the "Invest-By-
Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Tell the Signature Services
representative the fund name,
your share class, your
account number, the name(s)
in which the account is
registered and the amount
of your investment.
- ----------------------------------------
Address
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone number
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- ----------------------------------------
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
YOUR ACCOUNT 23
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip art] o Accounts of any type. o Write a letter of instruction
or complete a stock power
o Sales of any amount. indicating the fund name, your
share class, your account
number, the name(s) in which
the account is registered and
the dollar value or number of
shares you wish to sell.
o Include all signatures and any
additional documents that may
be required (see next page).
o Mail the materials to Signature
Services.
o A check will be mailed to the
name(s) and address in which
the account is registered, or
otherwise according to your
letter of instruction.
By phone
[Clip art] o Most accounts. o For automated service 24 hours
a day using your touch-tone
o Sales of up to $100,000. phone, call the EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most business
days.
By wire or electronic funds transfer (EFT)
[Clip art] o Requests by letter to o Fill out the "Telephone
sell any amount (accounts Redemption" section of your
of any type). new account application.
o Requests by phone to sell o To verify that the telephone
up to $100,000 (accounts redemption privilege is in
with telephone redemption place on an account, or to
privileges). request the forms to add it
to an existing account, call
Signature Services.
o Amounts of $1,000 or more will
be wired on the next business
day. A $4 fee will be deducted
from your account.
o Amounts of less than $1,000
may be sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day.
Your bank may charge a fee
for this service.
By exchange
[Clip art] o Accounts of any type. o Obtain a current prospectus for
the fund into which you are
o Sales of any amount. exchanging by calling your
financial representative or
Signature Services.
o Call your financial
representative or Signature
Services to request an exchange.
By check
[Clip art] o Short-Term Strategic Income o Request checkwriting on your
Fund only. account application.
o Any account with o Verify that the shares to be
checkwriting privileges. sold were purchased more
than 10 days earlier or were
o Sales of over $100. purchased by wire.
o Write a check for any amount
over $100.
----------------------------------------
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."
24 YOUR ACCOUNT
<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)
The signature guarantee must be from a member of the Signature Guarantee
Medallion Program (generally, a broker or securities dealer). We may refuse any
other source. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clip art]
- --------------------------------------------------------------------------------
Owners of individual, joint, o Letter of instruction.
sole proprietorship, UGMA/UTMA o On the letter, the signatures and
(custodial accounts for minors) titles of all persons authorized to
or general partner accounts. sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or o Letter of instruction.
association accounts. o Corporate resolution, certified
within the past twelve months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o 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.
YOUR ACCOUNT 25
<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 received 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 and Class
C 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.
Foreign currencies Purchases must be made in U.S. dollars. Purchases in foreign
currencies must be converted, which may result in a fee and delayed execution.
- --------------------------------------------------------------------------------
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 income funds generally declare income dividends daily and pay them
monthly. These income dividends begin accruing the day after payment is received
by the fund and continue through the day your shares are actually sold. The
growth funds pay income dividends, if any, annually. All funds distribute
capital gains, if any, annually.
26 YOUR ACCOUNT
<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 from the growth funds.
Dividends may include a return of capital.
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 retirement plans,
including Traditional and Roth IRAs, SIMPLE IRAs, SIMPLE 401(k)s, SEPs, 401(k)s,
money purchase 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.
YOUR ACCOUNT 27
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
How the funds are organized Each John Hancock international/global 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 international/global
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.
------------------------------------------------------
-------------------------------
Subadvisers
American Fund Advisors, Inc.
1415 Kellum Place
Garden City, NY 11530
John Hancock Advisers
International Limited
34 Dover Street
London, UK W1X 3RA
Indocam Asia Advisers Limited
One Exchange Square
Hong Kong
Indocam International
Investment Services
90 Boulevard Pasteur
Paris, France 75015
Provide portfolio management
to certain funds
-------------------------------
------------------------------------
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business and
investment activities.
------------------------------------
------------------------------------
Custodians
Investors Bank & Trust Co.
200 Clarendon Street
Boston, MA 02116
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Hold the funds' assets, settle all
portfolio trades and collect most of
the valuation data required for
calculating each fund's NAV.
------------------------------------
Asset
management
------------------------------------
Trustees
Supervise the funds' activities.
------------------------------------
28 FUND DETAILS
<PAGE>
Accounting compensation The funds (except for Global Technology) 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.
Global Technology pays a $100,000 administration fee to the adviser.
Portfolio trades In placing portfolio trades, the adviser or subadvisers may use
brokerage firms that market the fund's shares or are affiliated with John
Hancock Mutual Life Insurance Company or subadvisers, 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 European Equity Fund, Global Rx Fund, International
Fund and World Bond Fund, each fund's investment goal is fundamental and may
only be changed with shareholder approval.
Diversification Except for Global Rx Fund, Short-Term Strategic Income Fund and
World Bond Fund, all of the international/global 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 and Class C
shares, interest expenses.
- --------------------------------------------------------------------------------
Class B unreimbursed distribution expenses(1)
- --------------------------------------------------------------------------------
Unreimbursed As a % of
Fund expenses net assets
European Equity Fund N/A N/A
Global $ 795,893 2.56%
Global Rx $ 466,209 1.06%
Global Technology $ 1,198,204 2.00%
International $ 460,399 4.90%
Pacific Basin Equities $ 1,045,211 3.85%
Short-Term Strategic Income $ 2,554,608 7.17%
World Bond $ 5,324,432 15.75%
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
Class C Class C shares began operations after the 1997 fiscal year. Therefore,
there are no unreimbursed expenses to report.
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.
FUND DETAILS 29
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A investments
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
Short-Term Strategic Income Fund
Up to $99,999 3.00% 2.26% 0.25% 2.50%
$100,000 - $499,999 2.50% 2.01% 0.25% 2.25%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
World Bond Fund
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Growth funds
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 (all funds)
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
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
Short-Term Strategic Income Fund
All amounts 2.25% 0.25% 2.50%
All other funds
All amounts 3.75% 0.25% 4.00%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class C investments
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum
reallowance First year Maximum
or commission service fee total compensation
(% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C>
All amounts 0.75% 0.25% 1.00%
</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. For European
Equity Fund, John Hancock Funds may allow an amount up to the full
applicable sales charge.
(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.
30 FUND DETAILS
<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. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages 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 international/global fund will be positive over any period of time --
days, months or years. However, international markets have performed better over
the past two decades than domestic markets.
- --------------------------------------------------------------------------------
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. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency denominated investments, and may widen any losses.
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. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
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. These fluctuations may cause a security to
be worth less than it was worth at an earlier time. Market risk may affect a
single issuer, industry, sector of the economy or the market as a whole. 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 attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, 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.
Year 2000 risk The risk that the funds' operations could be disrupted by the
year 2000-related computer system problems. Although the adviser and the funds'
service providers are taking steps to address this issue, there may still be
some risk of adverse effects. Common to all mutual funds.
FUND DETAILS 31
<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/semiannual 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
o Permitted, but has not typically been used
- -- Not permitted
<TABLE>
<CAPTION>
European Pacific Short-Term
Equity Global Global Inter- Basin Strategic World
Fund Global RX Technology national Equities Income Bond
- ----------------------------------------------------------------------------------------------------------------------------------
Investment practices
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Borrowing; reverse repurchase agreements
The borrowing of money from banks or through
reverse repurchase agreements.
Leverage, credit risks. 33.3 10 33.3 10 33.3 33.3 10 10
Currency trading The direct trading or
holding of foreign currencies as an asset.
Currency risk. * * * * * * * *
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. 33.3 10 33.3 33.3 33.3 33.3 30 30
Short sales The selling of securities which
have been borrowed on the expectation that
the market price will drop.
o Hedged. Hedged leverage, market,
correlation, liquidity, opportunity risks. o -- o -- o o -- --
o Speculative. Speculative leverage, market,
liquidity risks. -- -- o -- o -- -- --
Short-term trading Selling a security soon
after purchase. A portfolio engaging
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
Foreign debt securities Debt securities
issued by foreign governments or
companies. Credit, currency, interest rate,
market, political risks. 20 5 35(1) 10(2) 35(1) 35(1) *(1) *(1)
Non-investment-grade debt securities Debt
securities rated below BBB/Baa are considered
junk bonds. Credit, market, interest rate,
liquidity, valuation, information risks. -- -- 35 10(2) -- -- 67 35
Restricted and illiquid securities.
Securities not traded on the open market.
May include illiquid Rule 144A securities.
Liquidity, valuation, market risks. 15 15 15 15 15 15 15 15
- --------------------------------------------------------------------------------------------------------------------------------
Unleveraged derivative securities
Asset-backed securities Securities backed
by unsecured debt, such as credit card
debt; these securities are often
guaranteed or over-collateralized to
enhance their credit quality. Credit,
interest rate risks. -- o o o o o * *
Mortgage-backed securities Securities
backed by pools of mortgages, including
pass-through certificates, PACs, TACs
and other senior classes of
collateralized mortgage obligations
(CMOs). Credit, extension, prepayment,
liquidity, interest rate risks. -- o o o o o * *
Participation interests Securities
representing an interest in another
security or in bank loans. Credit,
interest rate, liquidity,
valuation risks. -- -- -- 10(2) -- -- 15(3) 15(3)
</TABLE>
32 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Higher-risk securities and practices (cont'd)
- ----------------------------------------------------------------------------------------------------------------------------------
European Pacific Short-Term
Equity Global Global Inter- Basin Strategic World
Fund Global RX Technology national Equities Income Bond
- ----------------------------------------------------------------------------------------------------------------------------------
Leveraged derivative securities
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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. * o o o o o o o
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. * * * o * * * *
o Options on securities and indices.
Interest rate, currency, market,
hedged or speculative leverage,
correlation, liquidity, credit,
opportunity risks. * o o o o o o o
Structured securities Indexed
and/or leveraged mortgage-backed
and other debt securities, including
principal-only and interest-only
securities, leveraged floating rate
securities and others. These securities
tend to be highly sensitive to interest
rate movements and their performance
may not correlate to these movements
in a conventional fashion. Credit,
interest rate, extension, prepayment,
market, speculative leverage,
liquidity, valuation risks. -- * * 10(2) * * * *
</TABLE>
(1) No more than 25% of the fund's assets will be invested in securities of
any one foreign government.
(2) Included in the 10% limitation on debt securities.
(3) Included in the 15% limitation on illiquid securities.
- --------------------------------------------------------------------------------
Analysis of funds with 5% or more in junk bonds(1)
- --------------------------------------------------------------------------------
[The table below was represented by a bar chart in the printed materials.]
<TABLE>
<CAPTION>
Quality rating Short-Term Strategic Quality rating World Bond
(S&P/Moody's)(2) Income Fund (S&P/Moody's)(2) Fund
<S> <C> <C> <C> <C> <C>
Invest- AAA/Aaa 40.8% Invest- AAA/Aaa 70.2%
ment- AA/Aa 0.0% ment- AA/Aa 0.0%
Grade A/A 5.4% Grade A/A 0.4%
Bonds BBB/Baa 8.0% Bonds BBB/Baa 0.3%
- ------------------------------------------------------------------------------------------------------
Junk BB/Ba 32.0% Junk BB/Ba 17.9%
Bonds B/B 9.9% Bonds B/B 8.3%
CCC/Caa 0.0% CCC/Caa 0.0%
CC/Ca 0.0% CC/Ca 0.0%
C/C 0.0% C/C 0.0%
D 0.0% D 0.0%
% of portfolio in bonds 96.1% % of portfolio in bonds 97.1%
</TABLE>
o Rated by Standard & Poor's or Moody's Rated by the adviser
(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.
FUND DETAILS 33
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
international/global 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). You may visit
the Securities and Exchange Commission's Internet website (www.sec.gov) to view
the SAI, material incorporated by reference and other information.
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) (C) 1996 John Hancock Funds, Inc.
GLIPN 6/98
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JOHN HANCOCK SPECIAL OPPORTUNITIES FUND
Statement of Additional Information
Class A, Class B and Class C Shares
June 1, 1998
This Statement of Additional Information provides information about John Hancock
Special Opportunities Fund (the "Fund"), in addition to the information that is
contained in the combined Growth Funds' Prospectus dated June 1, 1998 (the
"Prospectus"). The Fund is a diversified series of John Hancock Investment Trust
III (the "Trust"), formerly Freedom Investment Trust II.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which may 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.......................................................13
Those Responsible for Management..............................................15
Investment Advisory and Other Services........................................23
Distribution Contracts........................................................25
Net Asset Value...............................................................27
Initial Sales Charge on Class A Shares........................................28
Deferred Sales Charge on Class B and Class C Shares...........................30
Special Redemptions...........................................................33
Additional Services and Programs..............................................34
Descriptions of the Fund's Shares.............................................35
Tax Status....................................................................37
Calculation of Performance....................................................41
Brokerage Allocation..........................................................42
Transfer Agent Services.......................................................44
Custody of Portfolio..........................................................44
Independent Auditors..........................................................44
Appendix A -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 on March 31, 1986 under the laws of
The Commonwealth of Massachusetts. The Fund commenced operations on September 7,
1993.
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. There is no assurance that
the Fund will achieve its investment objective.
The investment objective of the Fund is long-term capital appreciation. The Fund
seeks to achieve its objective by emphasizing investments n equity securities of
issuers in various economic sectors. The equity securities in which the Fund
invests consist primarily of common stocks of U.S. and foreign issuers but may
also include preferred stocks, convertible debt securities and warrants.
The Fund seeks to achieve its investment objective by varying the relative
weighting of its portfolio securities among various economic sectors based upon
both macroeconomic factors and the outlook for each particular sector. The
Adviser selects equity securities for the Fund from various economic sectors,
including, but not limited to, the following: basic material, energy, capital
equipment, technology, consumer cyclical, retail, consumer staple, health care,
transportation, financial and utility. The Fund may modify these sectors if the
Adviser believes that they no longer represent appropriate investments for the
Fund, or if other sectors offer better opportunities for investment.
The Adviser will adjust the Fund's relative weighting among the sectors in
response to changes in economic and market conditions. Subject to the Fund's
policy of investing not more than 25% of its total assets in any one industry,
issuers in any one sector may represent all of the Fund's net assets. Due to the
Fund's emphasis on a few sectors, the Fund may be subject to a greater degree of
volatility than a fund that is structured in a more diversified manner. However,
the Fund retains the flexibility to invest its assets in a broader group of
sectors if a narrower range of investments is not desirable. This flexibility
may offer greater diversification than a fund that is limited to investing in a
single sector or industry. The Fund may hold securities of issuers in fewer than
all of the sectors at any given time.
In selecting securities for the Fund's portfolio, the Adviser will determine the
allocation of assets among equity securities, fixed income securities and cash,
the sectors that will be emphasized at any given time, the distribution of
securities among the various sectors, the specific industries within each sector
and the specific securities within each industry. In making the sector analysis,
the Adviser considers the general economic environment, the outlook for real
economic growth in the United States and abroad, trends and developments within
specific sectors and the outlook for interest rates and the securities markets.
A sector is a "special opportunity" when, in the opinion of the Adviser, the
issuers in that sector have a high earnings potential. In selecting particular
issuers, the Adviser considers price/earnings ratios, ratios of market to book
value, earnings growth, product innovation, market share, management quality and
capitalization.
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The Fund's investments may include securities of both large, widely traded
companies and smaller, less well-known issuers. The Fund seeks growth companies
that either occupy a dominant position in an emerging or established industry or
have a significant and growing market share in a large, fragmented industry. The
Fund seeks to invest in those companies with potential for high growth, stable
earnings, ability to self-finance, a position of industry leadership and strong
visionary management. Higher risks are often associated with investments in
companies with smaller market capitalizations. These companies may have limited
product lines, market and financial resources, or they may be dependent upon
smaller or less experienced management groups. In addition, trading volume for
these securities may be limited. Historically, the market price for these
securities has been more volatile than for securities of companies with greater
capitalizations. However, securities of companies with smaller capitalization
may offer greater potential for capital appreciation, since they may be
overlooked and thus undervalued by investors. There is no assurance that the
Fund will achieve its investment objective.
Investment in Fixed Income Securities. The Fund may invest in the following
fixed income securities: U.S. Government securities and convertible and
non-convertible corporate preferred stocks and debt securities. 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 levels 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. The corporate fixed income securities in which the Fund may invest
will be rated at least BBB by Standard & Poor's Ratings Group ("S&P") or Baa by
Moody's Investors Service, Inc. ("Moody's") or, if unrated, determined to be of
comparable quality by the Adviser. Debt securities rated Baa or BBB are
considered medium grade obligations with speculative characteristics, and
adverse economic conditions or changing circumstances may weaken capacity to pay
interest and repay principal.
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.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized, however, that such ratings are
relative and subjective and are not absolute standards of quality. These ratings
will be used by the Fund as initial criteria for the selection of corporate debt
securities. Among the factors which will be considered are the long-term ability
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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, but the Adviser will consider the event in its determination of whether
the Fund should continue to hold the securities.
Investment in Foreign Securities. The Fund may invest 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 a U.S. 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 foreign currency transactions of the Fund may
be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. The Fund may enter
into forward foreign currency contracts involving currencies of the different
countries in which it will invest as a hedge against possible variations in the
foreign exchange rate between these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign currency contracts will be limited to hedging either specific
transactions or portfolio positions. The Fund will not attempt to hedge all of
its foreign portfolio positions. The Fund will not engage in speculative forward
currency transactions.
If the Fund enters into a forward contract to purchase foreign currency, its
custodian bank will segregate cash or liquid securities, of any type or
maturity, in a separate account of the Fund in an amount necessary to complete
the forward contract. These assets will be marked to market daily and if the
value of the assets in the separate account declines, additional cash or liquid
assets will be added so that the value of the account will equal the amount of
the Fund's commitments in forward 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. These transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency 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 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.
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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, interest and in some cases, capital gains 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 Adviser will continuously monitor the creditworthiness of the parties with
whom the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income decline in
value of the underlying securities or lack of access to income during this
period as well as the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank or securities firm 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. The Fund will
use proceeds obtained from the sale of securities pursuant to reverse repurchase
agreements to purchase other investments. The use of borrowed funds to make
investments is a practice known as "leverage," which is considered speculative.
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Use of reverse repurchase agreements is an investment technique that is intended
to increase income. Thus, the Fund will enter into a reverse repurchase
agreement only when the Adviser determines that the interest income to be earned
from the investment of the proceeds is greater than the interest expense of the
transaction. However, there is a risk that interest expense will nevertheless
exceed the income earned. 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. In addition, the Fund will not
borrow money or enter into reverse repurchase agreements except from banks as a
temporary measure for extraordinary or emergency purposes, except pursuant to
reverse repurchase agreements, 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 enter into reverse repurchase agreements only with selected registered
broker/dealers or with federally insured banks 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 firms 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 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, 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.
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
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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 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
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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
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
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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 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
9
<PAGE>
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.
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 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
10
<PAGE>
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 securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
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 and may be required to pay a premium.
11
<PAGE>
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 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 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 liquid 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 liquid securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until the Fund replaces the borrowed
security, it must daily maintain the segregated account at such a level that the
amount deposited in it plus the amount deposited with the broker as collateral
will equal the current market value of the securities sold short. Except for
short sales against the box, the amount of the Fund's net assets that may be
committed to short sales is limited and the securities in which short sales are
made must be listed on a national securities exchange.
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.
The Fund does not intend to enter into short sales (other than those "against
the box") if immediately after such sale the aggregate of the value of all
collateral plus the amount in such segregated account exceeds the value of 5% of
the Fund's net assets. A short sale is "against the box" to the extent that the
Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short.
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 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
12
<PAGE>
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 the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information means the 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 paragraph (2)
below. For purposes of this restriction, the issuance of
shares of beneficial interest in multiple classes or series,
the purchase or sale of options, futures contracts and options
on futures contracts, interest rate or currency swaps, forward
commitments, forward foreign currency exchange contracts 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 or emergency purposes, except pursuant to
reverse repurchase agreements, in amounts not to exceed 33
1/3% of the Fund's total assets (including the amount
borrowed) taken at market value.
(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
Securities Act of 1933.
(5) Purchase or sell real estate or any interest therein, except
that the Fund may invest in securities secured by real estate
or marketable interests therein or issued by companies that
invest in real estate or interests therein and may retain or
sell real estate acquired due to the ownership of securities.
(6) Make loans, except that the Fund may (a) lend portfolio
securities in an amount that does not exceed 33 1/3% of such
Fund's total assets; (b) enter into repurchase agreements; and
13
<PAGE>
(c) purchase bank certificates of deposit, bank loan
participation agreements, bankers' acceptances or all or a
portion of an issue of debt securities, whether or not the
purchase is made upon the original issuance of the securities.
(7) Investin commodities or commodity contracts or in puts, calls,
or combinations of both, except financial futures contracts,
options on securities, securities indices, currency and other
financial instruments, options on futures contracts, forward
foreign currency exchange contracts, forward commitments,
interest rate or currency swaps, warrants and repurchase
agreements entered into in accordance with the Fund's
investment policies.
(8) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after
such purchase, the value of the Fund's investments in such
industry would exceed 25% of its total assets taken at market
value at the time of each investment. For purposes of this
restriction, telephone, water, gas and electric public
utilities are each regarded as separate industries and
wholly-owned finance companies are considered to be in the
industry of their parents if their activities are primarily
related to financing the activities of their parent. This
limitation does not apply to investments by the Fund in
obligations of the U.S. Government or any of its agencies or
instrumentalities.
In connection with the lending of portfolio securities under item (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.
Notwithstanding the foregoing fundamental investment restrictions, or any
investment policy or non-fundamental investment restriction of the Fund, the
Fund may invest all or part of its assets in an open-end management investment
company with substantially the same investment objectives, policies and
restrictions as the Fund.
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 to save
commissions or to average prices among them is not deemed to
result in a securities trading account.
(b) Make short sales of securities or maintain a short position
unless (i) at all times when a short position is open the Fund
owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any
further consideration, for securities of the same issuer as,
and equal in amount to, the securities sold short; (ii) for
the purpose of hedging the Fund's exposure to an actual or
anticipated market decline in the value of its investments; or
(iii) in order to profit from an anticipated decline in the
value of a security.
(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
14
<PAGE>
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 for the purpose of exercising control over or
management of any company.
(e) Invest more than 15% of its net assets in illiquid securities.
(f) Purchase securities while outstanding borrowings, other than
reverse repurchase agreements, exceed 5% of the Fund's total
assets.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees, who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers or Directors of the Adviser, or officers or Directors of the
Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
15
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 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.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
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.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Vice President and Chief Economist,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 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.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of
Washington, DC 20008-3009 International Education (since
May 1943 January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emeritus of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, 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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, 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 Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
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.
</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 and Scipione and Ms.
Hodsdon, each a non-Independent Trustee and each of the officers of the Fund are
interested persons of the Adviser, are compensated by the Adviser and receive no
compensation from the Fund for their services.
22
<PAGE>
Aggregate Total Compensation From the
Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complesx to Trustees(2)
- -------------------- ---------------- -----------------------
Dennis S. Aronowitz $ 2,631 $ 72,000
Richard P. Chapman, Jr+ 2,731 75,000
William J. Cosgrove+ 2,631 72,000
Douglas M. Costle 2,731 75,000
Leland O. Erdahl 2,631 72,000
Richard A. Farrell 2,731 75,000
Gail D. Fosler 2,631 72,000
William F. Glavin+ 2,627 72,000
Dr. John A. Moore+ 2,631 72,000
Patti McGill Peterson 2,631 72,000
John W. Pratt 2,631 72,000
Edward J. Spellman 2,731 75,000
---------- ------
Totals $ 31,968 $ 876,000
1Compensation is for the fiscal year ended October 31, 1997.
2Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1997. As of this date, there were sixty-seven
funds in the John Hancock Fund Complex with each of these Independent Trustees
serving thirty-two.
(+)As of December 31, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $69,148, Mr. Cosgrove was $167,829, Mr. Glavin was $193,514 and for
Dr. Moore was $84,315 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
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 April 27, 1998, the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the Fund's outstanding shares. On that date,
no person owned of record or beneficially as much as 5% of the outstanding
shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Fund and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over approximately 1,400,000 shareholders. The Adviser is an
affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of $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
23
<PAGE>
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 the
Adviser monthly a fee based on a stated percentage of the average of the daily
net assets of the Fund as follows:
Net Asset Value Annual Rate
First $500,000,000 0.80%
Next $500,000,000 0.75%
Amount over $1,000,000,000 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 or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made insofar as feasible, for
the respective funds or clients in a manner deemed equitable to all of them. To
the extent that transactions on behalf of more than one client of the Adviser or
its affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreement, the Adviser is not liable to the Fund or its
shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of its obligations and duties under
the Advisory Agreement.
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<PAGE>
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and the Distribution Agreement
(discussed below) was approved by all Trustees. The Advisory Agreement and the
Distribution Agreement, will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both agreements may be terminated on 60 days
written notice by any party or by vote of a majority to the outstanding voting
securities of the Fund and will terminate automatically if assigned.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Fund paid the
Adviser an investment advisory fee of $1,870,771, $2,368,694 and $3,039,997,
respectively.
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 years ended October 31, 1996 and 1997, the
Fund paid the Adviser $21,182 and $69,934 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 an applicable sales charge, if any. In connection
with the sale of Fund shares, John Hancock Funds and Selling Brokers receive
compensation from a sales charge imposed, in the case of Class A shares, at the
time of sale. In the case of Class B or Class C shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended October 31, 1995, 1996 and 1997 were $443,675, $737,384 and
$579,686, respectively. Of such amounts $67,560, $102,281 and $91,952,
25
<PAGE>
respectively, were retained by John Hancock Funds in 1995, 1996, and 1997. The
remainder of the underwriting commissions were reallowed to dealers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (together, the "Plans"), pursuant to Rule 12b-1 under the Investment
Company Act. Under the Plans, the Fund will pay distribution and service fees at
an aggregate annual rate of up to 0.30% for Class A and 1.00% for Class B and
Class C share, of the Fund's average daily net assets attributable to shares of
that class. However, the service fee will not exceed 0.25% of the Fund's average
daily net assets attributable to each class of shares. The distribution fees
will be used to reimburse 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 and Class C shares only, interest expenses on unreimbursed
distribution expenses. The service fees will be used to compensate Selling
Brokers and others for providing personal and account maintenance services to
shareholders. In the event John Hancock Funds is not fully reimbursed for
payments or expenses they incur under the Class A Plan, these expenses will not
be carried beyond twelve months from the date they were incurred. Unreimbursed
expenses under the Class B and Class C Plans will be carried forward together
with interest on the balance of these unreimbursed expenses. The Fund does not
treat unreimbursed expenses under the Class B and Class C Plans as a liability
of the Fund because the Trustees may terminate the Class B and/or Class C Plans
at any time. For the fiscal year ended October 31, 1997, an aggregate of
$7,659,598 of distribution expenses or 3.39% of the average net assets of the
Class B shares of the Fund, was not reimbursed or recovered by John Hancock
Funds through the receipt of deferred sales charges or Rule 12b-1 fees in prior
periods. Class C shares of the Fund did not commence operations until June 1,
1998, therefore, there are no unreimbursed expenses to report.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on 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 appropriateness.
The Plans provide that they will continue in effect only as long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans prove that they may be terminated without
penalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote of
the 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 Plans will 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, Class B and Class C shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that the Plans will benefit the holders of the applicable class of
shares of the Fund.
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<PAGE>
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of the
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Fund.
During the fiscal year ended October 31, 1997, the Funds paid John Hancock Funds
the following amounts of expenses in connection with their services for the
Fund. Class C shares did not commence operations until June 1, 1998; therefore,
there are no expenses to report.
<TABLE>
<CAPTION>
Expense Items
Printing and Interest,
Mailing of Expenses of Carrying or
Prospectus to Compensation John Other
New to Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C>
Class A shares $ 58,220 $ 17,415 $ 270,387 $ 115,919 $ --
Class B shares $ 157,001 $ 53,003 $ 854,483 $ 311,058 $857,858
</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 mean
between the current closing bid and asked prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of a 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.
27
<PAGE>
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 purchases by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares of the Fund, the
investor is entitled to accumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund owned by the
investor, or if John Hancock Signature Services, Inc. ("Signature Services") is
notified by the investor's dealer or the investor at the time of the purchase,
the cost of the Class A shares owned.
Without Sales Charge. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o 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,
grandparents, grandchildren, mother, father, sister, brother,
mother-in-law, father-in-law, daughter-in-law, son-in-law,
niece, nephew, grandparents and domestic partner) of any of
the foregoing; or any fund, pension, profit sharing or other
benefit plan of the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement
with John Hancock Funds providing specifically for the use of
Fund shares in fee-based investment products or services made
available to their clients.
o A former participant in an employee benefit plan with John
Hancock funds, when he or she withdraws from his or her plan
and transfers any or all of his or her plan distributions
directly to the Fund.
o A member of a class action lawsuit against insurance companies
who is investing settlement proceeds.
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 Retirement plans investing through the PruArray Program
sponsored by Prudential Securities.
o Existing full service clients of the Life Company who were
group annuity contract holders as of September 1, 1994, and
participant directed retirement plans with at least 100
eligible employees at the inception of the Fund account. Each
of these investors may purchase Class A shares with no initial
sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the
purchase was made, a CDSC will be imposed at the following
rate:
Amount Invested CDSC RATE
--------------- ---------
$1 to $4,999,000 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transaction involving
other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
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 being invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments in
Class A shares made pursuant to a Letter of Intention ("LOI"), which should be
read carefully prior to its execution by an investor. The Fund offers two
options regarding the specified period for making investments under the LOI. All
29
<PAGE>
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 48 month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and
Section 457 plans. Non-qualified and retirement plans investments cannot be
combined to satisfy and LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) 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 been applied (including accumulations and combinations) had the LOI been
for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional shares and may be
terminated at any time.
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so the Fund will receive
the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B or Class C shares being redeemed. No
CDSC will be imposed on increases in account value above the initial purchase
prices, including all shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service retirement 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 this number of
years from the time of any payment for the purchases both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
30
<PAGE>
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C or those you acquired through dividend and capital
gain reinvestment, and next from the shares you have held the longest during the
six-year period for Class B shares. For this purpose, the amount of any increase
in a share's value above its initial purchase price is not regarded as a share
exempt from CDSC. Thus, when a share that has appreciated in value is redeemed
during the CDSC period, a CDSC is assessed only on its initial purchase price.
When requesting a redemption for a specific dollar amount, please indicate if
you require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
oProceeds of 50 shares redeemed at $12 per share (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
oMinus proceeds of 10 shares not subject to CDSC (dividend
reinvestment) (120.00)
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
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 and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C shares and of Class A shares that are subject
to 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. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemption of class B or Class C shares where the proceeds are used to
purchase a John Hancock Declaration Variable Annuity.
31
<PAGE>
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan or redemptions for fees charged by planners or advisors
for advisory services, as long as your annual redemptions do not exceed
12% of your account value, including reinvestment 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 do not
apply to periodic withdrawal plan redemptions of Class A or Class C
shares that are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A or Class C shares by retirement plans that in
vested through the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as Traditional, Roth and Education IRA, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, 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 plans that purchased shares
prior to May 15, 1995.
32
<PAGE>
CDSC Waiver Matrix for Class B and Class C
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
perodic
payments
- -------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72t) or 12% (72t) or 12% (72t) or (72t) or annually in
of account of account 12% of 12% of periodic
value value account account payments
annually in annually in value value
periodic periodic annually in annually in
payments payments periodic periodic
payments payments
- -------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------
Return of 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
33
<PAGE>
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares of
the Fund could be disadvantageous to a shareholder because of the initial sales
charge payable on such purchases of Class A shares and the CDSC imposed on
redemptions of Class B and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase shares at the same time a
Systematic Withdrawal 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:
34
<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 in that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of 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 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 five other
series. The Declaration of Trust also authorizes the Trustees to classify and
35
<PAGE>
reclassify the shares of the Fund, or any new series of the Trust, into one or
more classes. As of the date of this Statement of Additional Information, the
Trustees have authorized the issuance of three classes of shares of the Fund,
designated as Class A, Class B and Class C.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
each Class of shares have certain exclusive voting rights on matters relating to
their respective distribution plans. The different classes of the Fund may bear
different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class will be borne exclusively
by that class (ii) Class B and Class C shares will pay higher distribution and
service fees than Class A shares and (iii) each class of shares will bear any
other class expenses properly allocable to that class of shares, subject to the
conditions imposed by the Internal Revenue Service with respect to
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with a request for a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Furthermore, no fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock Fund. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. 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
36
<PAGE>
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 qualify in the
future. As such and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions, and the
diversification of its assets, the Fund will not be subject to Federal income
tax on its taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as 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 those gains and losses included in computing net
capital gain, after reduction by deductible expenses.) As a result of federal
tax legislation enacted on August 5, 1997 (the "Act"), gain recognized after May
6, 1997 from the sale of a capital asset is taxable to individual (noncorporate)
investors at different maximum federal income tax rates, depending generally
upon the tax holding period for the asset, the federal income tax bracket of the
taxpayer, and the dates the asset was acquired and/ or sold. The Treasury
Department has issued guidance under the Act that enables the Fund to pass
through to its shareholders the benefits of the capital gains rates enacted in
the Act. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances. Some
distributions may be paid in January but may be taxable to shareholders as if
they had been received on December 31 of the previous year. 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 (including an option to acquire stock such as is
inherent in a convertible bond) of certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and 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. An election may be available to ameliorate these
37
<PAGE>
adverse tax consequences, but could require the Fund to recognize taxable income
or gain without the concurrent receipt of cash. These investments could also
result in the treatment of associated capital gains as ordinary income. The Fund
may limit and/or manage its holdings in passive foreign investment companies or
make an available election to minimize its tax liability or maximize its return
from these investments.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency options, foreign currency forward contracts, foreign
currencies, or payables or receivables denominated in a foreign currency are
subject to Section 988 of the Code, which generally causes such gains and losses
to be treated as ordinary income and losses and may affect the amount, timing
and character of distributions to shareholders. Transactions in foreign
currencies that are not directly related to the Fund's investment in stock or
securities, including speculative currency positions, could under future
Treasury regulations produce income not among the types of "qualifying income"
from which the Fund must derive at least 90% of its gross income for each
taxable year. If the net foreign exchange loss for a year treated as ordinary
loss under Section 988 were to exceed the Fund's investment company taxable
income computed without regard to such loss, the resulting overall ordinary loss
for such year would not be deductible by the Fund or its shareholders in future
years.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. The Fund does not expect to qualify to pass such taxes through to its
shareholders, who consequently will not take such taxes into account on their
own tax returns. However, the Fund will deduct such taxes in determining the
amount it has available for distribution to shareholders.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities and/or engage in options, futures or forward transactions
that will generate capital gains. At the time of an investor's purchase of Fund
shares, a portion of the purchase price is often attributable to realized or
unrealized appreciation in the Fund's portfolio or undistributed taxable income
of the Fund. Consequently, subsequent distributions from such appreciation or
income may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. A sales charge paid in purchasing Class A
shares of the Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of the Fund or another John Hancock Fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 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
38
<PAGE>
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department guidance issued to
implement the Act may contain additional rules for determining the tax treatment
of sales of Fund shares held for various periods, including the treatment of
losses on the sales of shares held for six months or less that are
recharacterized as long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as capital gain
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled
to increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of such excess and his pro rata are of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset its net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed as such to
shareholders. The Fund has $11,066,430 of capital loss carry forward available
to the extent provided by regulations to offset future net realized capital
gains. The carry forward expire as follows: October 31, 1998- $769,302, October
31, 1999- $1,297,087, October 31, 2000- $12,856, October 31, 2001- $4,531,602,
and October 31, 2002- $4,455,583.
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) during a prescribed period extending before and after each such
dividend and distributed and properly designated by the Fund may be treated as
qualifying dividends. Corporate shareholders must meet the holding period
requirements stated above with respect to their shares of the Fund for each
dividend in order to qualify for the deduction and, if they have any debt that
is deemed under the Code directly attributable to such shares, may be denied a
portion of the dividends received deduction. The entire qualifying dividend,
including the otherwise deductible amount, will be included in determining the
excess (if any) of a corporate shareholder's adjusted current earnings over its
alternative minimum taxable income, which may increase its alternative minimum
tax liability, if any. Additionally, any corporate shareholder should consult
its tax adviser regarding the possibility that its basis in its shares may be
reduced, for Federal income tax purposes, by reason of "extraordinary dividends"
received with respect to the shares, and to the extent such basis would be
reduced below zero, that current recognition of income would be required.
The Fund is required to accrue income on any debt securities that have more than
a de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payment. The mark to
39
<PAGE>
market or constructive sale rules applicable to certain options, futures,
forwards, short sales or other transactions may also require the Fund to
recognize income or gain without a concurrent receipt of cash. Additionally,
some countries restrict repatriation which may make it difficult or impossible
for the Fund to obtain cash corresponding to its earnings or assets in those
countries. However, the Fund must distribute to shareholders for each taxable
year substantially all of its net income and net capital gains, including such
income or gain, to qualify as a regulated investment company and avoid liability
for any federal income or excise tax. Therefore, the Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash,
or borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
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.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into options, futures, foreign currency
positions, and foreign currency forward contracts.
Certain options, futures and forward foreign currency contracts 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 foreign currency
contracts, as ordinary income or loss) and timing of some capital gains and
losses realized by the Fund. Additionally, the Fund may be required to recognize
gain, but not loss, if an option, short sales or other transaction is treated as
a constructive sale of an appreciated financial position in the Fund's
portfolio. Also, certain of the Fund's losses on its transactions involving
options or forward contracts and/or offsetting or successor portfolio positions
40
<PAGE>
may be deferred rather than being taken into account currently in calculating
the Fund's taxable income or gains. These transactions may therefore affect the
amount, timing and character of the Fund's distributions to shareholders.
Certain of such transactions may also cause the Fund to dispose of investments
sooner than would otherwise have occurred. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and forward contracts in order to seek to minimize any potential adverse
tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
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.
The Fund anticipates that, 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 for Class A shares of the Fund for the 1 year
period ended October 31, 1997 and from commencement of operations on November 1,
1993 through October 31, 1997 was 3.35% and 11.46%, respectively.
The average annual total return for Class B shares of the Fund for the 1 year
period ended October 31, 1997 and from commencement of operations on November 1,
1993 through October 31, 1997, was 2.84% and 11.55%, respectively. Class C
shares of the fund commenced operations on June 1, 1998; therefore, there is no
average annual total return to report.
Average annual total return is determined separately for Class A and Class B
shares. Total return is computed by finding the average annual compounded rates
of return over the designated periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
n ______
T = \ / ERV/P - 1
41
<PAGE>
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 designated period.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, 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 or Class C shares into account. Excluding the Fund's
sales charge on Class A shares and the CDSC on Class B or Class C shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's total
return will be compared to indices of mutual funds such as Lipper Analytical
Services, Inc.'s "Lipper-Mutual Fund 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 ranking 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 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 redemption of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of the Fund
and the allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee, which consists of officers and
directors of the Adviser and its affiliates, and officers and Trustees who are
interested persons of the Trust. Orders for purchases and sales of securities
are placed in a manner which, in the opinion of the Adviser, will offer the best
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price and market for the execution of each transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these 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 such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and in the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and, conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitment to allocate portfolio transactions upon any
prescribed basis. While the Adviser's officers will be primarily responsible for
the allocation of the Fund's brokerage business, the policies 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 October 31,
1997, 1996 and 1995, the Fund paid negotiated brokerage commissions of $535,844,
$1,955,973 and $843,682, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the year ended October 31, 1997,
the Fund directed commissions in the amount of $838,762 to compensate brokers
for research services such as industry and company reviews and evaluations of
securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc., a broker-dealer ("Distributors"
or "Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. For the
fiscal year ended October 31, 1997, the Fund paid no commissions with any
Affiliated Broker.
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<PAGE>
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 Trust, the Adviser or the Affiliated Broker. Commissions on
transactions with Affiliated Brokers must comply with Rule 17e-1 of the 1940 Act
and must be fair and reasonable to shareholders as determined in good faith by
the Trustees. Because the Adviser, which is affiliated with the Affiliated
Brokers, has, as investment adviser to the Fund, the obligation to provide
investment management services, which includes elements of research and related
investment skills, such research and related skills will not be used by the
Affiliated 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 the securities
to be sold or purchased for the Fund with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee of $19.00 for each Class A shareholder account, $21.50
for each Class B shareholder account and $20.50 for each Class C shareholder
account. The Fund also pays certain out-of-pocket expenses and these expenses
are aggregated and charged to the Fund and allocated to each class on the basis
of their relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Trust 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 Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts, 02110. 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
DESCRIPTION OF BOND RATINGS
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.
A-1
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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-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.
A-2
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FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK SHORT-TERM STRATEGIC INCOME FUND
Class A and Class B Shares
Statement Of Additional Information
June 1, 1998
This Statement of Additional Information provides information about John Hancock
Short-Term Strategic Income Fund (the "Fund") in addition to the information
that is contained in the combined International/Global Funds' Prospectus dated
June 1, 1998 (the "Prospectus"). The Fund is a non-diversified series of John
Hancock Investment Trust III (the "Trust"), formerly Freedom Investment Trust
II.
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 Objectives and Policies......................................2
Investment Restrictions................................................18
Those Responsible for Management.......................................20
Investment Advisory and Other Services.................................29
Distribution Contracts.................................................31
Net Asset Value........................................................33
Initial Sales Charge on Class A Shares.................................34
Deferred Sales Charge on Class B Shares................................36
Special Redemptions....................................................40
Additional Services and Programs.......................................40
Description of the Fund's Shares.......................................42
Tax Status.............................................................43
Calculation of Performance.............................................47
Brokerage Allocation...................................................49
Transfer Agent Services................................................51
Custody of Portfolio...................................................51
Independent Auditors...................................................51
Appendix A - Description of Bond......................................A-1
Commercial Paper Ratings..............................................C-1
Financial Statements..................................................F-1
1
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ORGANIZATION OF THE FUND
The Fund is a non-diversified series of the Trust, an open-end investment
management company organized as a Massachusetts business trust on March 31, 1986
under the laws of The Commonwealth of Massachusetts. The Fund commenced
operations on July 31, 1990. The Fund is non-diversified in order to permit more
than 5% of its assets to be invested in the obligations of any one issuer.
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 OBJECTIVES AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. There is no assurance that
the Fund will achieve its investment objective.
The Fund's investment objective is a high level of current income. The Fund will
seek to achieve this objective by investing primarily in: (i) foreign government
and corporate debt securities, (ii) U.S. Government securities and (iii)
corporate debt securities of U.S. issuers. There is no fixed allocation among
the types of securities listed.
General. The Fund may invest in all types of debt securities, including debt
obligations issued or guaranteed by United States or foreign governments,
political subdivisions thereof (including states, provinces and municipalities)
or their agencies and instrumentalities ("Governmental entities"), or issued or
guaranteed by international organizations designated or supported by
governmental entities to promote economic reconstruction or development
("supranational entities"), or issued by corporations or financial institutions.
Examples of supranational entities include the International Bank for
Reconstruction and Development (the "World Bank"), the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
The governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings. Securities issued by supranational entities may be
denominated in U.S. dollars, a foreign currency or a multi-national currency
unit. Securities of corporations and financial institutions in which the Fund
may invest include corporate and commercial obligations, such as medium-term
notes and commercial paper, which may be indexed to foreign currency exchange
rates. In accordance with guidelines promulgated by the Staff of the Securities
and Exchange Commission (the "SEC"), the Fund will consider as an industry any
category of such supranational entities which may have been designated by the
SEC. There is no fixed allocation among the foregoing types of securities.
The maximum average dollar weighted maturity of the Fund is three years. This
maturity is calculated by including average maturities, prepayments, refunds,
redemptions, put dates and call dates. The debt securities in which the Fund may
invest include bonds, debentures, notes (including variable and floating rate
instruments), preferred and preference stock, zero coupon bonds, payment-in-kind
securities or increasing rate note securities.
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The Fund may invest in debt obligations denominated in the U.S. dollar or in
non- U.S. currencies issued or guaranteed by foreign corporations, certain
supranational entities (as described above), and foreign governments (including
political subdivisions having taxing authority) or their agencies or
instrumentalities. The Fund may also invest in debt obligations issued by U.S.
corporations denominated in non-U.S. currencies.
Foreign Securities. The percentage of the Fund's assets that will be allocated
to foreign securities will vary depending on the relative yields of foreign and
U.S. securities, the economies of foreign countries, the condition of such
countries' financial markets, the interest rate climate of such countries and
the relationship of such countries' currency to the U.S. dollar. These factors
are judged on the basis of fundamental economic criteria (e.g., relative
inflation levels and trends, growth rate forecasts, balance of payments status
and economic policies) as well as technical and political data. The Fund may
invest in any country where the Adviser believes there is a potential to achieve
the Fund's investment objective. The Fund may invest in securities of issuers in
industrialized Western European countries (including Scandinavian countries) and
in Canada, Japan, Australia and New Zealand, as well as in emerging markets or
countries with limited or developing capital markets. Investments in securities
of issuers in emerging markets generally involve more risk and may be considered
highly speculative, as described in more detail below.
The value of portfolio securities denominated in foreign currencies may increase
or decrease in response to changes in currency exchange rates. The value of the
Fund's dividends may also be affected. The Fund will incur costs in connection
with converting between currencies. Foreign companies may not be subject to
accounting standards and government supervision comparable to those applicable
to U.S. companies, and there is often less publicly available information about
their operations. Foreign markets generally provide less liquidity than U.S.
markets (and thus potentially greater price volatility), and typically provide
fewer regulatory protections for investors. Foreign securities can also be
affected by political or financial instability abroad. Additional costs could be
incurred in connection with the Fund's international investment activities.
Foreign brokerage commissions are generally higher than in the U.S. Expenses may
also be incurred on currency exchanges when the Fund changes investments from
one country to another. Increased custodian costs as well as administrative
difficulties (such as the need to use foreign custodians) may be associated with
the maintenance of assets in foreign jurisdictions. In addition, there may be
difficulty in enforcing legal rights outside the United States.
The securities markets of many countries have in the past moved relatively
independently of one another, due to differing economic, financial, political
and social factors. When markets in fact move in different directions and offset
each other, there may be a corresponding reduction in risk for the Fund's
portfolio as a whole. This lack of correlation among the movements of the
world's securities markets may also affect unrealized gains the Fund has derived
from movements in any one market.
If securities traded in markets moving in different directions are combined into
a single portfolio, such as that of the Fund, total portfolio volatility may be
reduced. Since the Fund may invest in securities quoted or denominated in
currencies other than U.S. dollars, changes in foreign currency exchange rates
may affect the value of its portfolio securities. Currency exchange rates may
not move in the same direction as the securities markets in a particular
country. As a result, market gains may be offset by unfavorable exchange rate
fluctuations.
Foreign securities markets, while growing in volume, have for the most part
substantially less volume than U.S. securities markets and securities of foreign
companies are generally less liquid and at times their prices may be more
volatile than securities of comparable U. S. companies. Foreign stock exchanges,
brokers and listed companies are generally subject to less government
supervision and regulation than those in the U.S. The customary settlement time
for foreign securities may be longer than the three (3) day customary settlement
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<PAGE>
time for U.S. securities, or less frequent than in the U.S., which could affect
the liquidity of the Fund's investments. The Adviser will monitor the settlement
time for foreign securities and take undue settlement delays into account in
considering the desirability of allocating investments among specific countries.
These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of business, restrictions of foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominately based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates or currency rates. Local securities markets may trade a small
number of securities and may be unable to respond effectively to increases in
trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. The Fund may be required to establish special
custodian or other arrangements before making certain investments in those
countries. Securities of issuers located in these countries may have limited
marketability and may be subject to more abrupt or erratic price movements.
Foreign Currency Transactions. The foreign currency transactions of the Fund may
be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. The Fund may also
enter into forward foreign currency contracts involving currencies of the
different countries in which it will invest as a hedge against possible
variations in the foreign exchange rate between these currencies. The Fund may
also engage in speculative forward currency transactions. Forward currency
transactions are accomplished through contractual agreements to purchase or sell
a specified currency or to deliver a final cash settlement amount based on the
relative performance of two currencies if the contract does not call for the
physical delivery of 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 for payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities denominated in foreign currencies. Portfolio hedging is the use of
forward foreign currency contracts to offset portfolio security positions
denominated or quoted in such foreign currencies. The Fund will not attempt to
hedge all of its foreign portfolio positions and will enter into such
transactions only to the extent, if any, deemed appropriate by the Adviser.
If the Fund enters into a forward contract requiring it to purchase foreign
currency, its custodian bank 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. Those assets will be valued at market daily and if the value of the
assets in the separate account declines, additional cash or liquid assets will
be placed in the account so that the value of the account will equal 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 should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
4
<PAGE>
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency transactions varies with
such factors as that 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.
Money Market Securities. The Fund's shorter-term investments may be money market
securities. Money market securities include short-term obligations issued or
guaranteed by the U.S. Government or foreign governments or issued by such
governments' respective agencies and instrumentalities, bank money market
instruments including certificates of deposit, banker's acceptances and deposit
notes and certain other short- term obligations such as short-term commercial
paper. With respect to bank money market instruments, the obligations may be
issued by U.S. or foreign depository institutions, foreign branches or
5
<PAGE>
subsidiaries of U.S. depository institutions ("Eurodollar" obligations), U.S.
branches or subsidiaries of foreign depository institutions ("Yankee dollar"
obligations) or foreign branches or subsidiaries of foreign depository
institutions. Eurodollar and Yankee dollar obligations and obligations of
branches or subsidiaries of foreign depository institutions may be general
obligations of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligations or by government regulation.
Foreign subsidiaries of U.S. depository institutions and U.S. and foreign
subsidiaries of foreign depository institutions may be considered investment
companies under the Investment Company Act of 1940 (the "Investment Company
Act").
Mortgage-Backed Securities. The Fund may invest in Government National Mortgage
Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae) and
Federal Home Mortgage Loan Corporation (Freddie Macs) mortgage-backed securities
and other U.S. Government securities, including real estate mortgage investment
companies ("REMICs") and Collateralized Mortgage Obligations ("CMOs")
representing ownership interests in mortgage pools. Certain U.S. Government
securities, including U.S. treasury bills, notes and bonds, and Ginnie Maes, are
supported by the full faith and credit of the United States or by the right of
the issuer to borrow from the U.S. Treasury. These securities include
obligations of Freddie Mac and Fannie Mae. 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 by the individual borrowers on the pooled
mortgage loans. 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. Investors may purchase "regular" or
"residual" interests in REMICs, although the Fund does not intend, absent a
change in current tax law, to acquire residual interests in REMICs.
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Fannie Mae, a federally
chartered and privately owned corporation, issues pass-through securities which
are guaranteed as to payment of principal and interest by Fannie Mae. Freddie
Mac, a corporate instrumentality of the Untied States, issues participation
certificates which represent an interest in mortgages from Freddie Mac's
portfolio. Freddie Mac guarantees the timely payment of interest and the
ultimate collection of principal. As is the case with Ginnie Mae Certificates,
the actual maturity of and realized yield on particular Fannie Mae and Freddie
Mac mortgage-based securities will vary based on the prepayment experience of
the underlying pool of mortgages. Generally, the issuers of mortgaged-backed and
receivable-backed bonds, notes or pass-through certificates are special purpose
entities and do not have any significant assets other than the assets securing
such obligations.
Instruments backed by pools of mortgages and receivables may be subject to
unscheduled prepayments of principal prior to maturity. During periods of
declining interest rates, principle and interest on mortgage-backed securities
may be prepaid at faster than expected rates, with the proceeds of these
prepayments being invested in lower-yielding securities. In this situation,
mortgage-backed securities may be less effective at maintaining yields than
traditional debt obligations of similar maturity. Conversely, in a rising
interest rate environment, a declining prepayment rate will extend the average
life of many mortgage-backed securities. Extending the average life of a
mortgage-backed security increases the risk of depreciation due to future
increases in market interest rates. Moreover, prepayments of securities
purchased at a premium could result in a realized loss.
Indexed Obligations. Indexed notes and commercial paper typically provide that
the principal amount is adjusted upwards or downwards (but not below zero) at
maturity to reflect fluctuations in the exchange rate between two currencies
during the period the obligation is outstanding, depending on the terms of the
specific security. In selecting the two currencies, the Adviser will consider
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the correlation and relative yields of various currencies. The Fund will
purchase an indexed obligation using the currency in which it is denominated
and, at maturity, will receive interest and principal payments thereon in that
currency. The amount of principal payable by the issuer at maturity, however,
will vary (i.e., increase or decrease) in response to the change (if any) in the
exchange rates between the two specified currencies during the period from the
date the instrument is issued to its maturity date. The potential for realizing
gains as a result of changes in foreign currency exchange rates may enable the
Fund to hedge the currency in which the obligation is denominated (or to effect
cross-hedges against other currencies) against a decline in the U.S. Dollar
value of investments denominated in foreign currencies while providing an
attractive money market rate of return. However, there can be no assurance that
the Fund's hedging strategies will be effective. The Fund will purchase such
indexed obligations to generate current income or for hedging purposes and will
not speculate in such obligations. As of the date of this Statement of
Additional Information, the Fund has no present intention to invest in these
obligations.
Obligations of Foreign Governmental Entities. The obligations of foreign
governmental entities have various kinds of government support and include
obligations issued or guaranteed by foreign governmental entities with taxing
power. These obligations may or may not be supported by the full faith and
credit of a foreign government. The Fund will invest in foreign government
securities of issuers considered stable by the Adviser, based on its analysis of
factors such as general political or economic conditions relating to the
government and the likelihood of expropriation, nationalization, freezes or
confiscation of private property. No more than 25% of the Fund's total assets,
at the time of purchase will be invested in government securities of any one
foreign country. The Adviser does not believe that the credit risk inherent in
the obligations of stable foreign governments is significantly greater than that
of U.S. Government securities.
Multi-National Currency Unit Securities. As indicated above, the Fund may invest
in securities denominated in a multi-national currency unit. An illustration of
a multi-national currency unit is the European Currency Unit (the "ECU"), which
is a "basket" consisting of specified amounts of the currencies of the member
states of the European Community, a Western European economic cooperative
organization that includes France, West Germany, The Netherlands and the United
Kingdom. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community to reflect changes in
relative values of the underlying currencies. The Adviser does not believe that
such adjustments will adversely affect holders of ECU- denominated obligations
or the marketability of such securities. European supranational entities, in
particular, issue ECU-denominated obligations. The Fund may invest in securities
denominated in the currency of one nation although issued by a governmental
entity, corporation or financial institution of another nation. For example, the
Fund may invest in a British Pound sterling-denominated obligation issued by a
United States corporation. Such investments involve credit risks associated with
the issuer and currency risks associated with the currency in which the
obligation is denominated.
The Fund may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between a foreign entity and one or more financial
institutions ("Lenders"). The majority of the Fund's investments in Loans in
emerging markets is expected to be in the form of participations in Loans
("Participations") and assignments of portions of Loans from third parties
("Assignments"). Participations typically will result in the Fund having a
contractual relationship only with the Lender not with the borrower. As a
result, the Fund will assume the credit risk of both the borrower and the Lender
that is selling the Participation. In the event of the insolvency of the Lender
selling a Participation, the Fund may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the borrower.
The Fund will acquire Participations only if the Lender interpositioned between
the Fund and the borrower is determined by the Adviser to be creditworthy.
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The secondary market for Participations and Assignments is limited to certain
institutional investors, which could adversely affect the value of these
securities and make it more difficult to assign a value to them (see
"Participations" below).
Lower Rated High Yield "High Risk" Debt Obligations. The Fund seeks high current
income and may invest in high yielding, fixed income securities rated Baa, Ba or
B by Moody's or BBB, BB or B by Standard & Poor's, sometimes referred to as junk
bonds. The Fund may also invest in unrated securities which, in the opinion of
the Adviser, offer comparable yields and risks to rated securities. The Fund
will, however, maintain an average portfolio quality rating of A by Standard &
Poor's Ratings Group ("Standard & Poor's") or Moody's Investors Service Inc.
("Moody's") or the unrated equivalent. Ratings are based largely on the
historical financial condition of the issuer. Consequently, the rating assigned
to any particular security is not necessarily a reflection of the issuer's
current financial condition, which may be better or worse than the rating would
indicate.
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 high yield fixed income market is relatively new and its
growth occurred during a period of economic expansion. The market has not yet
been fully tested by a recession. 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 ongoing debt obligations.
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 investments 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.
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.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that 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 rating 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 minimum required for
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purchase by the Fund. Neither of these events will require the sale of the
securities by the Fund.
Time Deposits. The Fund's time deposits are non-negotiable deposits maintained
for a stated period of time at a stated interest rate. If the Fund purchases
time deposits maturing in seven days or more, it will treat those longer-term
time deposits as illiquid.
Participation Interests. The Fund may acquire participation interests in senior
floating rate loans that are made primarily to U.S. and foreign companies.
Participation interests, which may take the form of interests in, or assignments
of, the loans, are acquired from banks who have made loans or are members of a
lending syndicate. The Fund's investments in participation interests are subject
to its 15% limitation on investments in illiquid securities.
Structured Securities. The Fund may invest in structured notes, bonds or
debentures, the value of the principal of and/or interest on which is to be
determined by reference to changes in the value of specific currencies, interest
rates, commodities, indices or other financial indicators (the "Reference") or
the relative change in two or more References. The interest rate or the
principal amount payable upon maturity or redemption may be increased or
decreased depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal is
due at maturity and, therefore, may result in the loss of the Fund's investment.
Structured securities may be positively or negatively indexed, so that
appreciation of the Reference may produce an increase or decrease in the
interest rate or value of the security at maturity. In addition, the change in
interest rate or the value of the security at maturity may be a multiple of the
change in the value of the Reference. Consequently, structured securities entail
a greater degree of market risk than other types of debt obligations. Structured
securities may also be more volatile, less liquid and more difficult to
accurately price than less complex fixed income investments.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of the Fund's borrowing and other senior securities. For financial reporting and
tax purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar roll transactions that are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset-backed securities.Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Fund's ability to
maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
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residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps, and other types of swap agreements such as caps, collars and floors. In a
typical interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a grater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
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securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status."
Brady Bonds. The Fund may invest in Brady Bonds and other sovereign debt
securities of countries that have restructured or are in the process of
restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt
securities issued by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness (generally, commercial bank debt). In restructuring its external
debt under the Brady Plan framework, a debtor nation negotiates with its
existing bank lenders as well as multilateral institutions such as the World
Bank and the International Monetary Fund (the "IMF"). The Brady Plan facilitates
the exchange of commercial bank debt for newly issued bonds (known as Brady
Bonds). The World Bank and the IMF provide funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to repurchase outstanding bank debt at a discount. Under these
arrangements the IMF debtor nations are required to implement domestic monetary
and fiscal reforms. These reforms have included the liberalization of trade and
foreign investment, the privatization of state-owned enterprises and the setting
of targets for public spending and borrowing. These policies and programs
promote the debtor country's ability to service its external obligations and
promote its economic growth and development. The Brady Plan only sets forth
general guiding principles for economic reform and debt reduction, emphasizing
that solutions must be negotiated on a case-by- case basis between debtor
nations and their creditors. The Adviser believes that economic reforms
undertaken by countries in connection with the issuance of Brady Bonds make the
debt of countries which have issued or have announced plans to issue Brady Bonds
an attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of January, 1, 1997, the Fund is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have a long
payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
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
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substitute for the purchase or sale of securities or currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency written by the
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by the Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive the Fund of the opportunity to profit from an increase in the market
price of the securities or foreign currency assets in its portfolio. Writing
covered put options may deprive the Fund of the opportunity to profit from a
decrease in the market price of the securities or foreign currency assets to be
acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid 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
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currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by
the Fund for the purpose of affirmatively benefiting from a decline in the price
of securities or currencies which it does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities or currency decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by 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
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contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and any other financial instruments and indices. All
futures contracts entered into by the Fund are traded on U.S. or foreign
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire or the
exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, the Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. The Fund may
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the Fund or securities with characteristics similar to those of the
Fund's portfolio securities. Similarly, the Fund may sell futures contracts on
any currencies in which its portfolio securities are quoted or denominated or in
one currency to hedge against fluctuations in the value of securities
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
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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.
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
15
<PAGE>
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 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.
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 or be
prevented from liquidating the underlying securities and could experience
losses, including possible decline in the value of the underlying securities
during the period in which the Fund seeks to enforce its rights thereto,
possible subnormal levels of income decline in value of the underlying
securities or lack of access to income during this period, as well as the
expense of enforcing its rights.
16
<PAGE>
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 these
securities (plus accrued interest thereon) under such agreements. In addition,
the Fund will not borrow money or enter into reverse repurchase agreements
except from banks temporarily for extraordinary or emergency purposes (not
leveraging or investment) and then in an aggregate amount not in excess of 10%
of the value of the Fund's total assets at the time of such borrowing, provided
that the Fund will not purchase securities for investment while borrowings
equaling 5% or more of the Fund's total assets are outstanding. 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 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. The Fund will not invest more than 15% of its net
assets in illiquid investments. 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 and monitoring the liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
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.
17
<PAGE>
On the date the Fund enters into an agreement to purchase securities on a when-
issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
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 30% 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. The Fund may not invest more than 5% of its total assets in
warrants or more than 2% of its total assets in warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange. Generally, warrants
and stock purchase rights do not carry with them the right to receive dividends
or exercise voting rights with respect to the underlying securities, and they do
not represent any rights in the assets of the issuer. As a result, an investment
in warrants and rights may be considered to entail greater investment risk than
certain other types of investments. In addition, the value of warrants and
rights does not necessarily change with the value of the underlying securities,
and they cease to have value if they are not exercised on or prior to their
expiration date. Investment in warrants and rights increases the potential
profit or loss to be realized from the investment of a given amount of the
Fund's assets as compared with investing the same amount in the underlying
stock.
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 may vary widely
from year to year and may be higher than that of many other mutual funds with
similar investment objectives. Management anticipates that the annual turnover
in the Fund will not be in excess of 400%. An annual turnover rate of 400%
occurs, for example, when all of the securities in the Fund's portfolio are
replaced four times in a period of one year. Portfolio turnover rates of the
Fund for recent periods are shown in the "Financial Highlights" section of the
Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, the 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
18
<PAGE>
the Fund's outstanding shares are present in person or by proxy at the meeting
or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
1. Purchases on Margin and Short Sales. Purchase securities on
margin or sell short, except that the Fund may obtain such
short term credits as are necessary for the clearance of
securities transactions. The deposit or payment by the Fund of
initial or maintenance margin in connection with futures
contracts or related options transactions is not considered
the purchase of a security on margin.
2. Borrowing. Borrow money, except from banks temporarily for
extraordinary or emergency purposes (not for leveraging or
investment) and then in an aggregate amount not in excess of
10% of the value of the Fund's total assets at the time of
such borrowing, provided that the Fund will not purchase
securities for investment while borrowings equaling 5% or more
of the Fund's total assets are outstanding.
3. Underwriting Securities. Act as an underwriter of securities
of other issuers, except to the extent that it may be deemed
to act as an underwriter in certain cases when disposing of
restricted securities. (See also Restriction 12.)
4. Senior Securities. Issue senior securities except as
appropriate to evidence indebtedness which the Fund is
permitted to incur, provided that (i) the purchase and sale of
futures contracts or related options, (ii) collateral
arrangements with respect to futures contracts, related
options, forward foreign currency exchange contracts or other
permitted investments of the Fund as described in the
Prospectus, including deposits of initial and variation
margin, and (iii) the establishment of separate classes of
shares of the Fund for providing alternative distribution
methods are not considered to be the issuance of senior
securities for purposes of this restriction.
5. Warrants. Invest more than 5% of its total assets in warrants,
whether or not the warrants are listed on the New York or
American Stock Exchanges, or more than 2% of the value of the
total assets of the Fund in warrants which are not listed on
those exchanges. Warrants acquired in units or attached to
securities are not included in this restriction.
6. Real Estate. Purchase or sell real estate although the Fund
may purchase and sell securities which are secured by real
estate, mortgages or interests therein, or issued by companies
which invest in real estate or interests therein; provided,
however, that the Fund will not purchase real estate limited
partnership interests.
7. Commodities; Commodity Futures; Oil and Gas Exploration and
Development Programs. Purchase or sell commodities or
commodity futures contracts or interests in oil, gas or other
mineral exploration or development programs, except the Fund
may engage in such forward foreign currency contracts and/or
purchase or sell such futures contracts and options thereon as
described in the Prospectus.
8. Making Loans. Make loans, except that the Fund may purchase or
hold debt instruments and may enter into repurchase agreements
(subject to Restriction 11) in accordance with its investment
objectives and policies and make loans of portfolio securities
provided that as a result, no more than 30% of the total
assets of the Fund taken at current value would be so loaned.
19
<PAGE>
9. Industry Concentration. Purchase any securities which would
cause more than 25% of the market value of the Fund's total
assets at the time of such purchase to be invested in the
securities of one or more issuers having their principal
business activities in the same industry, provided that there
is no limitation with respect to investments in obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. This restriction will apply to obligations
of a foreign government unless the SEC permits their
exclusion.
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) Invest more than 15% of its net assets in illiquid securities.
(b) Acquisition for Control Purposes. Purchase securities of any
issuer for the purpose of exercising control or management,
except in connection with a merger, consolidation, acquisition
or reorganization.
(c) Joint Trading Accounts. Participate on a joint or joint and
several basis in any trading account in securities (except for
a joint account with other funds managed by the Adviser for
repurchase agreements permitted by the SEC pursuant to an
exemptive order).
(d) Securities of Other Investment Companies. Purchase a security
if, as a result (i) more than 10% of the Fund's total assets
would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company,
or (iii) more than 5% of the Fund's total assets would be
invested in the securities of any one investment company.
These limitations do not apply to (a) the investment of cash
collateral, received by the Fund in connection with lending
the Fund's portfolio securities, in the securities of open-end
investment companies or (b) the purchase of shares of any
investment company in connection with a merger, consolidation,
reorganization or purchase of substantially all of the assets
of another investment company. Subject to the above percentage
limitations, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent
Trustees/Directors, purchase securities of other investment
companies within the John Hancock Group of Funds.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees, who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and Directors of the Adviser or officers and Directors of the
Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
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.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Vice President and Chief Economist,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 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.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of
Washington, DC 20008-3009 International Education (since
May 1943 January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emeritus of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, 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.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, 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 Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
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.
</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 and Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and
receive no compensation from the Fund for their services.
27
<PAGE>
Aggregate Total Compensation From the
Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
- -------------------- ---------------- ----------------------
Dennis S. Aronowitz $ 631 $ 72,000
Richard P. Chapman, Jr.+ 656 75,000
William J. Cosgrove+ 631 72,000
Douglas M. Costle 656 75,000
Leland O. Erdahl 631 72,000
Richard A. Farrell 656 75,000
Gail D. Fosler 631 72,000
William F. Glavin + 630 72,000
Dr. John A. Moore+ 631 72,000
Patti McGill Peterson 631 72,000
John W. Pratt 631 72,000
Edward J. Spellman 656 75,000
--------- ------
Totals $ 7,671 $ 876,000
1Compensation is for the fiscal year ended October 31, 1997.
2Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1997. As of this date, there were sixty-seven
funds in the John Hancock Fund Complex with each of these Independent Trustees
serving thirty-two.
(+)As of December 31, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $69,148, Mr. Cosgrove was $167,829, Mr. Glavin was $193,514 and for
Dr. Moore was $84,315 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
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 April 27, 1998, the officers and trustees of the Fund as a group owned
less than 1% of the outstanding shares of the fund. As of that date, the
following shareholders beneficially owned 5% of or more of outstanding shares of
the Fund:
28
<PAGE>
<TABLE>
<CAPTION>
Percentage of total
Name and Address outstanding shares of
of Shareholder Class of Shares the class of the Fund
- -------------- --------------- ---------------------
<S> <C> <C>
MLPF&S B 5.74%
Sole Benefit Of Its
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
Jacksonville FL 32246-6484
MLPF&S A 10.61%
Sole Benefit Of Its
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
Jacksonville FL 32246-6484
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Fund and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds, having
a combined total of over 1,400,000 shareholders. The Adviser is an affiliate of
the Life Company, one of the most recognized and respected financial
institutions in the nation. With total assets under management of more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries high ratings from Standard and 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 plans 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
29
<PAGE>
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average of the daily
net assets of the Fund as follows:
Net Asset Value Annual Rate
First $500 million 0.65%
Amounts over $500 million 0.60%
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 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 the Adviser renders investment advice arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds or clients in a manner deemed equitable to
all of them. To the extent that transactions on behalf of more than one client
of the Adviser or its affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
Pursuant to the Advisory Agreement, the Adviser is not liable to the Fund or its
shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of its obligations and duties under
the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and the Distribution Agreement
(discussed below) was approved by all Trustees. The Advisory Agreement and the
Distribution Agreement, will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both agreements may be terminated on 60 days
written notice by any party or by vote of a majority to the outstanding voting
securities of the Fund and will terminate automatically if assigned.
30
<PAGE>
For the fiscal years ended October 31, 1995, 1996 and 1997, the Fund paid the
Adviser, an investment advisory fee of $682,732, $640,833 and $625,143,
respectively.
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 October 31, 1996 and 1997, the
Fund paid the Adviser $6,208 and $417,692, respectively, 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 on behalf 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. In the case of Class B shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended October 31, 1995, 1996 and 1997 were $ 128,857, $127,241 and
$84,777, respectively. Of such amounts $15,493, $17,608, and $11,040,
respectively, retained by John Hancock Funds in 1995, 1996, and 1997. The
remainder of the underwriting commissions were reallowed to dealers.
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 fee will not exceed 0.25% of the Fund's average daily net assets
attributable to each class of shares. The distribution fees will be used to
reimburse the John Hancock Funds for their distribution expenses, including but
not limited to: (i) initial and ongoing sales compensation to Selling Brokers
and others (including affiliates of the John Hancock Funds) engaged in the sale
of Fund shares; (ii) marketing, promotional and overhead expenses incurred in
connection with the distribution of Fund shares; and (iii) with respect to Class
B 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 the
John Hancock Funds are not fully reimbursed for payments or expenses they incur
under the Class A Plan, these expenses will not be carried beyond twelve months
from the date they were incurred. Unreimbursed expenses under the Class B Plan
will be carried forward together with interest on the balance of the
unreimbursed expenses. The Fund does not treat unreimbursed expenses relating to
31
<PAGE>
the Class B shares as a liability of the Fund because the Trustees may terminate
the Class B Plan at any time. For the fiscal year ended October 31, 1997, an
aggregate of $2,554,608 of distribution expenses or 7.17% of the average net
assets of the Class B shares of the Fund was not reimbursed or recovered by the
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 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 meeting called for the purpose of voting
on such Plans.
Pursuant to the Plans, at least quarterly, the John Hancock Funds provide the
Fund with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only as 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 upon 60
day's written notice to the 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
majority vote 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 classes of
shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the participating Fund.
32
<PAGE>
During the fiscal year ended October 31, 1997, the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services for the
Fund:
<TABLE>
<CAPTION>
Expense Items
Printing and Interest,
Mailing of Expenses of Carrying or
Prospectus to Compensation to John Other
New Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C>
Class A shares $19,547 $3,075 $109,290 $49,794 $ ---
Class B shares $17,121 $2,733 $ 94,993 $42,688 $196,137
</TABLE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a 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 a 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 the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
33
<PAGE>
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 a reduced sales charge
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 contingent deferred sales charge ("CDSC") to various individuals and
institutions as follows:
o A Trustee or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandparents, grandchildren, mother, father, sister,
brother, mother-in-law, father-in-law, daughter-in-law, son-in-law,
niece, nephew, grandparents and domestic partner) of any of the
foregoing; or any fund, pension, profit sharing or other benefit plan
for the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement with John
Hancock Funds providing specifically for the use of Fund shares in
fee-based investment products or services made available to their
clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any
or all of his or her plan distributions directly to the Fund.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if
the Plan has more than $3 million in assets or 500 eligible employees
at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping
Service Agreement. See your Merrill Lynch financial consultant for
further information.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed retirement plans with at least 100 eligible employees at the
inception of the Fund account. Each of these investors may purchase
Class A shares with no initial sales charge. However, if the shares are
34
<PAGE>
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
- --------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
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 being invested but also
the investor's 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. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges also are 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
retirement plan, however, may opt to make the necessary investments called for
by the LOI over a forty-eight (48) month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing, and
Section 457 plans. Non-qualified and retirement plans investments cannot be
combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) must
aggregate $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
35
<PAGE>
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 3% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
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 four
years of purchase will be subject to a 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 retirement 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 this 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 four-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 four-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.
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
36
<PAGE>
you redeem 50 shares at this time your CDSC will be calculated as follows:
ooceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
oMinus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) (120.00)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
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. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemption of Class B shares where the process are used to purchase a
John Hancock Declaration Variable Annuity.
* Redemptions of Class B shares made under a periodic withdrawal plan or
redemptions for fees charged by planners or advisors for advisory
services,, as long as your annual redemptions do not exceed 12% of your
account value, including reinvested dividends, at the time you
established your periodic withdrawal plan and 12% of the value of
subsequent investments (less redemptions) in that account at the time
you notify Signature Services. (Please note, this waiver does not apply
to periodic withdrawal plan redemptions of Class A shares that are
subject to a CDSC.)
* Redemptions by retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A shares by retirement plans that invested through
the PruArray Program sponsored by Prudential Securities.
37
<PAGE>
For Retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted:
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* 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.
38
<PAGE>
CDSC Waiver Matrix for Class B
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
perodic
payments
- -------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72t) or 12% (72t) or 12% (72t) or (72t) or annually in
of account of account 12% of 12% of periodic
value value account account payments
annually in annually in value value
periodic periodic annually in annually in
payments payments periodic periodic
payments payments
- -------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------
Return of 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.
39
<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act. Under
that rule, the Fund must redeem its shares for cash except to the extent that
the redemption payments to any shareholder during any 90-day period would exceed
the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of
such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional 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
40
<PAGE>
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the 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 of the other John Hancock funds. 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 investment
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).
41
<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 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 the classes 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 other class expenses properly allocable to that class of
shares, subject to the conditions the Internal Revenue Service imposes with
respect to 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 such
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 Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Furthermore, no fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock fund. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote.
42
<PAGE>
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. 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 qualify for each
taxable year. As such and by complying with the applicable provisions of the
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to Federal
income tax on taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
The Fund will be subject to a 4% percent non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to seek to avoid or minimize liability
for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as capital gain. (Net capital
gain is the excess (if any) of net long-term capital gain over net short-term
capital loss, and investment company taxable income is all taxable income and
capital gains, other than those gains and losses included in computing net
capital gain, after reduction by deductible expenses.) As a result of federal
tax legislation enacted on August 5, 1997 (the "Act"), gain recognized after May
6, 1997 from the sale of a capital asset is taxable to individual (noncorporate)
investors at different maximum federal income tax rates, depending generally
upon the tax holding period for the asset, the federal income tax bracket of the
taxpayer, and the dates the asset was acquired and/or sold. The Treasury
Department has issued guidance under the Act that enables the Fund to pass
through to its shareholders the benefits of the capital gains rates enacted in
the Act. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances. Some
distributions may be paid in January but may be taxable to shareholders as if
they had been received on December 31 of the previous year. 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 futures and options, foreign currency forward
43
<PAGE>
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. Transactions
in foreign currencies that are not directly related to the Fund's investment in
stock or securities, possibly including speculative currency positions could
under future Treasury regulations produce income not among the types of
"qualifying income" from which the Fund must derive at least 90% of its gross
income for each taxable year. If the net foreign exchange loss for a year
treated as ordinary loss under Section 988 were to exceed the Fund's investment
company taxable income computed without regard to such loss the resulting
overall ordinary loss for such year would not be deductible by the Fund or its
shareholders in future years.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits or deductions
with respect to foreign income taxes or certain other foreign taxes ("qualified
foreign taxes"), paid by the Fund, subject to certain provisions and limitations
contained in the Code, if the Fund so elects. If more than 50% of the value of
the Fund's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include in ordinary gross income (in addition to taxable
dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received by
them, and (ii) treat such respective pro rata portions as foreign taxes paid by
them.
If the Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portions of qualified foreign taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit for such foreign
taxes may be required to treat a portion of dividends received from the Fund as
a separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year (if any) that the Fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified foreign taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income from each foreign country. If the Fund
cannot or does not make this election, the Fund will deduct the foreign taxes it
pays in determining the amount it has available for distribution to
shareholders, and shareholders will not include these foreign taxes in their
income, nor will they be entitled to any tax deductions or credits with respect
to such taxes.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities and/or engages in options, futures, or forward transactions
that will generate capital gains. At the time of an investor's purchase of Fund
shares, a portion of the purchase price is often attributable to realized or
unrealized appreciation in the Fund's portfolio. Consequently, subsequent
distributions on those shares from such appreciation may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
44
<PAGE>
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
Class A shares of the Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares within 90
days after their purchase to the extent shares of the Fund or another John
Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. This disregarded charge will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired. Also, any loss realized on a redemption or exchange may be disallowed
to the extent the shares disposed of are replaced with other shares of the Fund
within a period of 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. Shareholders should consult their own
tax advisers regarding their particular circumstances to determine whether a
disposition of Fund shares is properly treated as a sale for tax purposes, as is
assumed in the foregoing discussion. Also, future Treasury Department guidance
issued to implement the Act may contain additional rules for determining the tax
treatment of sales of Fund shares held for various periods, including the
treatment of losses on the sales of shares held for six months or less that are
recharacterized as long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata shares of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as capital gain
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata shares of the taxes paid by the Fund, and (c) be
entitled to increase the adjusted tax basis for his shares in the Fund by the
difference between his pro rata share of such excess and his pro rata share of
such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset its net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed as such to
shareholders. The Fund has $27,884,467 of capital loss carryforwards available
to the extent provided by regulations to offset net capital gains. Of these,
$16,879,029 expire October 31, 2000, $3,127,414 expire October 31, 2001,
$2,774,082 expire October 31, 2002 and $5,103,942 expire October 31, 2003.
The dividends and distributions from the Fund are generally not expected to
qualify for the dividends-received deduction for corporations under the Code.
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
45
<PAGE>
market or constructive rules applicable to certain options, futures, forwards or
other transactions may also require the Fund to recognize income or gain without
a concurrent receipt of cash. Additionally, some countries restrict repatriation
which may make it difficult or impossible for the Fund to obtain cash
corresponding to its earnings or assets in those countries. However, the Fund
must distribute to shareholders for each taxable year substantially all of its
net income and net capital gains, including such income or gain, to qualify as a
regulated investment company and avoid liability for any federal income or
excise tax. Therefore, the Fund may have to dispose of its portfolio securities
under disadvantageous circumstances to generate cash, or borrow cash, to satisfy
these distribution requirements.
A state income (and possibly local 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 intangible property taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in some
states that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. The Fund will not seek to satisfy any threshold or
reporting requirements that may apply in particular taxing jurisdictions,
although the Fund may in its sole discretion provide relevant information to
shareholders.
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.
Investment in debt obligations that are at risk of or in default presents
special tax issues for the Fund. Tax rules are not entirely clear about issues
such as when the Fund may cease to accrue interest, original issue discount, or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Fund in order to reduce the risk of distributing insufficient
income to preserve its status as a regulated investment company and seek to
avoid becoming subject to Federal income or excise tax.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into options, futures, foreign currency
positions, and foreign currency forward contracts. Certain payments received by
the Fund with respect to loan participations, such as commitment fees or
46
<PAGE>
facility fees, may not be treated as qualifying income under the 90% requirement
referred to above if they are not properly treated as interest under the Code.
Certain options, futures and forward foreign currency contracts 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 foreign currency
contracts, as ordinary income or loss) and timing of some capital gains and
losses realized by the Fund. Additionally, the Fund may be required to
recognized gain, but not loss, it an option or other transaction is treated as a
constructive sale of an appreciated financial position in the Fund's portfolio.
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 gains. 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. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options, futures or forward contracts in order to minimize any potential adverse
tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their Fund
investment is effectively connected will be subject to U.S. Federal income tax
treatment that is different from that described above. These investors may be
subject to nonresident alien withholding tax at the rate of 30% (or a lower rate
under an applicable tax treaty) on amounts treated as ordinary dividends from
the Fund and, unless an effective IRS Form W-8 or authorized substitute for Form
W-8 is on file, to 31% backup withholding on certain other payments from the
Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended October 31, 1997, the annualized yield on Class A
and Class B shares of the Fund was 6.29% and 5.77%, respectively. The average
annual total returns of the Class A shares of the Fund for the one and five year
periods ended October 31, 1997 and since inception on January 3, 1992 were
2.38%, 5.85% and 5.22%, respectively. As of October 31, 1997, the average annual
returns for the Fund's Class B shares for the one and five year periods and
since inception on December 28, 1990 were 1.88%, 5.74% and 5.41%, respectively.
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
47
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a-b
___ 6
Yield = 2 ( [ ( cd ) + 1 ] - 1)
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).
While the foregoing formula reflects the standard accounting method for
calculating yield, it does not reflect the Fund's actual bookkeeping; as a
result, the income reported or paid by the Fund may be different.
Total return is computed by finding the average annual compounded rate of return
over the 1 year and life of fund periods that would equate the initial amount
invested to the ending redeemable value according to the following formula:
n ______
T = \ / ERV/P - 1
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 and life-of-the 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 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.
48
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From time to time, in reports and promotional literature, the Fund's total
return will be compared to indices of mutual funds such as Lipper Analytical
Services, Inc.'s "Lipper-Mutual Performance Analysis," a monthly publication
which tracks net assets, total return, and yield on mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well as the Russell and Wilshire indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MORNINGSTAR, STANGER'S and BARRON'S, etc. 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
Fund performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and its affiliates, and officers and
Trustees who are interested persons of the Trust. Orders for purchases and sales
of securities are placed in a manner which, in the opinion of the officers of
the Adviser, will offer the best price and market for the execution of each such
transaction. Purchases from underwriters of portfolio securities may include a
commission or commissions paid by the issuer and transactions with dealers
serving as market makers reflect a "spread." Debt securities are generally
traded on a net basis through dealers acting for their own account as principals
and not as brokers; no brokerage commissions are payable on these 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 such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and in the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information, and, to
a lesser extent, statistical assistance furnished to the Adviser of the Fund,
and their value and expected contribution to the performance of the Fund. It is
not possible to place a dollar value on information and services to be received
from brokers and dealers, since it is only supplementary to the research efforts
of the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
49
<PAGE>
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitment to allocate portfolio transactions upon any
prescribed basis. While the Adviser officers will be primarily responsible for
the allocation of the Fund's brokerage business, its 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 years ended on October 31, 1997, 1996
and 1995, no negotiated brokerage commissions were paid on portfolio
transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay 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. During the fiscal year ended October 31, 1997, the Fund did not
pay commissions as compensation to any brokers for research services such as
industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc., a broker-dealer ("Distributors"
or "Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. For the
fiscal years ended October 31, 1997, 1996 and 1995, the Fund did not execute any
portfolio transactions with any 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
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 or determined
by a majority of the Trustees who are not interested persons (as defined in the
Investment Company Act) of the Fund, the Adviser or the Affiliated Broker.
Because the Adviser, which is affiliated with the Affiliated Brokers, has, as an
investment adviser to the Fund, the obligation to provide investment management
services, which includes elements of research and related investment skills,
such research and related skills will not be used by the Affiliated Brokers as a
basis for negotiating commissions at a rate higher than that determined in
accordance with the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate 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.
50
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TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee of $20.00 for each Class A shareholder and $22.50 for
each Class B shareholder, plus certain out-of-pocket expenses. These expenses
are aggregated and charged to the Fund and allocated to each class on the basis
of their relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. Under the custodian agreement, State Street Bank
and Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts, 02110. 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
DESCRIPTION OF BOND RATINGS1
Moody's Bond ratings
Bonds. "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 likely to impair
the fundamentally strong position of such issues.
"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.
"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.
"Bonds which are rated 'Baa' are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
"Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue. Should
no rating be assigned, the reason may be one of the following: (i) an
application for rating was not received or accepted; (ii) the issue or issuer
belongs to a group of securities that are not rated as a matter of policy; (iii)
there is a lack of essential data pertaining to the issue or issuer; or (iv) the
issue was privately placed, in which case the rating is not published in Moody's
publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to- date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
A-1
<PAGE>
Standard & Poor's Bond ratings
"AAA. Debt rated 'AAA' has the highest rating 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 higher 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 adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Debt rated "BB," or "B," is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and pay 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 may be outweighed
by large uncertainties or major risk exposures to adverse conditions.
Unrated. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
A-2
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper Ratings
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- 'Prime-1' indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- 'Prime-2' indicates that the issuer has a strong capacity for repayment
of short- term promissory obligations. Earnings trends and coverage ratios,
while sound, will be more subjective to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained."
Standard & Poor's Commercial Paper Ratings
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
C-1
<PAGE>
FINANCIAL INFORMATION
F-1
<PAGE>
JOHN HANCOCK GROWTH FUND
Class A, Class B and Class C Shares
Statement of Additional Information
June 1, 1998
This Statement of Additional Information provides information about John Hancock
Growth Fund (the "Fund") in addition to the information that is contained in the
combined Growth Funds' Prospectus, dated June 1, 1998 (the "Prospectus"). The
Fund is a diversified series of John Hancock Investment Trust III (the "Trust"),
formerly Freedom Investment Trust II.
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
Organization of the Fund 2
Investment Objective and Policies 2
Investment Restrictions 14
Those Responsible for Management 16
Investment Advisory and Other Services 25
Distribution Contracts 27
Net Asset Value 29
Initial Sales Charge on Class A Shares 30
Deferred Sales Charge on Class B and Class C Shares 33
Special Redemptions 37
Additional Services and Programs 37
Description of the Fund's Shares 39
Tax Status 40
Calculation of Performance 45
Brokerage Allocation 47
Transfer Agent Services 49
Custody of Portfolio 50
Independent Auditors 50
Appendix A-1
Financial Statements F-1
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 in 1984 under the laws of The
Commonwealth of Massachusetts. Prior to July 1996, the Fund was a series of John
Hancock Capital Series (known as John Hancock Growth Fund prior to October
1993).
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. There is no assurance that
the Fund will achieve its investment objective.
The investment objective of the Fund is to seek long-term capital appreciation.
The Fund invests principally in common stocks (and in securities convertible
into or with rights to purchase common stocks) of companies which the Fund's
management believes offer outstanding growth potential over both the
intermediate and long term. The Adviser will pursue the strategy of investing in
common stocks of those companies whose five-year average operating earnings and
revenue growth are at least two times that of the economy, as measured by the
Gross Domestic Product. Companies selected will generally have positive
operating earnings growth for five consecutive years, although companies without
a five-year record of positive earnings growth may also be selected if, in the
opinion of the Adviser, they have significant growth potential. The Fund may
invest up to 15% of its net assets in securities having a limited or restricted
market. The Adviser expects that the median market capitalization of the
portfolio will be over three billion dollars.
When management believes that current market or economic conditions warrant, the
Fund temporarily may retain cash or invest in preferred stock, nonconvertible
bonds or other fixed-income securities. Fixed income securities in the Fund's
portfolio will generally be rated at least BBB by Standard & Poor's Ratings
Group ("S&P") or Baa by Moody's Investor's Service, Inc. ("Moody's"), or if
unrated, determined by the Adviser to be of comparable quality. The Fund may,
however, invest up to 5% of its net assets in lower rated securities, commonly
known as "junk bonds".
Lower Rated High Yield Debt Obligations. The Fund may invest in debt securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P") and unrated securities deemed of equivalent quality
by the Adviser. These securities are speculative to a high degree and often have
very poor prospects of attaining real investment standing. Lower rated
securities are generally referred to as junk bonds. No more than 5% of the
Fund's net assets, however, will be invested in securities rated lower than BBB
by S&P or Baa by Moody's. In addition, no more than 5% of the Fund's net assets
2
<PAGE>
may be invested in securities rated BBB or Baa and unrated securities deemed of
equivalent quality. See the Appendix attached to this Statement of Additional
Information which describes the characteristics of the securities in the various
ratings categories. The Fund may invest in comparable quality unrated securities
which, in the opinion of the Adviser, offer comparable yields and risks to those
securities which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal. The high yield fixed income market is relatively new and
its growth occurred during a period of economic expansion. The market has not
yet been fully tested by an economic recession.
The market price and liquidity of lower rated fixed income securities generally
respond to short term corporate and market developments to a greater extent than
do the price and liquidity of higher rated securities because such developments
are perceived to have a more direct relationship to the ability of an issuer of
such lower rated securities to meet its ongoing debt obligations. The market
prices of zero coupon bonds are affected to a greater extent by interest rate
changes, and thereby tend to be more volatile than securities which pay interest
periodically. Increasing rate note securities are typically refinanced by the
issuers within a short period of time.
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of the
bonds and 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 bonds. In addition, the Fund's investments in
high yield 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 risks inherent in all securities.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that 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 rating 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 minimum required for
purchase by the Fund. Neither of these events will require the sale of the
securities by the Fund.
Investments In Foreign Securities. The Fund may invest up to 15% of its total
assets in securities of foreign issuers including securities in the form of
sponsored or unsponsored American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") or other securities convertible into securities of
foreign issuers. 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
3
<PAGE>
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 foreign currency transactions of the Fund may
be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. The Fund may enter
into forward foreign currency contracts involving currencies of the different
countries in which it will invest as a hedge against possible variations in the
foreign exchange rate between these currencies. 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. The Fund's dealings in forward foreign currency
contracts will be limited to hedging either specific transactions or portfolio
positions. The Fund may elect to hedge less than all of its foreign portfolio
positions. The Fund will not engage in speculative forward currency
transactions.
If the Fund enters into a forward contract to purchase foreign currency, its
custodian will segregate cash or liquid securities, of any type or maturity, in
a separate account of the Fund in an amount necessary to complete forward
contract. These assets will be marked to market daily and if the value of the
assets in the separate account declines, additional cash or liquid assets will
be added so that the value of the account will equal the amount of the Fund's
commitments in purchased forward 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 should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency transactions varies with
such factors as the currency involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency are
usually conducted on a principal basis, no fees or commissions are involved.
Purchases and sales of securities will be made whenever necessary in
management's view to achieve the objectives of the Fund. Management believes
that unsettled market and economic conditions during certain periods require
greater portfolio turnover in pursuing the Fund's objective than would otherwise
be the case.
Risks in 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 and auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than 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
4
<PAGE>
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 principal
offices of the issuers of the various securities 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, interest and in some cases, capital gains payable on certain
Fund's foreign portfolio securities, as well as 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 Adviser will continuously monitor the creditworthiness of the parties with
whom the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities and could experience losses, including the
possible decline in the value of the underlying securities during the period in
which the Fund seeks to enforce its rights thereto, possible subnormal levels of
income decline in value of the underlying securities or lack of access to income
during this period, as well as the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
5
<PAGE>
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. In
addition, the Fund will not borrow money or enter into reverse repurchase
agreements 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 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. 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 and monitoring the liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that 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.
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
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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 on the
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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), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
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Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on these futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and any other financial instruments and indices. All
futures contracts entered into by the Fund are traded on U.S. or foreign
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments [or
currencies] for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire or the
exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, the Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. The Fund may
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the Fund or securities with characteristics similar to those of the
Fund's portfolio securities. Similarly, the Fund may sell futures contracts on
any currencies in which its portfolio securities are quoted or denominated or in
one currency to hedge against 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.
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Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available. The Fund
may also purchase futures contracts as a substitute for transactions in
securities or foreign currency, to alter the investment characteristics of or
currency exposure associated with portfolio securities or to gain or increase
its exposure to a particular securities market or currency.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
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
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they are quoted or denominated) that the Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the currency in which they are quoted or denominated) it intends to purchase.
The Fund will determine that the price fluctuations in the futures contracts and
options on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of its hedging intent, the Fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities (or assets denominated in the related currency) in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualifications as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
securities in an amount equal to the underlying value of such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Fund than if
it had not entered into any futures contracts or options transactions.
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
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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 warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
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 a
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 possesses volatility characteristics similar to those being
hedged. To effect such 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 an accrued interest and may be required to pay a premium.
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, 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 U.S. Government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. Government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
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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 in order for the Fund to
qualify as a regulated investment company under the Code (see "Taxation").
The Fund does not intend to enter into short sale (other than those "against the
box") if immediately after such sale the aggregate of the value of all
collateral plus the amount in such segregated account exceeds 5% of the value of
the Fund's assets. A short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no added cost securities
identical to those sold short.
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 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
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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 the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information means the 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 observes the following fundamental investment restrictions.
The Fund may not:
(1) Purchase or sell real estate or any interest therein, except that the Fund
may invest in securities of corporate entities secured by real estate or
marketable interests therein or issued by companies that invest in real estate
or interests therein.
(2) 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 securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, 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.
(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
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leverage to attempt to increase income. The Fund will not purchase securities
while outstanding borrowings exceed 5% of the Fund's total assets.
(7) Pledge, mortgage or hypothecate its assets, except to secure indebtedness
permitted by paragraph (6) above and then only if such pledging, mortgaging or
hypothecating does not exceed 33 1/3% of the Fund's total assets taken at market
value.
(8) Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets taken at
market value at the time of each investment. This limitation does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
(9) Issue senior securities, except as permitted by paragraphs (2), (3) and (6)
above. For purposes of this restriction, the issuance of shares of beneficial
interest in multiple classes or series, the purchase or sale of options, futures
contracts and options on futures contracts, forward commitments, forward foreign
currency exchange contracts and repurchase agreements entered into in accordance
with the Fund's investment policy, and the pledge, mortgage or hypothecation of
the Fund's assets within the meaning of paragraph (7) above are not deemed to be
senior securities.
In connection with the lending of portfolio securities under item (2) above,
such loans must at all times be fully collateralized by cash or securities of
the U.S. Government or its agencies or instrumentalities, and the Fund's
custodian must take possession of the collateral either physically or in book
entry form. Any cash collateral will consist of short-term high quality debt
instruments. Securities used as collateral must be marked to market daily.
Non-fundamental Investment Restrictions
The following restrictions are designated as non-fundamental and may be changed
by the Trustees without shareholder approval.
The Fund may not:
(a) 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.
(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 securities of other investment
companies, (ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one investment company being held
by the Fund, or (iii) more than 5% of the Fund's total assets would be
invested in the securities of any one such investment company.
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(d) Invest more than 15% of its net assets in illiquid securities.
(e) Notwithstanding any investment restriction to the contrary, 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 provided that, as a result, (i) no more than 10% of the Fund's
assets would be invested in securities of all other investment
companies, (ii) such purchase would not result in more than 3% of the
total outstanding voting securities of any one such investment company
being held by the Fund and (iii) no more than 5% of the Fund's assets
would be invested in any one such investment company.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the values of the Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees, who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and Directors of the Adviser or officers and Directors of the
Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
16
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 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.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
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.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation (s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Vice President and Chief Economist,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman,
Xerox Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 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.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of
Washington, DC 20008-3009 International Education (since
May 1943 January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emeritus of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, 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.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, 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 Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
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.
</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 and Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and
receive no compensation from the Fund for their services.
23
<PAGE>
Aggregate Total Compensation From the
Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
- -------------------- ---------------- ----------------------
Dennis S. Aronowitz $ 1,876 $ 72,000
Richard P. Chapman, Jr.+ 1,951 75,000
William J. Cosgrove + 1,876 72,000
Douglas M. Costle 1,951 75,000
Leland O. Erdahl 1,876 72,000
Richard A. Farrell 1,951 75,000
Gail D. Fosler 1,876 72,000
William F. Glavin + 1,876 72,000
Dr. John A. Moore+ 1,876 72,000
Patti McGill Peterson 1,876 72,000
John W. Pratt 1,876 72,000
Edward J. Spellman 1,951 75,000
------ ------
Totals $ 22,812 $ 876,000
(1) Compensation is for the fiscal year ended October 31, 1997.
(2) Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1997. As of this date, there were sixty-seven
funds in the John Hancock Fund Complex, with each of these Independent Trustees
serving thirty-two.
+ As of December 31, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $69,148, Mr. Cosgrove was $167,829, Mr. Glavin was $193,514 and for
Dr. Moore was $84,315 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
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 April 27, 1998, the officers and Trustees of the Fund as a group owned
less than 1% of the outstanding shares of the Fund. As of that date, the
following shareholders beneficially owned 5% or more of the outstanding shares
of the Fund listed below:
24
<PAGE>
Percentage of Total
Name and Address of Outstanding Shares of
Shareholders Class of Shares the Class of the Fund
MLPF & S for the Sole Benefit B 5.70%
of it Customers
4800 Deer Lake Drive East
Jacksonville, FL
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-
7603, was organized in 1968 and presently has more than $30 billion in assets
under management in its capacity as investment adviser to the Fund and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds having a combined total of over 1,400,000 shareholders. The Adviser is
an affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating with Standard & Poor's
and A. M. Best's. Founded in 1862, the Life Company has been serving clients for
over 130 years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
25
<PAGE>
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average of the daily
net assets of the Fund as follows:
Net Asset Value Annual Rate
First $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 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 the Adviser renders investment advice arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds or clients in a manner deemed equitable to
all of them. To the extent that transactions on behalf of more than one client
of the Adviser or its affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
Pursuant to its Advisory Agreement, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and the Distribution Agreement
(discussed below) was approved by all Trustees. The Advisory Agreement and the
Distribution Agreement, 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
26
<PAGE>
persons" of any such parties. Both agreements may be terminated on 60 days
written notice by any party or by vote of a majority of the outstanding voting
securities of the Fund and will terminate automatically if assigned.
For the year ended December 31, 1995 and the period from January 1, 1996 to
October 31, 1996 and fiscal year ended October 31, 1997, the Adviser received
fees of $1,561,020, $1,884,304 and $2,560,785, respectively.
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 January 1, 1996 to October 31, 1996, the
Fund paid the Adviser $44,503 for services and for the year ended October 31,
1997, the Fund paid the Adviser $59,616 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 an applicable sales charge, if any. In connection
with the sale of Fund shares, John Hancock Funds and Selling Brokers receive
compensation from a sales charge imposed, in the case of Class A shares, at the
time of sale. In the case of Class B or Class C shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal year ended December 31, 1995 and for the period from January 1, 1996 to
October 31, 1996 and for the fiscal year ended October 31, 1997 were $376,267,
$327,255 and $376,266, respectively. Of such amounts $59,781, $42,144 and
$58,043, respectively, were retained by John Hancock Funds in 1995, 1996, and
1997. The remainder of the underwriting commissions were reallowed to dealers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of
1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% for class A shares and 1.00% for Class B
27
<PAGE>
and Class C shares 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 the John Hancock Funds for its distribution
expenses, including but not limited to: (i) initial and ongoing sales
compensation to Selling Brokers and others (including affiliates of the John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the distribution of Fund
shares; and (iii) with respect to Class B and Class C shares only, interest
expenses on unreimbursed distribution expenses. The service fees will be used to
compensate Selling Brokers and others for providing personal and account
maintenance services to shareholders. In the event that John Hancock Funds is
not fully reimbursed for payments or expenses 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 and Class C Plans 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 and
Class C Plans as a liability of the Fund because the Trustees may terminate the
Class B and /or Class C Plans at any time. For the fiscal year ended October 31,
1997, an aggregate of $162,442 distribution expenses or 0.51% 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. Class C shares of the Fund did not commence operations until
June 1, 1998; therefore, there are no unreimbursed expenses to report.
The Plans were approved by a majority of the voting securities of the applicable
class of the Fund. Both Plans and all amendments were 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 Plans (the "Independent Trustees"), by votes cast in person at
meetings called for the purpose of voting on these 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 will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. 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 that Plan. Each plan provides, that no
material amendment to the Plans will 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, Class B and Class C shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that the Plans will benefit the holders of the applicable class of
shares of the Fund.
28
<PAGE>
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 join 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 October 31, 1997, the Fund paid John Hancock Funds
the following amounts of expenses in connection with their services for the
Fund. Class C shares did not commence operations until June 1, 1998; therefore,
there are no expenses to report.
<TABLE>
<CAPTION>
Expense Items
Growth Fund Advertising Printing and Compensation Expenses of Interest
- ----------- ------------ Mailing of to Selling John Carrying or
Prospectus to Brokers Hancock Other
New ------- Funds Finance
Shareholders ----- Charges
------------ -------
<S> <C> <C> <C> <C> <C>
Class A shares $65,328 $28,700 $658,947 $126,359 $ --
Class B shares $50,847 $24,258 $115,489 $98,501 $ 24,371
</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.
29
<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 a determination of the Fund's NAV. If quotations
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 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 the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share 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, owned by
the investor, or if John Hancock Signature Services, Inc. ("Signature Services")
is notified by the investor's dealer or the investor at the time of the
purchase, the cost of the Class A shares owned.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o A Trustee or officer of the Trust; a Director or officer of the Adviser
and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandparents, grandchildren, mother, father, sister,
brother, mother-in-law, father-in-law, daughter-in-law, son-in-law,
niece, nephew and domestic partner) 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 a signed agreement with John
Hancock Funds providing specifically for the use of Fund shares in
fee-based investment products or services made available to their
clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any
or all of his or her plan distributions directly to the Fund.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if
the Plan has more than $3 million in assets or 500 eligible employees
at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping
Service Agreement. See your Merrill Lynch financial consultant for
further information.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed retirement plans with at least 100 eligible employees at the
inception of the Fund account. Each of these investors may purchase
Class A shares with no initial sales charge. However, if the shares are
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
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 being invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
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<PAGE>
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "LOI"), which should be read
carefully prior to its execution by an investor. The Fund offers two options
regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
retirement plan, however, may opt to make the necessary investments called for
by the LOI over a forty-eight (48) month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and
Section 457 plans. Non-qualified and retirement plans investments cannot be
combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) must
aggregate $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 escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales 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.
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<PAGE>
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so the Fund will receive
the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B or Class C shares being redeemed. No
CDSC will be imposed on increases in account value above the initial purchase
prices, including all shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service retirement plans administered
by Signature Services or the Life Company that had more than 100 eligible
employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C, or those you acquired through dividend and
capital gain reinvestment, and next from the shares you have held the longest
during the six-year period for Class B shares. For this purpose, the amount of
any increase in a share's value above its initial purchase price is not regarded
as a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price.
When requesting a redemption for a specific dollar amount, please indicate if
you require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
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<PAGE>
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:
oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
oMinus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) (120.00)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
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 and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C shares and of Class A shares that are subject
to 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. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemption of Class B or Class C shares where the proceeds are used to
purchase a John Hancock Declaration Variable annuity.
* Redemption of Class B (but not Class C) shares made under a periodic
withdrawal plan or redemptions for fees charged by planners or advisors
for advisory services, as long as your annual redemptions do not exceed
12% of your account value, including reinvested dividends, at the time
you established your periodic withdrawal plan and 12% of the value of
subsequent investments (less redemptions) in that account at the time
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<PAGE>
you notify Signature Services. (Please note, this waiver does not apply
to periodic withdrawal plan redemptions of Class A or Class C 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.
* Redemption of Class A or Class C shared by retirement plans that
invested through the PruArray Program sponsored by Prudential
Securities.
For Retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, 457, 403(b), 401(k), Money Purchase Pension
Plan, Profit-Sharing Plan and other plans as described in the Internal Revenue
Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* 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 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 and Class C
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
perodic
payments
- -------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72t) or 12% (72t) or 12% (72t) or (72t) or annually in
of account of account 12% of 12% of periodic
value value account account payments
annually in annually in value value
periodic periodic annually in annually in
payments payments periodic periodic
payments payments
- -------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------
Return of 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.
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<PAGE>
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholders will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares of
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<PAGE>
the Fund could be disadvantageous to a shareholder because of the initial sales
charge payable on such purchases of Class A shares and the CDSC imposed on
redemptions of Class B and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase shares at the same time a
Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify
or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days'
prior written notice to such shareholder, or to discontinue the availability of
such plan in the future. The shareholder may terminate the plan at any time by
giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the 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 in that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of 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."
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<PAGE>
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 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 six other
series. Additional series may be added in the future. The Declaration of Trust
also authorizes the Trustees to classify and reclassify the shares of the Fund,
or any new series of the Trust, into one or more classes. As of the date of this
Statement of Additional Information, the Trustees have authorized the issuance
of three classes of shares of the Fund, designated as Class A, Class B and Class
C.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
each class of shares have certain exclusive voting rights on matters relating to
their respective distribution plans. The different classes of the Fund may bear
different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class will be borne exclusively
by that class, (ii) Class B and Class C shares will pay higher distribution and
service fees than Class A shares and (iii) each class of shares will bear any
class expenses properly allocable to that class of shares, subject to the
conditions the Internal Revenue Service imposes with respect to the
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
39
<PAGE>
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 Fund. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable for 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 starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. 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 as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and intends to continue to 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 realized 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
such tax by satisfying such distributions requirements.
Distribution from the Fund's current or accumulated earnings and profits ("E&P")
will be taxable under the Code for investors who are subject to tax. If these
distributions are paid from the Fund's "investment company taxable income," they
will be taxable as ordinary income; and if they are paid from the Fund's "net
capital gain" they will be taxable as capital gain. (Net capital gain is the
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<PAGE>
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 those gains and losses included in computing net capital gain, after
reduction by deductible expenses). As a result of federal tax legislation
enacted on August 5, 1997 (the "Act"), gain recognized after May 6, 1997 from
the sale of a capital asset is taxable to individual (noncorporate) investors at
different maximum federal income tax rates, depending generally upon the tax
holding period for the asset, the federal income tax bracket of the taxpayer,
and the dates the asset was acquired and/ or sold. The Treasury Department has
issued guidance under the Act that enables the Fund to pass through to its
shareholders the benefits of the capital gains rates enacted in the Act.
Shareholders should consult their own tax advisers on the correct application of
these new rules in their particular circumstances. Some distributions may be
paid in January but may be taxable to shareholders as if they had been received
on December 31 of the previous year. 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.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to their investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Because more than 50% of the Fund's assets at the close of any taxable
year will not consist of stocks or securities of foreign corporations, the Fund
will be unable to pass such taxes through to shareholders (as additional income)
along with a corresponding entitlement to a foreign tax credit or deduction. The
Fund will deduct the foreign taxes it pays in determining the amount it has
available for distribution to shareholders.
If the Fund invests in stock or ADRs representing stock (including an option to
acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gain) or hold at least 50% of their asset 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. An election may be
available to ameliorate these adverse tax consequences, but could require the
Fund to recognize taxable income or gain without the concurrent receipt of cash.
These investments could also result in the treatment of associated capital gains
as ordinary income. The Fund may limit and/or manage its holdings in passive
foreign investment companies or make an available election to minimize its tax
liability or maximize its return for these investments.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency options, foreign currencies, or payables or receivables
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<PAGE>
denominated in 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. Transactions in foreign currencies that are not directly related
to the Fund's investment in stock or securities, including speculative currency
positions could under future Treasury regulations produce income not among the
types of "qualifying income" from which the Fund must derive at least 90% of its
gross income from each taxable year. If the net foreign exchange loss for a year
treated as ordinary loss under Section 988 were to exceed the Fund's investment
company taxable income computed without regard to such loss the resulting
overall ordinary loss for such year would not be deductible by the Fund or its
shareholders in future years.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into options, futures, foreign currency
positions, and foreign currency forward contracts.
Certain options, futures, and forward foreign currency contracts undertaken by
the Fund could 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 foreign currency
contracts, as ordinary income or loss) and timing of some capital gains and
losses realized by the Fund. Additionally, the Fund may be required to recognize
gain, but not loss, if an option, short sales or other transaction is treated as
a constructive sale of an appreciated financial position in the Fund's
portfolio. 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 gains. Certain of such transactions may
also cause the Fund to dispose of investments sooner than would otherwise have
occurred. These transactions may therefore affect the amount, timing and
character of the Fund's distributions to shareholders. The Fund will take into
account the special tax rules (including consideration of available elections)
applicable to options, futures and forward contracts in order to seek to
minimize any potential adverse tax consequences.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities and/or engage in options transactions that will generate
capital gains. At the time of an investor's purchase of Fund shares, a portion
of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio or undistributed taxable income of the
Fund. Consequently, subsequent distributions on those 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 such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) that in a transaction is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
Class A shares of the Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares within 90
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<PAGE>
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 automatic
dividend reinvestments. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares. Shareholders should consult
their own tax advisers regarding their particular circumstances to determine
whether a disposition of Fund shares is properly treated as a sale for tax
purposes, as is assumed in the foregoing discussion. Also, future Treasury
Department guidance issued to implement the Act may contain additional rules for
determining the tax treatment of sales of Fund shares held for various periods,
including the treatment of losses on the sales of shares held for six months or
less that are recharacterized as long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the 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 capital gain in his
return for his taxable year in which the last day of the Fund's taxable year
falls, (b) be entitled either to a tax credit on his return for, or to a refund
of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to
increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of 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. The Fund does not have any capital loss carryforwards.
Investment in debt obligations that are at risk of or in default present special
tax issues for the Fund. Tax rules are not entirely clear about issues such as
when the Fund may cease to accrue interest, original issue discount, or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Fund, in the event it acquires or holds any such obligations,
in order to reduce the risk of distributing insufficient income to preserve its
43
<PAGE>
status as a regulated investment company and seeks to avoid becoming subject to
Federal income or excise tax.
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) during a prescribed period extending before and after each such
dividend and distributed and properly designated by the Fund may be treated as
qualifying dividends. Corporate shareholders must meet the holding period
requirements stated above with respect to their shares of the Fund for each
dividend 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. Additionally, any corporate shareholder should consult its tax
adviser regarding the possibility that its basis in its shares may be reduced,
for Federal income tax purposes, by reason of "extraordinary dividends" received
with respect to the shares, and, to the extend such basis would be reduced below
zero, that current recognition of income would be required.
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 or constructive sale rules applicable to certain options, futures,
forwards, short sales or other transactions may also require the Fund to
recognize income or gain without a concurrent receipt of cash. Additionally,
some countries restrict repatriation which may make it difficult or impossible
for the Fund to obtain cash corresponding to its earnings or assets in those
countries. 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 borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although it 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
44
<PAGE>
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 nor 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 Federal income tax law as applicable
to U.S. persons (i.e., U.S. citizens and 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
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to non-resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from the Fund and, unless an effective IRS Form W-8 or
authorized substitute for Form W-8 is on file, to 31% backup withholding on
certain other payments from the Fund. Non-U.S. investors should consult their
tax advisers regarding such treatment and the application of foreign taxes to an
investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, 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 10 year periods ended October 31, 1997 was 10.24%, 13.92 % and 13.51%,
respectively. The average annual total return on Class B shares of the Fund for
the 1 year period ended October 31, 1997 and since inception on January 3, 1994
was 10.33% and 12.72%, respectively. Class C shares of the fund commenced
operations on June 1, 1998; therefore, there is no average annual total return
to report.
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Total return is computed by finding the average annual compounded rate of return
over the 1 year, 5 year and 10 year periods that would equate the initial amount
invested to the ending redeemable value according to the following formula:
n _______
T = \ / ERV /P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1 year, 5 year, and 10 year periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, 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 or Class C shares into account. Excluding the Fund's
sales charge on Class A shares and the CDSC on Class B or Class C 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) on the
last day of the period, according to the following standard formula:
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a - b
_____ 6
Yield = 2 ( [ ( cd ) + 1 ] - 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 will be compared to indices of mutual funds such as Lipper Analytical
Services, Inc.'s "Lipper - Mutual Fund 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 Adviser pursuant to
recommendations made by its investment committee of the Adviser, 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
47
<PAGE>
of securities are placed in a manner which, in the opinion of the Adviser, will
offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer, and transactions with dealers serving as market
makers reflect a spread. Debt securities are generally traded on a net basis
through dealers acting for their own account as principals and not as brokers;
no brokerage commissions are payable on these transactions.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. Ion other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and, to a
lesser extent, statistical assistance furnished to the Adviser of the Fund and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
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 Adviser'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,
1995, the Fund paid negotiated brokerage commissions in the amount of $334,672.
For the period from January 1, 1996 to October 31, 1996, the Fund paid
negotiated brokerage commissions in the amount of $365,163 and for the fiscal
year end November 1, 1996 to October 31, 1997, the Fund paid negotiated
brokerage commissions in the amount of $662,164.
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 such commission is reasonable in
light of the services provided and to such policies as the Trustees may adopt
48
<PAGE>
from time to time. For the year ended October 31, 1997, the Fund directed
commissions in the amount of $154,242 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 Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. During the
fiscal year ended October 31, 1997, the Fund did not execute any portfolio
transactions with Affiliated Brokers.
Distributors may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as 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 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 account and $21.50
for each Class B shareholder account and $20.50 for each Class C shareholder
account. The Fund also pays certain out-of-pocket expenses and these expenses
are aggregated and charged to the Fund allocated to each class on the basis of
their relative net asset value.
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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 LLP 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
Moody's describes its lower ratings for corporate bonds as follows:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represented obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
S&P describes its lower ratings for corporate bonds as follows:
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Debt rated BB, B, CCC, or CC is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Moody's describes its three highest ratings for commercial paper as follows:
Issuers rated P-1 (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics: (1) leading market
positions in well-established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate reliance on
A-1
<PAGE>
debt and ample asset protections; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated P- (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P describes its three highest ratings for commercial paper as follows:
A-1. This designation indicated that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
A-2
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK GLOBAL FUND
JOHN HANCOCK WORLD BOND FUND
Class A and Class B Shares
Statement of Additional Information
June 1, 1998
This Statement of Additional Information provides information about John Hancock
Global Fund ("Global Fund") and John Hancock World Bond Fund ("World Bond Fund")
(collectively, the "Funds") in addition to the information that is contained in
the combined International/Global Funds' Prospectus dated June 1, 1998 (the
"Prospectus"). The Funds are a diversified (Global Fund) and a non-diversified
(World Bond Fund) series of John Hancock Investment Trust III (the "Trust"),
formerly Freedom Investment Trust II.
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 Funds 2
Investment Objectives and Policies 2
Investment Restrictions 16
Those Responsible for Management 19
Investment Advisory and Other Services 27
Distribution Contracts 30
Net Asset Value 32
Initial Sales Charge on Class A Shares 33
Deferred Sales Charge on Class B Shares 35
Special Redemptions 39
Additional Services and Programs 39
Description of the Funds' Shares 41
Tax Status 42
Calculation of Performance 47
Brokerage Allocation 50
Transfer Agent Services 53
Custody of Portfolio 53
Independent Auditors 53
Appendix A A-1
Financial Statements F-1
1
<PAGE>
ORGANIZATION OF THE FUNDS
The Fund are series of the Trust, an open-end investment management company
organized as a Massachusetts business trust on March 31, 1986 under the laws of
The Commonwealth of Massachusetts. The Funds commenced operations on March 31,
1986 (Global Fund) and on July 31, 1986 (World Bond Fund).
John Hancock Advisers, Inc. (the "Adviser") is the Funds' investment adviser.
John Hancock Advisers International Limited ("JH Advisers International") is the
sub-Adviser for Global Fund. 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 OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's investment
objectives and policies in the Prospectus. There is no assurance that either
Fund will achieve its investment objective.
Global Fund
The Global Fund's investment objective is to achieve long-term growth of capital
primarily through investment in common stocks of companies domiciled in foreign
countries and in the United States. Any income received on the Fund's
investments will be incidental to the Fund's objective of long-term growth of
capital. Normally, the Fund will invest in the securities markets of at least
three countries, including the United States.
Under normal circumstances, at least 65% of the Global Fund's total assets will
consist of common stocks and securities convertible into common stock. However,
if deemed advisable by the Adviser, the Fund may invest in any other type of
security including preferred stocks, warrants, bonds, notes and other debt
securities (including Eurodollar securities) or obligations of domestic or
foreign governments and their political subdivisions. The Fund will only invest
in investment grade debt securities, which are securities rated within the four
highest rating categories of Standard & Poor's Rating Group ("S&P") (AAA, AA, A,
BBB) or Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A, Baa).
Investments in the lowest investment grade rating category may have speculative
characteristics and therefore may involve higher risks. Investment grade debt
securities are subject to market fluctuations and changes in interest rates;
however, the risk of loss of income and principal is generally expected to be
less than with lower quality debt securities. In the event a debt security is
downgraded below investment grade, the Adviser will consider this event in its
determination of whether the Fund should continue to hold the security. See
Appendix A to this Statement of Additional Information for a description of the
various ratings of investment grade debt securities. The global allocation of
assets is not fixed, and will vary from time to time based on the judgment of
the Adviser and JH Advisers International. Global Fund will maintain a flexible
investment policy and will invest in a diversified portfolio of securities of
companies and governments located throughout the world. In making the allocation
of assets among various countries and geographic regions, the Adviser and JH
Advisers International ordinarily consider such factors as prospects for
relative economic growth between foreign countries; expected levels of inflation
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and interest rates; government policies influencing business conditions; and
other pertinent financial, tax, social, political, currency and national factors
all in relation to the prevailing prices of the securities in each country or
region.
When the Adviser believes that adverse market conditions are present, for
temporary defensive purposes, the Fund may hold or invest all or part of its
assets in cash and in domestic and foreign money market instruments, including
but not limited to, governmental obligations, certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate debt securities and
repurchase agreements.
Any income received on the Fund's investments will be incidental to the Fund's
objective of long-term growth of capital.
World Bond Fund
The World Bond Fund's investment objective is to achieve a high total investment
return, a combination of current income and capital appreciation, by investing
in a global portfolio of fixed income securities. Normally, the Fund will invest
in fixed income securities denominated in at least three currencies or
multi-currency units, including the U. S. Dollar.
Under normal circumstances, World Bond Fund will invest primarily (at least 65%
of total assets) in fixed income securities issued or guaranteed by: (i) the
U.S. Government, its agencies or instrumentalities; (ii) foreign governments
(including foreign states, provinces and municipalities) or their political
subdivisions, authorities, agencies or instrumentalities; (iii) international
organizations backed or jointly owned by more than one national government, such
as the International Bank for Reconstruction and Development, European
Investment Bank, Asian Development Bank, European Coal and Steel Community and
Inter-American Development Bank; and (iv) foreign corporations or financial
institutions. The term "fixed income securities" includes debt obligations of
all types, including bonds, debentures and notes, and certain stocks such as
preferred stocks. A fixed income security may itself be convertible into or
exchangeable for equity securities, or may carry with it the right to acquire
equity securities evidenced by warrants attached to the security or acquired as
part of a unit with a security. The Fund has registered as a "non-diversified"
fund so that it will be able to invest more than 5% of its assets in obligations
of a single foreign government or other issuer. The Fund will not invest more
than 25% of its total assets in securities issued by any one foreign government.
World Bond Fund may invest less than 35% of its total assets in fixed income
securities which are high yield, high risk securities in the lower rating
categories of the established rating services. These securities are rated below
Baa by Moody's or below BBB by S&P. The Fund may invest in securities rated as
low as Caa by Moody's or CCC by S&P, which may indicate that the obligations are
speculative to a high degree and in default. These securities are generally
referred to as "emerging market" or "junk" bonds. See the Appendix attached to
this Statement of Additional Information for a description of the
characteristics of 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 minimum ratings noted above. The credit ratings of Moody's
and S&P (the "Rating Agencies") may not be changed by the Rating Agencies in a
timely fashion to reflect subsequent economic events. These credit ratings
evaluate credit risk but not general market risk. The Fund may also invest in
unrated securities which, in the opinion of the Adviser, offer comparable yields
and risks to the rated securities in which the Fund may invest.
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Debt securities that are 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 ability of the issuer to make
payments of interest and principal. The market price and liquidity of lower
rated fixed income securities generally respond to short-term corporate and
market developments to a greater extent than the price and liquidity 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
ongoing debt obligations. Although the Adviser seeks to minimize these risks
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions, there can be no
assurance that the Adviser will be successful in limiting the Fund's exposure to
the risks associated with lower rated securities. Because the World Bond Fund
may invest in securities in the lower rated categories, the achievement of the
Fund's goals is more dependent on the Adviser's ability than would be the case
if the Fund were investing in securities in the higher rated categories.
Reduced volume and liquidity in the high yield high risk bond market or the
reduced availability of market quotations may make it more difficult to dispose
of the World Bond Fund's investments in high yield high risk securities and to
value accurately these 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 investments 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.
World Bond Fund may invest in fixed income securities denominated in any
currency or a multi-national currency unit. The European Currency Unit ("ECU")
is a composite currency consisting of specified amounts of each of the
currencies of ten member countries of the European Economic Community. The Fund
may also invest in fixed income securities denominated in the currency of one
country although issued by a governmental entity, corporation or financial
institution of another country. For example, the Fund may invest in a Japanese
yen-denominated fixed income security issued by a United States corporation.
This type of investment involves credit risks associated with the issuer and
currency risks associated with the currency in which the obligation is
denominated.
World Bond Fund will maintain a flexible investment policy and its portfolio
assets may be shifted among fixed income securities denominated in various
foreign currencies that the Adviser believes will provide relatively high rates
of income or potential capital appreciation in U.S. Dollars. As with all debt
securities, the prices of the Fund's portfolio securities will generally
increase when interest rates decline and decrease when interest rates rise.
Similarly, if the foreign currency in which a portfolio security is denominated
appreciates against the U.S. Dollar, the total investment return from that
security will be enhanced further. Conversely, if the foreign currency in which
a portfolio security is denominated depreciates against the U.S. Dollar, total
investment return from that security will be adversely affected.
With respect to the international organizations described above, the
governmental members of such organizations, or "stockholders," usually make
initial capital contributions to the organization and in many cases are
committed to make additional capital contributions if the organization is unable
to repay its borrowings. In accordance with guidelines promulgated by the Staff
of the Securities and Exchange Commission (the "SEC"), the Fund will consider as
an industry any category of international organizations designated by the SEC.
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The Fund may invest in corporate and commercial obligations, such as medium-term
notes and commercial paper, which may be indexed to foreign currency exchange
rates.
In selecting fixed income securities for World Bond Fund's portfolio, the
Adviser ordinarily considers such factors as the strengths and weaknesses of the
currencies in which the securities are denominated; expected levels of inflation
and interest rates; government policies influencing business conditions; the
financial condition of the issuer; and other pertinent financial, tax, social,
political and national factors. The average maturity of the Fund's portfolio
securities will vary based upon the Adviser's assessment of economic and market
conditions.
When the Adviser determines that adverse market conditions are present, for
temporary defensive purposes, the Fund may hold or invest all or part of its
assets in cash and in domestic and foreign money market instruments, including
but not limited to governmental obligations, certificates of deposit, bankers'
acceptances, commercial paper, short-term corporate debt securities and
repurchase agreements.
World Bond Fund is a "non-diversified" fund in order to permit more than 5% of
its assets to be invested in the obligations of any one issuer. Since a
relatively high percentage of the Fund's assets may be invested in the
obligations of a limited number of issuers, the value of the Fund's shares may
be more susceptible to a single economic, political or regulatory event, and to
the credit and market risks associated with a single issuer.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that 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 rating 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 minimum required for
purchase by the Fund.
Neither of these events will require the sale of the securities by the Fund.
Time Deposits. The Funds' time deposits are non-negotiable deposits maintained
for a stated period of time at a stated interest rate. If the Fund purchases
time deposits maturing in seven days or more, it will treat those longer-term
time deposits as illiquid.
Investments in Foreign Securities. The Funds may invest 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 corporations domiciled in
foreign countries. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are designed for use in the U.S. securities markets
and EDRs, in bearer form, are designed for use in European securities markets.
ADRs are receipts typically issued by a United States bank or trust company
evidencing ownership of the underlying securities. EDRs are European receipts
evidencing a similar arrangement.
Foreign Currency Transactions. The foreign currency transactions of each Fund
may be conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market. Each Fund may also
enter into forward foreign currency contracts involving currencies of the
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different countries in which it will invest either as a hedge against possible
variations in the foreign exchange rate between these currencies, for
speculative purposes, as a substitute for investing in securities denominated in
that currency or in order to create a synthetic position consisting of a
security issued in one country and denominated in the currency of another
country. Forward foreign currency contracts involve contractual agreements to
purchase or sell a specified currency at a specified future date and price set
at the time of the contract. Transaction hedging is the purchase or sale of
forward foreign currency contracts with respect to specific receivables for
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities denominated in foreign currencies. Portfolio hedging is the
use of forward foreign currency contracts to offset portfolio security positions
denominated or quoted in such foreign currencies. The Funds will not attempt to
hedge all of their foreign portfolio positions and will enter into such
transactions only to the extent, if any, deemed appropriate by the Adviser, in
the case of Global Fund or the Adviser or JH Advisers International, in the case
of World Bond Fund. There is no limitation on the value of a Fund's assets that
may be committed to forward contracts or on the term of a forward contract.
If the Fund enters into a forward contract requiring it to purchase foreign
currency, its custodian bank 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. Those assets will be valued at market daily and if the value of the
assets in the separate account declines, additional cash or liquid assets will
be placed in the account so that the value of the account will equal 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 should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
When the Adviser or JH Advisers International believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, a Fund may enter into a forward contract to sell or buy the
amount of the former foreign currency approximating the value of some or all of
that Fund's portfolio securities denominated in such foreign currency. This
second investment practice is generally referred to as "cross-hedging". The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
It is impossible to forecast the market value of a particular portfolio security
at the expiration of the contract. Accordingly, it may be necessary for a Fund
to purchase additional foreign currency on the spot market (and bear the expense
of such purchase) if the market value of the security is less than the amount of
foreign currency that the Fund is obligated to deliver and if a decision is made
to sell the security and make delivery of the foreign currency.
The cost to the Fund of engaging in foreign currency transactions varies with
such factors as that 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.
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Although the Funds value their assets daily in terms of United States dollars,
neither Fund intends to convert its holdings of foreign currencies into United
States dollars on a daily basis. A Fund will do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell the currency to the dealer.
Risks in Foreign Securities. Investments in foreign securities may involve
certain risks not present in domestic securities. Because of the following
considerations, shares of the Global Fund and the World Bond Fund should not be
considered a complete investment program. There is generally less publicly
available information about foreign companies and other issuers comparable to
reports and ratings that are published about issuers in the United States. There
may be difficulty in enforcing legal rights outside the United States. Foreign
issuers are also generally not subject to uniform accounting and auditing and
financial reporting standards, practices and requirements comparable to those
applicable to United States issuers.
Security trading practices abroad may offer less protection to investors such as
the Funds. It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on exchanges located in the countries in which the
respective principal offices of the issuers of the various securities are
located, if that is the best available market. 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. Similarly, volume
and liquidity in most foreign bond markets is less than in the United States and
at times, volatility of price can be greater than in the United States. Fixed
commissions on foreign exchanges are generally higher than negotiated
commissions on United States exchanges, although each 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. In addition, foreign
securities may be denominated in the currency of the country in which the issuer
is located. Consequently, changes in the foreign exchange rate will affect the
value of the Funds' shares and dividends.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of a
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 such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
The dividends and interest payable on certain of the Funds' foreign portfolio
securities (and, in some cases, capital gains) may be subject to foreign
withholding or other foreign taxes, thus reducing the net amount of income
available for distribution to each Fund's shareholders. See "TAX STATUS".
Investors should understand that the expense ratio of each Fund will be higher
than that of investment companies investing in domestic securities since the
expenses of the Funds, such as the cost of maintaining the custody of foreign
securities and the rate of advisory fees paid by the Funds, are higher.
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These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens,
inflation rates or currency exchange rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. The Funds may be required to establish special
custodial or other arrangements before making certain investments in those
countries. Securities of issuers located in these countries may have limited
marketability and may be subject to more abrupt or erratic price movements
Repurchase Agreements. The Funds may invest in repurchase agreements. In a
repurchase agreement a 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. A 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 or Advisers,
as appropriate, will continuously monitor the creditworthiness of the parties
with whom a Fund enters into repurchase agreements.
Each 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, a 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. Each Fund may also enter into reverse purchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. A 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, a 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
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securities (plus any accrued interest thereon) under such agreements. In
addition, a Fund will not borrow money or enter into reverse repurchase
agreements from banks temporarily for extraordinary or emergency purposes (not
leveraging or investment) and then in an aggregate amount not in excess of 10%
of the value of a Fund's total assets at the time of such borrowing, provided
that the Fund will not purchase securities for investment while borrowing
equaling 5% or more of the Fund's total assets outstanding. A Fund will enter
into reverse repurchase agreements only with federally insured banks which are
approved in advance as being creditworthy by the of Trustees. Under the
procedures established by the of Trustees, the Adviser will monitor the
creditworthiness of the banks involved.
Restricted Securities. Each 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. A 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 or Advisers, as appropriate, the daily function of determining and
monitoring the liquidity of restricted securities. The Trustees, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor a 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 a Fund if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
A Fund may acquire other restricted securities including securities for which
market quotations are not readily available. These securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the 1933 Act. Where
registration is required, a Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time a Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be priced at
fair market value as determined in good faith by the Funds' Trustees.
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.
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
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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 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
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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
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").
11
<PAGE>
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 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
12
<PAGE>
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.
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
13
<PAGE>
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 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 Funds 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
Funds may reinvest any cash collateral in short-term securities and money market
funds. When the Funds lend portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Funds may incur a loss or, in the event of the borrower's
bankruptcy, the Funds may be delayed in or prevented from liquidating the
collateral. It is a fundamental policy of each of Global Fund and World Bond
Fund not to lend portfolio securities having a total value exceeding 10% and
30%, respectively, of its total assets.
Rights and Warrants. The Funds may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
14
<PAGE>
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.
Forward Commitment and When-Issued Securities. The Funds 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. A 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, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When a 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 a 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 a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Structured or Hybrid Notes. Each Fund may invest in "structured" or "hybrid"
notes, bonds or debentures. The distinguishing feature of a structured or hybrid
note, bond or debenture is that the amount of interest and/or principal payable
on the security is based on the performance of a benchmark asset or market other
than fixed income securities or interest rates. Examples of these benchmark
include stock prices, currency exchange rates and physical commodity prices.
Investing in a structured note allows a Fund to gain exposure to the benchmark
market while fixing the maximum loss that the Fund may experience in the event
that market does not perform as expected. Depending on the terms of the
security, the Fund may forego all or part of the interest and principal that
would be payable on a comparable conventional note, bond or debenture; a Fund's
loss cannot exceed this foregone interest and/or principal. An investment in
structured or hybrid notes involves risks similar to those associated with a
direct investment in the benchmark asset.
Asset-Backed Securities. Each Fund may invest a portion of its assets in
asset-backed securities. Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Funds' ability to
maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
15
<PAGE>
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Participation Interests (World Bond Fund only). Participation interests, which
may take the form of interests in, or assignments of certain loans, are acquired
from banks who have made these loans or are members of a lending syndicate. The
Fund's investments in participation interests are subject to its 15% limitation
on investments in illiquid securities.
Short-Term Trading and Portfolio Turnover. Each Fund may attempt to maximize
current income through short-term portfolio trading. This will involve selling
portfolio instruments and purchasing different instruments to take advantage of
yield disparities in different segments of the market for government
obligations. Short-term trading may have the effect of increasing portfolio
turnover rate. A high rate of portfolio turnover (100% or greater) involves
correspondingly greater brokerage expenses. The Funds' portfolio turnover rate
is set forth in the table under the caption "Financial Highlights" in the
Prospectus .
The World Bond Fund's portfolio turnover rate may vary widely from year to year
and may be higher than that of many other mutual funds with similar investment
objectives. For example, if the World Bond Fund writes a substantial number of
call options and the market prices of the underlying securities appreciate, or
if it writes a substantial number of put options and the market prices of the
underlying securities depreciate, there may be a very substantial turnover of
the portfolio. While the Fund will pay commissions in connection with its
options transactions, government securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission. Nevertheless, high portfolio turnover may involve correspondingly
greater commissions and other transaction costs, which will be borne directly by
the Fund.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of a Fund's outstanding voting
securities which, as used in the Prospectus and this Statement of Additional
Information, means the 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.
A Fund may not:
1. Purchases on Margin and Short Sales. Purchase securities on margin
or sell short, except that a Fund may obtain such short term credits as are
necessary for the clearance of securities transactions. The deposit or payment
16
<PAGE>
by a Fund of initial or maintenance margin in connection with futures contracts
or related options transactions is not considered the purchase of a security on
margin.
2. Borrowing. Borrow money, except from banks temporarily for
extraordinary or emergency purposes (not for leveraging or investment) and then
in an aggregate amount not in excess of 10% of the value of the Fund's total
assets at the time of such borrowing, provided that the Fund will not purchase
securities for investment while borrowings equaling 5% or more of the Fund's
total assets are outstanding.
3. Underwriting Securities. Act as an underwriter of securities of
other issuers, except to the extent that it may be deemed to act as an
underwriter in certain cases when disposing of restricted securities.
4. Senior Securities. Issue senior securities except as appropriate to
evidence indebtedness which a Fund is permitted to incur, provided that, to the
extent applicable, (i) the purchase and sale of futures contracts or related
options, (ii) collateral arrangements with respect to futures contracts, related
options, forward foreign currency exchange contracts or other permitted
investments of a Fund as described in the Prospectus, including deposits of
initial and variation margin, and (iii) the establishment of separate classes of
shares of a Fund for providing alternative distribution methods are not
considered to be the issuance of senior securities for purposes of this
restriction.
5. Warrants. Invest more than 5% of the Fund's total assets in
warrants, whether or not the warrants are listed on the New York or American
Stock Exchanges, or more than 2% of the value of the Fund's total assets in
warrants which are not listed on those exchanges. Warrants acquired in units or
attached to securities are not included in this restriction.
6. Single Issuer Limitation/Diversification. Purchase securities of any
one issuer, except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, if immediately after such purchase more than 5%
of the value of a Fund's total assets would be invested in such issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
such issuer; provided, however, that with respect to each Fund, up to 25% of the
value of the Fund's total assets may be invested without regard to these
limitations. This restriction does not apply to World Bond Fund, which is a
non-diversified fund under the 1940 Act.
7. Real Estate. Purchase or sell real estate although a Fund may
purchase and sell securities which are secured by real estate, mortgages or
interests therein, or issued by companies which invest in real estate or
interests therein; provided, however, that no Fund will purchase real estate
limited partnership interests.
8. Commodities; Commodity Futures; Oil and Gas Exploration and
Development Programs. Purchase or sell commodities or commodity futures
contracts or interests in oil, gas or other mineral exploration or development
programs, except a Fund may engage in such forward foreign currency contracts
and/or purchase or sell such futures contracts and options thereon as described
in the Prospectus.
9. Making Loans. Make loans, except that a Fund may purchase or hold
debt instruments and may enter into repurchase agreements (subject to
Restriction 12) in accordance with its investment objectives and policies and
make loans of portfolio securities provided that as a result, no more than 10%
17
<PAGE>
of the Global Fund's total assets and 30% of the total assets of the World Bond
Fund, taken at current value would be so loaned.
10. Industry Concentration. Purchase any securities which would cause
more than 25% of the market value of a Fund's total assets at the time of such
purchase to be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that there is no
limitation with respect to investments in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. With respect to World
Bond Fund, this restriction will apply to obligations of a foreign government
unless the Securities and Exchange Commission permits their exclusion.
Non-fundamental Investment Restrictions. The following restrictions are
designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
A Fund may not:
(a) Options Transactions. Write, purchase, or sell puts, calls or
combinations thereof except that a Fund may write, purchase or sell puts and
calls on securities as described in this Statement of Additional Information,
and the World Bond Fund may purchase or sell puts and calls on foreign
currencies as described in this Statement of Additional Information.
(b) Invest more than 15% of its net assets in illiquid securities.
(c) Acquisition for Control Purposes. Purchase securities of any issuer
for the purpose of exercising control or management, except in connection with a
merger, consolidation, acquisition or reorganization.
(d) Joint Trading Accounts. Participate on a joint or joint and several
basis in any trading account in securities (except for a joint account with
other funds managed by the Adviser for repurchase agreements permitted by the
Securities and Exchange Commission pursuant to an exemptive order).
(e) Securities of Other Investment Companies. Purchase a security if,
as a result, (i) more than 10% of the Fund's total assets would be invested in
the securities of other investment companies, (ii) the Fund would hold more than
3% of the total outstanding voting securities of any one investment company, or
(iii) more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not apply to (a)
the investment of cash collateral, received by the Fund in connection with
lending the Fund's portfolio securities, in the securities of open-end
investment companies or (b) the purchase of shares of any investment company in
connection with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company. Subject to the
above percentage limitations, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amounts of net assets will not be considered a violation
of any of the foregoing restrictions.
18
<PAGE>
The World Bond Fund has registered as a "non-diversified" investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). However, the Fund intends to limit its investments to the extent required
by the diversification requirements of the Code. See "Taxes".
THOSE RESPONSIBLE FOR MANAGEMENT
The business of each Fund is managed by its Trustees, who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and directors of the Adviser or officers and Directors of the
Funds' principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 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.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
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.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Vice President and Chief Economist,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 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.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of
Washington, DC 20008-3009 International Education (since
May 1943 January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emeritus of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, 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.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, 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 Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
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.
</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 and Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Funds,
are interested persons of the Adviser are compensated by the Adviser and receive
no compensation from the Fund for their services.
26
<PAGE>
Aggregate Compensation (1)
Total Compensation
From the Funds and
Global World Bond John Hancock Fund
Independent Trustee Fund(1) Fund (1) Complex to Trustee(2)
------------------- ------- -------- ---------------------
Dennis S. Aronowitz $814 $455 $ 72,000
Richard P. Chapman, Jr. 847 471 75,000
William J. Cosgrove 814 454 72,000
Douglas M. Costle 847 471 75,000
Leland O. Erdahl 814 454 72,000
Richard A. Farrell 847 471 75,000
Gail D. Fosler 814 454 72,000
William F. Glavin 176 454 72,000
Dr. John A. Moore 48 455 72,000
Patti McGill Peterson 814 455 72,000
John W. Pratt 814 455 72,000
Edward J. Spellman 847 471 75,000
------- ------- ----------
Totals $8,496 $5,520 $876,000
1Compensation is for the fiscal year ended October 31, 1997.
2Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1997. As of this date, there were sixty-seven
funds in the John Hancock Fund Complex with each of these Independent Trustees
served thirty-two.
(+)As of December 31, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $69,148, Mr. Cosgrove was $167,829, Mr. Glavin was $193,514 and for
Dr. Moore was $84,315 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
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 April 27, 1998, the officers and trustees of the Trust as a group owned
less than 1% of the outstanding shares of each class of each of the Funds. As of
that date, no person of record owned beneficially 5% or more of the outstanding
shares of the John Hancock World Bond Fund. As of that date, MLPF & S for the
Sold Benefit of its Customers, 4800 Deer Lake Drive East, Jacksonville, FL of
record owned 9.52% of the outstanding securities of the John Hancock Global
Fund-Class B.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
27
<PAGE>
in its capacity as investment adviser to the Funds and the other mutual funds
and publicly traded investment companies in the John Hancock group of funds
having a combined total of over 1,400,000 shareholders. The Adviser is an
affiliate of the Life Insurance 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 high ratings from
Standard & Poor's and A.M. Best's. Founded in 1862, the Life Company has been
serving clients for over 130 years.
The Funds have entered into investment management contracts (the "Advisory
Agreements") with the Adviser, which were approved by the Funds' shareholders.
Pursuant to the Advisory Agreements, the Adviser will: (a) furnish continuously
an investment program for each of the Funds 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 each Fund's operations except those which are delegated to a custodian,
transfer agent or other agent.
The Funds bear all costs of their 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 plans 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 Funds (including an allowable portion of the cost of the
Adviser's employees rendering such services to the Funds); 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 Agreements, the Adviser
receives from each Fund a fee computed and paid monthly based upon the following
annual rates: (a) for Global Fund, 0.90% on the first $100 million of average
daily net assets of the Fund, 0.80% on the next $200 million of average daily
net assets, 0.75% on the next $200 million of average daily net assets and
0.625% of average daily net assets in excess of $500 million; and (b) for World
Bond Fund, 0.75% on the first $250 million of average daily net assets, and
0.70% of average daily net assets in excess of $250 million.
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 Funds may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made insofar as feasible, for
the respective funds or clients in a manner deemed equitable to all of them. To
28
<PAGE>
the extent that transactions on behalf of more than one client of the Adviser or
its affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreement, the Adviser is not liable to the Funds or
its shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of its obligations and duties under
the Advisory Agreement.
Under the Advisory Agreement, the Funds may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Funds (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and the Distribution Agreement
(discussed below) was approved by all Trustees. Each Advisory Agreement and the
Distribution Agreement, will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both agreements may be terminated on 60 days
written notice by any party or by vote of a majority to the outstanding voting
securities of the Fund and will terminate automatically if assigned.
The Global Fund and the Adviser have entered into a sub-investment management
contract with JH Advisers International under which JH Advisers International,
subject to the review of the Trustees and the overall supervision of the
Adviser, is responsible for providing the Fund with advice with respect to that
portion of the assets invested in countries other than the United States and
Canada. JH Advisers International, with offices located at 34 Dover Street,
London, England W1X 3RA, is a wholly-owned subsidiary of the Adviser formed in
1987 to provide international investment research and advisory services to U.S.
institutional clients. As compensation for its services under the Sub-Advisory
Agreement, JH Advisers International receives from the Adviser a monthly fee
equal to 0.70% on an annual basis of the average daily net asset value of the
Global Fund for each calendar month up to $200 million of average daily net
assets; and 0.6375% on an annual basis of the average daily net asset value over
$200 million. Global Fund is not responsible for paying JH Advisers
International's fee.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Trust paid the
Adviser, on behalf of Global Fund, a fee of $1,169,884, $1,175,079 and
$1,251,029, respectively.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Trust paid the
Adviser, on behalf of World Bond Fund, a fee of $840,527, $645,661 and $462,654,
respectively.
Accounting and Legal Services Agreement. The Trust, on behalf of the Funds, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
29
<PAGE>
to this agreement, the Adviser provides the Funds with certain tax, accounting
and legal services. For the fiscal year ended October 31, 1997, the Global Fund
and World Bond Fund paid the Adviser $24,127 and $11,364, respectively.
In order to avoid conflicts with portfolio trades for the Funds, the Adviser, JH
Advisers International and each Fund have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates. In
the case of the Adviser, 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. JH Advisers International's restrictions may differ where
appropriate, as long as they maintain the same intent. These restrictions are a
continuation of the basic principle that the interests of the Funds and their
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 on behalf 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. In the case of Class B shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
For the fiscal years ended October 31, 1995, 1996 and 1997, the following
amounts reflect (a) the total underwriting commissions for sales of the Funds'
Class A shares and (b) the portion of such amount retained by John Hancock
Funds. The remainder of the underwriting commissions were reallowed to dealers.
Global Fund World Bond Fund
11/1/94-10/31/95 (a)$ 132,895 (b) $19,426 (a)$ 23,002 (b) $1,220
11/1/95-10/31/96 (a) $139,302 (b) $21,673 (a) $16,669 (b) $1,709
11/1/96-10/31/97 (a) $114,878 (b) $18,135 (a) $ 8,851 (b) $ 810
The Funds' 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, each Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% and 1.00%, respectively, of the Funds'
average daily net assets attributable to shares of that class. However, the
service fee will not exceed 0.25% of the applicable Fund's average daily net
assets attributable to each class of shares. The distribution fees will be used
to reimburse the John Hancock Funds for their distribution expenses, including
but not limited to: (i) initial and ongoing sales compensation to Selling
Brokers and others (including affiliates of John Hancock Funds) engaged in the
sale of each Fund's shares; (ii) marketing, promotional and overhead expenses
incurred in connection with the distribution of each Fund's 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
30
<PAGE>
Brokers and others for providing personal and account maintenance services to
shareholders. In the event that the John Hancock Funds are not fully reimbursed
for payments or expenses they incur under the Class A Plan, these expenses will
not be carried beyond twelve months from the date they were incurred.
Unreimbursed expenses under the Class B Plan will be carried forward together
with interest on the balance of these unreimbursed expenses. The Funds do not
treat unreimbursed expenses relating to Class B Plan as a liability of the
Funds, because the Trustees may terminate the Class B Plan at any time. For the
fiscal year ended October 31, 1997, an aggregate of $795,893 and $5,324,432 of
distribution expenses or 2.56% and 15.75%, respectively, of the average net
assets of the Class B shares of each of Global Fund and World Bond Fund were not
reimbursed or recovered by the 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 each Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the applicable 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, the John Hancock Funds provide the
Funds with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
Each of the Plans provides that it will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. Each of the Plans may be terminated without penalty,
(a) by vote of a majority of the Independent Trustees, (b) by a vote of a
majority of the applicable Fund's outstanding shares of the applicable class
upon 60 days' written notice to the John Hancock Funds and (c) automatically in
the event of assignment. Each of the Plans further provides that it may not be
amended to increase the maximum amount of the fees for the services described
therein without the approval of a majority of the outstanding shares of the
class of the applicable Fund which has voting rights with respect to the Plan.
Each of the Plans provides that no material amendment to the Plan will be
effective unless it is approved by a majority vote of the Trustees and the
Independent Trustees of the applicable 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 shares of each Fund.
Amounts paid to John Hancock Funds by any class of shares of the Funds will not
be used to pay the expenses incurred with respect to any other class of shares
of the Funds; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the
During the fiscal year ended October 31, 1997, the Funds paid the John Hancock
Funds the following amounts of expenses in connection with their services for
each of the Funds:
31
<PAGE>
<TABLE>
<CAPTION>
Expense Items
Printing and Interest,
Mailing of Expenses of Compen-sation Carrying or
Prospectuses John to Other
to New Hancock Selling Finance
Advertising Shareholder Funds Brokers Charges
----------- ----------- ----- ------- -------
<S> <C> <C> <C> <C>
Global Fund
Class A Shares $26,705 $2,846 $221,945 $ 49,398 $ --
Class B Shares $27,107 $3,076 $129,037 $ 52,365 $94,634
World Bond Fund
Class A Shares $6,752 $1,535 $65,360 $ 9,977 $ --
Class B Shares $7,064 $2,733 $69,114 $ 11,789 $247,425
</TABLE>
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a 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 categories for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. 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 their value. Any assets or liabilities expressed in terms of foreign
currencies are translated into U.S. dollars by the custodian bank based on
London currency exchange quotations as of 5:00 p.m., London time ( 12:00 noon,
New York time) on the date of any determination of a Fund's NAV.
32
<PAGE>
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, a Fund's portfolio securities may trade and the NAV of the Fund's
redeemable securities may be significantly affected on days when a shareholder
has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Funds 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 of each Fund reserve the right
to change or waive each 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 respective Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Funds are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A shares of the Funds, owned by the investor, or if
John Hancock Signature Services, Inc. ("Signature Services") is notified by the
investor's dealer or the investor at the time of the purchase, the cost of the
Class A shares owned.
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:
oA 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,
grandparents, mother-in-law, father-in-law, daughter-in-law,
son-in-law, niece, nephew, grandparents and domestic partner) of any of
the foregoing; or any fund, pension, profit sharing or other benefit
plan for the individuals described above.
oA broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement with John
Hancock Funds providing specifically for the use of a Fund's shares in
fee-based investment products or services made available to their
clients.
oA 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 a
Fund.
oA member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
33
<PAGE>
oRetirement 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.
oRetirement plans investing through the PruArray Program sponsored by
Prudential Securities.
oExisting full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed retirement plans with at least 100 eligible employees at the
inception of the subject Fund's account. Each of these investors 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 may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
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 being invested but also
the investor's 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. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
34
<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 Funds offer 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 a Fund as a funding medium for a
retirement plan, however, may opt to make the necessary investments called for
by the LOI over a forty-eight (48) month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and
Section 457 plans. Non-qualified and retirement plans investments cannot be
combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) must
aggregate $100,000 or more with respect to World Bond Fund and $50,000 or more
with respect to Global Fund, in each case 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 escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay the sales charge as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Funds 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 Funds 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 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 retirement 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
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<PAGE>
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.
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:
oProceeds of 50 shares redeemed at $12 per share (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
oMinus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) (120.00)
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Funds in connection with the sale of the
Class B 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 Funds 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 the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Funds' right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
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<PAGE>
* Redemptions due to death or disability. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemption of Class B shares where the proceeds are used to purchase a
John Hancock Declaration Variable Annuity.
* Redemptions of Class B shares made under a periodic withdrawal plan,
or redemptions for fees charged by planners or advisors for advisory
services, as long as your annual redemptions do not exceed 12% of
your account value, including reinvested dividends, at the time you
established your periodic withdrawal plan and 12% of the value of
subsequent investments (less redemptions) in that account at the time
you notify Signature Services. (Please note, this waiver does not
apply to periodic withdrawal plan redemptions of Class A shares that
are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch
financial consultant for further information.
* Redemptions of Class A shares by retirement plans that invested
through the PruArray Program sponsored by Prudential Securities.
For retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory 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 plans that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
37
<PAGE>
CDSC Waiver Matrix for Class B
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
perodic
payments
- -------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72t) or 12% (72t) or 12% (72t) or (72t) or annually in
of account of account 12% of 12% of periodic
value value account account payments
annually in annually in value value
periodic periodic annually in annually in
payments payments periodic periodic
payments payments
- -------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------
Return of 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.
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<PAGE>
SPECIAL REDEMPTIONS
Although they would not normally do so, the Funds have the right to pay the
redemption price of shares of the Funds in whole or in part in portfolio
securities as prescribed by the Trustees. If 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 Funds
have, however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, the Funds must redeem their 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 applicable 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.
Each 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.
Each Fund may refuse any exchange order. Each 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. Each Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of shares of the applicable Fund which may result in realization of
gain or loss for purposes of Federal, state and local income taxes. The
maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional Class A or Class B shares could be disadvantageous to a shareholder
because of the initial sales charge payable on such purchases of Class A shares
39
<PAGE>
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
Funds reserve the right to modify or discontinue the Systematic Withdrawal Plan
of any shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained in
the Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the processing date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the same Fund or
another John Hancock fund, subject to the minimum investment limit in that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the same 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 each Fund, each Fund may cancel
the reinvestment privilege of any parties that, in the opinion of each Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, each Fund may refuse any reinvestment
request.
Each Fund may change or cancel its reinvestment policies at any time.
A redemption on 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."
40
<PAGE>
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 FUNDS' SHARES
Each series of the Trust, including the Fund, is treated as a separate entity
for tax purposes. The Trustees of the Trust are responsible for the management
and supervision of the Funds. 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 the issuance
of two classes of shares of the Funds, designated as Class A and Class B.
The shares of each class of a Fund represent an equal proportionate interest in
the aggregate net assets attributable to the classes 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 a 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 will be in the same amount,
except for differences resulting from the facts that (i) the distribution and
service fees relating to the 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
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 applicable Fund available for distribution to
such 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, each Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares, and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with a request for a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
41
<PAGE>
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 each Fund. The
Declaration of Trust also provides for indemnification out of the Funds' 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 the Funds' prospectus shall be liable
for the liabilities of any other John Hancock fund. Liability is therefore
limited to circumstances in which a Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
The Funds reserve the right to reject any application which conflicts with the
Funds' internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. Use of
information provided on the account application may be used by the Funds 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 to
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 Fund is treated as a separate entity for accounting and tax purposes. Each
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 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, each 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.
Each 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. Each Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from each 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 a Fund's "investment company taxable income,"
they will be taxable as ordinary income; and if they are paid from the Fund's
"net capital gain," they will be taxable as capital gain. (Net capital gain is
the excess (if any) of net long-term capital gain over net short-term capital
loss, and investment company taxable income is all taxable income and capital
gains, other than those gains and losses included in computing net capital gain,
after reduction by deductible expenses.) As a result of federal tax legislation
enacted on August 5, 1997 (the "Act"), gain recognized after May 6, 1997 from
the sale of a capital asset is taxable to individual (noncorporate) investors at
different maximum federal income tax rates, depending generally upon the tax
holding period for the asset, the federal income tax bracket of the taxpayer,
and the dates the asset was acquired and/ or sold. The Treasury Department has
42
<PAGE>
issued guidance under the Act that enables the Fund to pass through to its
shareholders the benefits of the capital gains rates enacted in the Act.
Shareholders should consult their own tax advisers on the correct application of
these new rules in their particular circumstances. Some distributions may be
paid in January but may be taxable to shareholders as if they had been received
on December 31 of the previous year. The tax treatment described above will
apply without regard to whether distributions are received in cash or reinvested
in additional shares of a 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 a Fund invests in stock (including an option to acquire stock such as is
inherent in a convertible bond) of certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), that Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from these
passive foreign investment 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. An election may be
available to ameliorate these adverse tax consequences, but could require the
applicable Fund to recognize taxable income or gain without the concurrent
receipt of cash. These investments could also result in the treatment of
associated capital gains as ordinary income. Each Fund may limit and/or manage
its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
Foreign exchange gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt securities, certain
foreign currency futures and options, foreign currency forward contracts,
foreign currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains and
losses to be treated as ordinary income and losses and may affect the amount,
timing and character of distributions to shareholders. Transactions in foreign
currencies that are not directly related to a Fund's investment in stock or
securities, including speculative currency positions could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed a Fund's investment company taxable income computed without
regard to such loss the resulting overall ordinary loss for such year would not
be deductible by the Fund or its shareholders in future years.
The Funds may be subject to withholding and other taxes imposed by foreign
countries with respect to their investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits or deductions
with respect to foreign income taxes or certain other foreign taxes ("qualified
foreign taxes"), paid by the Fund, subject to certain provisions and limitations
contained in the Code, if the Fund so elects. If more than 50% of the value of a
43
<PAGE>
Fund's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include in ordinary gross income (in addition to taxable
dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received by
them, and (ii) treat such respective pro rata portions as foreign taxes paid by
them.
If a Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit for such foreign
taxes may be required to treat a portion of dividends received from the Fund as
a separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year (if any) that a Fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified foreign taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income from each foreign country. A Fund that
cannot or does not make this election may deduct such taxes in determining the
amount it has available for distribution to shareholders, and shareholders would
not, in this event, include these foreign taxes in their income, nor would they
be entitled to any tax deductions or credits with respect to such taxes.
For each Fund, the amount of net realized capital gains, if any, in any given
year will vary depending upon the Adviser's current investment strategy and
whether the Adviser believes it to be in the best interest of the Fund to
dispose of portfolio securities or enter into option, futures or forward
transactions that will generate capital gains. At the time of an investor's
purchase of Fund shares, a portion of the purchase price is often attributable
to realized or unrealized appreciation in the Fund's portfolio or undistributed
taxable income of the Fund. Consequently, subsequent distributions on those
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 such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of a Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
Class A shares of a Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares within 90
days after their purchase to the extent shares of the Fund or another John
Hancock Fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. This disregarded charge will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired. Also, any loss realized on a redemption or exchange may be disallowed
to the extent the shares disposed of are replaced with other shares of the same
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 the automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares. Shareholders should consult their own
44
<PAGE>
tax advisers regarding their particular circumstances to determine whether a
disposition of Fund shares is properly treated as a sale for tax purposes, as is
assumed in the foregoing discussion. Also, future Treasury Department guidance
issued to implement the Act may contain additional rules for determining the tax
treatment of sales of Fund shares held for various periods, including the
treatment of losses on the sales of shares held for six months or less that are
recharacterized as long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, each Fund reserves the right to retain and reinvest all or
any portion of the excess of net long-term capital gain over net short-term
capital loss in any year. The Funds will not in any event distribute net capital
gain realized in any year to the extend 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 a Fund. Upon proper designation of
this amount by the Fund, each shareholder would be treated for Federal income
tax purposes as if such Fund had distributed to him on the last day of its
taxable year his pro rata share of such excess, and he had paid his pro rata
share of the taxes paid by the Fund and reinvested the remainder in the Fund.
Accordingly, each shareholder would (a) include his pro rata share of such
excess as capital gain in his return for his taxable year in which the last day
of the Fund's taxable year falls, (b) be entitled either to a tax credit on his
return for, or 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, each Fund is permitted to carry forward a net
capital loss in any year to offset its own 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 applicable Fund, and as noted above, would not be distributed
as such to shareholders. The capital loss carryforwards for each of the Funds
are as follows: (i) Global Fund has no capital loss carryforwards; and (ii)
World Bond Fund has $1,621,817 of which $938,808 will expire October 31, 2002
and $683,009 will expires October 31, 2005.
A 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 or constructive sale rules applicable to certain options, futures,
forwards or other transactions may also require the Fund to recognize income or
gain without a concurrent receipt of cash. Additionally, some countries restrict
repatriation which may make it difficult or impossible for the Fund to obtain
cash corresponding to its earnings or assets in those countries. However, each
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 Funds may have to dispose of portfolio securities
under disadvantageous circumstances to generate cash, or may have to leverage 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) a Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Funds will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although either Fund may in its sole discretion provide relevant
information to shareholders.
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<PAGE>
Each Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Funds 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.
For purposes of the dividends received deduction available to corporations,
dividends received by a Fund, if any, from U.S. domestic corporations in respect
of any share of stock 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) during a
prescribed period extending before and after each such dividend and distributed
and properly designated by the Fund may be treated as qualifying dividends.
Corporate shareholders must meet the holding period requirements stated above
with respect to their shares of the applicable Fund for each dividend 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 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 and to the extent such basis
would be reduced below zero, that current recognition of income would be
required.
Investment in debt obligations that are at risk of or in default presents
special tax issues for World Bond Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount, when and to what extent deductions may be taken
for bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and income, and whether exchanges
of debt obligations in a workout context are taxable. These and other issues
will be addressed by World Bond Fund in order to reduce the risk of distributing
insufficient income to preserve its status as a regulated investment company and
seek to avoid becoming subject to Federal income or excise tax.
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 Funds
may restrict each Fund's ability to enter into options, futures, foreign
currency positions, and foreign currency forward contracts.
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<PAGE>
Certain options, futures and forward foreign currency contracts undertaken by a
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 foreign currency contracts, as
ordinary income or loss) and timing of some capital gains and losses realized by
the Fund. Additionally, the Fund may be required to recognize gain, but not
loss, if an option or other transaction is treated as a constructive sale of an
appreciated financial position in the Fund's portfolio. Also, certain of a
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 gains. Certain of these transactions may also cause a 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. The Funds will take into account the special tax rules (including
consideration of available elections) applicable to options, futures or forward
contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from a 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 a Fund.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that a 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
Total Return. Average annual total return is determined separately for each
class of shares.
Set forth below are tables showing the performance on a total return basis
(i.e., with all dividends and distributions reinvested) of a hypothetical $1,000
investment in the Class A and Class B shares of the Funds. The performance
information for each Fund is stated for the one year and five year periods ended
October 31, 1997 and, with respect to Class A shares of each Fund for the period
from the commencement of operations (indicated by an asterisk). With respect to
Class B shares of each Fund, performance information is also stated for the ten
year period ended October 31, 1997.
47
<PAGE>
Global Fund
Class A Class A Class B Class B Class B
Shares Shares Class A Shares Shares Shares
One Year Five Years Shares One Years Five Years Ten Years
Ended Ended 1/3/92* to Ended Ended Ended
10/31/97 10/31/97 10/31/97 10/31/97 10/31/97 10/31/97
- -------- ------- -------- -------- -------- --------
3.89% 10.86% 7.95% 3.73% 11.06% 8.85%
World Bond Fund
Class A Class A Class B Class B
Shares Shares Class A Shares Shares Class B
One Year Five Years Shares One Years Five Years Shares
Ended Ended 1/3/92* to Ended Ended 12/17/86* to
10/31/97 10/31/97 10/31/97 10/31/97 10/31/97 10/31/97
- -------- ------- -------- -------- -------- --------
(1.49)% 4.29% 3.54% (2.43)% 4.32% 7.15%
* Commencement of operations.
Total return is computed by finding the average annual compounded rates of
return over the designated periods that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
n ________
T = \ / ERV / P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV= ending redeemable value of a hypothetical
$1,000 investment made at the beginning of
the 1 year, 5 years, and life-of-fund
periods.
The result of the foregoing calculation is an average and is not the same as the
actual year-to-year results.
Because each Fund's class has its own sales charge and fee structure, each
Fund's class have different performance results. This calculation assumes that
the maximum sales charge for Class A shares of 5% for Global Fund and 4.50% for
World Bond Fund is included in the initial investment or, for Class B shares,
the applicable CDSC is applied at the end of the period. This calculation also
assumes that all dividends and distributions are reinvested at net asset value
on the reinvestment dates during the period. The "distribution rate" is
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<PAGE>
determined by annualizing the result of dividing the declared dividends of a
Fund during the period stated by the maximum offering price and net asset value
at the end of the period. Excluding a Fund's sales charge from the distribution
rate produces a higher rate.
In addition to average annual total returns, the Funds 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 Funds' sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding the Funds' sales charge on
Class A shares and the CDSC on Class B shares from a total return calculation
produces a higher total return figure.
World Bond Fund
Yield. Yield is determined separately for Class A and Class B shares. The yields
for the Class A and Class B shares of the World Bond Fund for the thirty days
ended October 31, 1997 were 5.27% and 4.81%, respectively.
Yield is computed by dividing the net investment income per share earned during
a specified 30 day period by the maximum offering price per share on the last
day of such period, according to the following formula:
a - b
___ 6
Yield = 2 ( [ ( cd ) + 1 ] - 1 )
Where:
a= dividends and interest earned during the period.
b= net expenses accrued for the period.
c= the average daily number of share outstanding during the
period that were entitled to receive dividends.
d= the maximum offering price per share on the last day of the period.
While the foregoing formula reflects the standard accounting method for
calculating yield, it does not reflect the Fund's actual bookkeeping; as a
result, the income reported or paid by the Fund may be different.
To calculate interest earned (for the purpose of "a" above) on debt obligations,
World Bond Fund computes the yield to maturity of each obligation held by the
Fund based on the market value of the obligation (including actual accrued
interest) at the close of last business day of the period, or, with respect to
obligations purchased during the period, the purchase price (plus actual accrued
interest). The yield to maturity is then divided by 360 and the quotient is
multiplied by the market value of the obligation (including actual accrued
interest) to determine the interest income on the obligation for each day of the
subsequent period that the obligation is in the portfolio.
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To calculate interest earned (for the purpose of "a" above) on foreign debt
obligations, the Fund computes the yield to maturity of each obligation based on
the local foreign currency market value of the obligation (including actual
accrued interest) at the beginning of the period, or, with respect to
obligations purchased during the period, the purchase price plus accrued
interest. The yield to maturity is then divided by 360 and the quotient is
multiplied by the current market value of the obligation (including actual
accrued interest in local currency denomination), then converted to U.S. dollars
using exchange rates from the close of the last business day of the period to
determine the interest income on the obligation for each day of the subsequent
period that the obligation is in the portfolio. Applicable foreign withholding
taxes, net of reclaim, are included in the "b" expense component.
Solely for the purpose of computing yield, the Fund recognizes dividend income
by accruing 1/360 of the stated dividend rate of a security each day that a
security is in the portfolio.
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price.
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be declared as a dividend shortly thereafter.
All accrued expenses are taken to account as described later herein.
From time to time, in reports and promotional literature, the Funds' 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 Russell and Wilshire indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MORNINGSTAR, STANGER'S and BARRON'S, etc. may also be utilized. The
Funds' promotional and sales literature may make reference to the Funds' "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 Funds is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Funds for
any period in the future. The performance of any 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 Funds' performances.
BROKERAGE ALLOCATION
Each Advisory Agreement authorizes the Adviser (subject to the control of the
Board of Trustees) to select brokers and dealers to execute purchases and sales
of portfolio securities. It directs the Adviser to use its best efforts to
obtain the best overall terms for the Funds, taking into account such factors as
price (including dealer spread), the size, type and difficulty of the
transaction involved, and the financial condition and execution capability of
the broker or dealer.
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The Sub-Advisory Agreement between the Adviser and JH Advisers International
authorizes JH Advisers International (subject to the control of the Trustees of
the Trust) to provide the Global Fund with a continuing and suitable investment
program with respect to investments by the Fund in countries other than the
United States and Canada.
To the extent that the execution and price offered by more than one dealer are
comparable, the Adviser or JH Advisers International, as the case may be, may,
in their discretion, decide to effect transactions in portfolio securities with
dealers on the basis of the dealer's sales of shares of the Funds or with
dealers who provide the Funds, the Adviser or JH Advisers International with
services such as research and the provision of statistical or pricing
information. In addition, the Funds may pay brokerage commissions to brokers or
dealers in excess of those otherwise available upon a determination that the
commission is reasonable in relation to the value of the brokerage services
provided, viewed in terms of either a specific transaction or overall brokerage
services provided with respect to the Funds' portfolio transactions by such
broker or dealer. Any such research services would be available for use on all
investment advisory accounts of the Adviser or JH Advisers International. The
Funds may from time to time allocate brokerage on the basis of sales of their
shares. Review of compliance with these policies, including evaluation of the
overall reasonableness of brokerage commissions paid, is made by the Trustees.
The Adviser places all orders for purchases and sales of portfolio securities of
the Funds. In selecting broker-dealers, the Adviser may consider research and
brokerage services furnished to them. The Adviser may use this research
information in managing the Funds' assets, as well as assets of other clients.
Municipal securities, foreign debt securities and Government Securities are
generally traded on the over-the-counter market on a "net" basis without a
stated commission, through dealers acting for their own account and not as
brokers. The World Bond Fund (with respect to Government Securities in its
portfolio) will primarily engage in transactions with these dealers or deal
directly with the issuer. Prices paid to the dealer will generally include a
"spread", which is the difference between the prices at which the dealer is
willing to purchase and sell the specific security at that time.
During the fiscal years ended October 31, 1995, 1996 and 1997, the Trust paid,
$525,839, $706,944 and $38,297 in negotiated brokerage commissions on behalf of
the Global Fund. During the fiscal years ended October 31, 1995, 1996 and 1997,
the Trust paid $24,400, $0 and $0 in brokerage commissions on behalf of the
World Bond Fund.
When a Fund engages in an option transaction, ordinarily the same broker will be
used for the purchase or sale of the option and any transactions in the
securities to which the option relates. The writing of calls and the purchase of
puts and calls by a Fund will be subject to limitations established (and changed
from time to time) by each of the Exchanges governing the maximum number of puts
and calls covering the same underlying security 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, held or written in one or more accounts or through one or
more brokers. Thus, the number of options which a Fund may write or purchase may
be affected by options written or purchased by other investment companies and
other investment advisory clients of the Adviser and its affiliates or JH
Advisers International. An Exchange may order the liquidation of positions found
to be in violation of these limits, and it may impose certain other sanctions.
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In the U.S. Government securities market, securities are generally traded on a
"net" basis with dealers acting as principal for their own account without a
stated commission, although the price of the security usually includes a profit
to the dealer. On occasion, certain money market instruments and agency
securities may be purchased directly from the issuer, in which case no
commissions or premiums are paid.
Municipal securities are generally traded on the over-the-counter market on a
"net" basis without a stated commission, through dealers acting for their own
account and not as brokers. Prices paid to a municipal securities dealer will
generally include a "spread", which is the difference between the prices at
which the dealer is willing to purchase and sell the specific security at that
time.
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"). The Trustees have established that any portfolio
transaction for the Funds may be executed through Affiliated Brokers if, in the
judgment of the Adviser or JH Advisers International, as the case may be, the
use of Affiliated Brokers is likely to result in price and execution at least as
favorable as those of other qualified brokers, and if, in the transaction,
Affiliated Brokers charges the Funds a commission rate consistent with those
charged by Affiliated Brokers to comparable unaffiliated customers in similar
transactions. Affiliated Brokers will not participate in commissions in
brokerage given by a Fund to other brokers or dealers and neither will receive
any reciprocal brokerage business resulting therefrom. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.
Affiliated Brokers will not receive any brokerage commissions for orders they
execute for a Fund in the over-the-counter market. A Fund will in no event
effect principal transactions with Affiliated Brokers in the over-the-counter
securities in which Affiliated Brokers makes a market.
During the fiscal periods ended October 31, 1995, 1996 and 1997 no brokerage
commissions were paid to Affiliated Brokers in connection with the portfolio
transactions of either the Global Fund or the World Bond Fund.
Other investment advisory clients advised by the Adviser or JH Advisers
International, as the case may be, may also invest in the same securities as a
Fund. When these clients buy or sell the same securities at substantially the
same time, the Adviser or JH Advisers International may average the transactions
as to price and allocate the amount of available investments in a manner which
the Adviser or JH Advisers International believes to be equitable to each
client, including the Funds. In some instances, this investment procedure may
adversely affect the price paid or received by a Fund or the size of the
position obtainable for it. On the other hand, to the extent permitted by law,
the Adviser or JH Advisers International may aggregate the securities to be sold
or purchased for a Fund with those to be sold or purchased for other clients
managed by it in order to obtain best execution.
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. During the fiscal year ended October 31,
1997, Global Fund paid $ 532,415 and World Bond Fund paid $0.
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TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Funds. Global Fund pays Signature
Services an annual fee of $19.00 for each Class A shareholder and of $21.50 for
each Class B shareholder. The World Bond Fund pays Signature Services an annual
fee of $20.00 for each Class A shareholder and $22.50 for each Class B
shareholder. Each Fund also pays certain out-of-pocket expenses and these
expenses are aggregated and charged to each Fund and allocated to each class on
the basis of their relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Funds are held pursuant to a custodian agreement
between the Trust and State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. Under the custodian agreement, State Street Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Funds are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts, 02110. Price Waterhouse LLP audits and renders an
opinion on each Fund's annual financial statements and reviews each Fund's
annual Federal income tax return.
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APPENDIX A
DESCRIPTION OF BOND RATINGS*
Moody's Bond Ratings
Bonds. "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 likely to impair
the fundamentally strong position of such issues.
"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 grater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in 'Aaa'
securities
.
"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.
"Bonds which are rated 'Baa' are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
"Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Bonds which are rated `Caa' are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
"Bonds which are rated `Ca' represented obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue. Should
no rating be assigned, the reason may be one of the following: (i) an
application for rating was not received or accepted; (ii) the issue or issuer
belongs to a group of securities that are not rated as a matter of policy; (iii)
A-2
<PAGE>
there is a lack of essential data pertaining to the issue or issuer; or (iv) the
issue was privately placed, in which case the rating is not published in Moody's
publications.
- ------------
*As described by the rating companies themselves.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Standard & Poor's Bond Ratings
"AAA. Debt rated 'AAA' has the highest rating 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 higher 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 adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Debt rated "BB," or "B," is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and pay 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 may be 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.
Unrated. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
A-3
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COMMERCIAL PAPER RATINGS
Moody's Commercial Paper Ratings
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for repayment
of short-term promissory obligations. Earnings trends and coverage ratios, while
sound, will be more subjective to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained."
Standard & Poor's Commercial Paper Ratings
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
A-4
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FINANCIAL STATEMENTS
F-1
<PAGE>
JOHN HANCOCK INTERNATIONAL FUND
Class A, Class B and Class C Shares
Statement of Additional Information
June 1, 1998
This Statement of Additional Information provides information about John Hancock
International Fund (the "Fund") in addition to the information that is contained
in the combined International/Global Funds' Prospectus dated June 1, 1998 (the
"Prospectus"). The Fund is a diversified series of John Hancock Investment Trust
III (the "Trust"), formerly Freedom Investment Trust II.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which may 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...........................................13
Those Responsible for Management..................................15
Investment Advisory and Other Services............................24
Distribution Contracts............................................26
Net Asset Value...................................................28
Initial Sales Charge on Class A Shares............................29
Deferred Sales Charge on Class B and Class C Shares...............31
Special Redemptions...............................................34
Additional Services and Programs..................................35
Descriptions of the Fund's Shares.................................36
Tax Status........................................................38
Calculation of Performance........................................42
Brokerage Allocation..............................................44
Transfer Agent Services...........................................45
Custody of Portfolio..............................................46
Independent Auditors..............................................46
Appendix A - 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 under the laws of The Commonwealth
of Massachusetts. The Fund commenced operations on January 3, 1994.
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. There is no assurance that
the Fund will achieve its investment objective.
The Fund's investment objective is long-term growth of capital. The Fund seeks
to achieve its investment objective by investing primarily in foreign equity
securities. The Fund's investments will be subject to the market fluctuations
and risks inherent in all securities.
Under normal circumstances, at least 65% of the Fund's total assets will be
invested in equity securities of issuers located in various countries around the
world. Generally, the Fund's portfolio will contain securities of issuers from
at least three countries other than the United States. The Fund normally will
invest substantially all of its assets in equity securities, such as common
stock, preferred stock, and securities convertible into common and preferred
stock. However, if deemed advisable by the Adviser, the Fund may invest in any
other type of security including warrants, bonds, notes and other debt
securities (including Eurodollar securities) or obligations of domestic or
foreign governments and their political subdivisions, or domestic or foreign
corporations.
The Fund will maintain a flexible investment policy and will invest in a
diversified portfolio of securities of companies and government located
throughout the world. In making the allocation of assets among various countries
and geographic regions, the Adviser and John Hancock Advisers International
Limited the ("Sub-Adviser") ordinarily consider such factors as prospects for
relative economic growth between foreign countries; expected levels of inflation
and interest rates; government policies influencing business conditions; and
other pertinent financial, tax, social, political, currency and national factors
- - all in relation to the prevailing prices of the securities in each country or
region.
In choosing investments for the Fund, the Adviser generally looks for companies
whose earnings show a strong growth trend or companies whose current market
value per share is undervalued. The Fund will not restrict its investments to
any particular size company and, consequently, the portfolio may include the
securities of small and relatively less well-known companies. The securities of
small and medium-sized companies may be subject to more volatile market
movements than the securities of larger, more established companies or the stock
market averages in general.
It is the intention of the Fund generally to invest in debt securities or
convertible securities only for temporary defensive purposes. Accordingly, when
the Adviser believes unfavorable investment conditions exist requiring the Fund
to assume a temporary defensive investment posture, the Fund may hold cash or
invest all or a portion of its assets in short-term domestic as well as foreign
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instruments, including: short-term U.S. Government securities and repurchase
agreements in connection with such instruments; bank certificates of deposit,
bankers' acceptances, time deposits and letters of credit; and commercial paper
(including so called Section 4(2) paper rated at least A-1 or A-2 by Standard &
Poor's Ratings Group ("S&P") or P-1 or P-2 by Moody's Investors Service, Inc.
("Moody's") or if unrated considered by the Adviser to be of comparable value.
The Fund's temporary defensive investments may also include: debt obligations of
U.S. companies, rated at least BBB or Baa by S&P or Moody's, respectively, or,
if unrated, of comparable quality in the opinion of the Adviser; commercial
paper and corporate debt obligations not satisfying the above credit standards
if they are (a) subject to demand features or puts or (b) guaranteed as to
principal and interest by a domestic or foreign bank having total assets in
excess of $1 billion, by a corporation whose commercial paper may be purchased
by the Fund, or by a foreign government having an existing debt security rated
at least BBB or Baa by S&P or Moody's, respectively; and other short-term
investments which the Trustees of the Fund determine present minimal credit
risks and which are of "high quality" as determined by any major rating service
or, in the case of an instrument that is not rated, of comparable quality as
determined by the Adviser.
Government Securities. Certain U.S. Government securities, including U.S.
Treasury bills, notes and bonds, and GNMA 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 by the
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.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Ratings as Investment Criteria. In general the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized, however, that these 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
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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.
Investments in Foreign Securities. The Fund may invest 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. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. 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 by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and EDRs, in
bearer form, are designed for use in European securities markets. Issuers of the
shares underlying unsponsored ADRs are not contractually obligated to disclose
material information in the United States and, therefore, there may not be a
correlation between that information and the market value of the unsponsored
ADR.
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 a 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 equal to the amount of the Fund's commitment with respect to
such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency transactions varies with
such factors as the currency involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency are
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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.
These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
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inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. The Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate.
The Fund's ability and decisions to purchase or sell portfolio securities may be
affected by laws or regulations relating to the convertibility and repatriation
of assets. Because the shares of the Fund are redeemable on a daily basis in
U.S. dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars. Under present conditions,
it is not believed that these considerations will have any significant effect on
its portfolio strategy.
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 it enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period while the Fund seeks to
enforce its rights thereto, possible subnormal levels of income, decline in
value of the underlying securities or lack of access to income during this
period as well as the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse 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. In
addition, the Fund will not borrow money or enter into reverse repurchase
agreements 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 enter into reverse
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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 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 ("Securities 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 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
Advisers the daily function of determining and monitoring the liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
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.
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.
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The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. The Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by
the Fund for the purpose of affirmatively benefiting from a decline in the price
of securities or currencies which it does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities or currency decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by 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
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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, the Fund may purchase and
sell interest rate 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 fixed income securities
(such as U.S. Government securities) and fixed income securities 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 for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire. When
interest rates are rising or securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Fund's fixed income
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 fixed income securities.
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If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's fixed income securities and futures
contracts based on other fixed income securities or indices, the Fund may also
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of fixed income 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 interest rate futures contracts or
by attempting to achieve only a partial hedge against price changes affecting
the Fund's fixed income 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 fixed income 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 fixed income
securities, to alter the investment characteristics of fixed income securities
or to gain or increase its exposure to a particular fixed income securities
market.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it 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
10
<PAGE>
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 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 fixed income securities, except certain U.S. Government securities.
The only futures contracts available to hedge the Fund's fixed income securities
are various futures on U.S. Government securities and securities indices. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
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 331/3% 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
11
<PAGE>
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
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 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, 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 liquid 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 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 in order for the Fund to
qualify as a regulated investment company under the Code (see "Taxation").
The Fund does not intend to enter into short sales (other than those "against
the box") if immediately after such sale the aggregate of the value of all
collateral plus the amount in such segregated account exceeds 5% of the value of
the Fund's assets. A short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain at no added cost securities
identical to those sold short.
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
12
<PAGE>
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 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 the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means the 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 outstanding shares.
The Fund observes the following fundamental restrictions:
The Fund may not:
(1) Issue senior securities, except as permitted by paragraph (2)
below. For purposes of this restriction, the issuance of
shares of beneficial interest in multiple classes or series,
the purchase or sale of options, futures contracts and options
on future contracts, forward commitments, forward foreign
exchange contracts and repurchase agreements entered into in
accordance with the Fund's investment policy 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 Fund's total assets (including the amount
borrowed) taken at market value.
13
<PAGE>
(3) 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.
(4) Purchase or sell real estate or any interest therein, except
that the Fund may invest in securities of corporate or
governmental entities secured by real estate or marketable
interests therein or issued by companies that invest in real
estate or interests therein.
(5) Make loans, except that the Fund may purchase or hold debt
instruments in accordance with the Fund's investment policies
and may make loans of portfolio securities provided that as a
result no more than 33 1/3% of the Fund's total assets taken
at current value would be so loaned. The Fund does not, for
this purpose, consider the purchase of repurchase agreements,
bank certificates of deposit, bank loan participation
agreements, bankers' acceptances, a portion of an issue of
publicly distributed bonds, 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.
(6) Invest in commodities or commodity contracts or in puts,
calls, or combinations of both, except interest rate futures
contracts, options on securities, securities indices, currency
and other financial instruments and options on such futures
contracts, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and
repurchase agreements entered into in accordance with the
Fund's investment policies.
(7) 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.
In connection with the lending of portfolio securities under item (5) 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, as well as
the Fund's investment objective, 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 (except for a joint account with
other funds managed by the Adviser for repurchase agreements
permitted by the SEC pursuant to an exemptive order). The
"bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under the management
of the Adviser to save commissions or to average prices among
them is not deemed to result in a securities trading account.
(b) Make short sales of securities or maintain a short position
unless (i) at all times when a short position is open the Fund
owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any
14
<PAGE>
further consideration, for securities of the same issuer as,
and equal in amount to, the securities sold short; (ii) for
the purpose of hedging the Fund's exposure to an actual or
anticipated market decline in the value of its investments; or
(iii) in order to profit from an anticipated decline in the
value of a security.
(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 for the purpose of exercising control over or
management of any company.
(e) Invest more than 15% of its net assets in illiquid securities.
(f) Purchase securities while outstanding borrowings, other than
reverse repurchase agreements, exceed 5% of the Fund's total
assets.
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, who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and Directors of the Adviser or officers and directors of the
Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
15
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Trustee and Chief
October 1944 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.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
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.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Vice President and Chief Economist,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; Trustee,
Boston, MA 02199 The Berkeley Group; Director, John
April 1953 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.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange of International Exchange of Scholars
Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of
Washington, DC 20008-3009 International Education (since
May 1943 January 1998); Cornell Institute of
Public Affairs, Cornell University
(until December 1997); President
Emeritus of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) and Security
Mutual Life (insurance).
John W. Pratt Trustee Professor of Business Administration
2 Gray Gardens East at Harvard University Graduate
Cambridge, MA 02138 School of Business Administration
September 1931 (since 1961).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp.
and NM Capital; Trustee, The
Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, Signature Services (until
January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, 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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, 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 Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until April
1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
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.
</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 and Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and
receive no compensation from the Fund for their services.
22
<PAGE>
Aggregate Total Compensation From the
Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
Dennis S. Aronowitz $ 89 $ 72,000
Richard P. Chapman, Jr.+ 91 75,000
William J. Cosgrove + 89 72,000
Douglas M. Costle 91 75,000
Leland O. Erdahl 89 72,000
Richard A. Farrell 91 75,000
Gail D. Fosler 89 72,000
William F. Glavin + 89 72,000
Dr. John A. Moore+ 89 72,000
Patti McGill Peterson 89 72,000
John W. Pratt 89 72,000
Edward J. Spellman 91 75,000
--------- ------
Totals $1,076 $ 876,000
1Compensation is for the fiscal year ended October 31, 1997.
2Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 1997. As of this date, there were sixty-seven
funds in the John Hancock Fund Complex, with each of these Independent Trustees
serving thirty-two.
(+)As of December 31, 1997, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $69,148, Mr. Cosgrove was $167,829, Mr. Glavin was $193,514 and for
Dr. Moore was $84,315 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
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 April 27, 1998, the officers and Trustees of the Trust as a group owned
less than 1% of the outstanding shares of the Fund. As of that date, the
following shareholders beneficially owned 5% or more of the outstanding shares
of the Fund:
23
<PAGE>
Percentage of Total
Name and Address of Outstanding Shares of
Shareholders Class of Shares the Class of the Fund
- ------------ --------------- -----------------
MLPF&S For The B 18.16%
Sole Benefit
of Its Customers
4800 Deer Lake Dr East
Jacksonville FL 32246-6484
Wexford B 7.53%
Clearing
Services Corp FBO
County Employees Annuity
Benefit Fund #3
c/o CTC Illinois TR CO
Chicago, IL 60606
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and presently has more than $30 billion in assets under
management in its capacity as investment adviser to the Fund and other mutual
funds and publicly traded investment companies in the John Hancock group of
funds having over 1,400,000 shareholders. The Adviser is an affiliate of the
Life Company, one of the most recognized and respected financial institutions in
the nation. With total assets under management of $100 billion, the Life Company
is one of ten largest life insurance companies in the United States, and carries
high ratings from Standard & Poor's and A.M. Best's. Founded in 1862, the Life
Company has been serving clients for over 130 years.
The Fund has entered into an investment management contract (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.
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<PAGE>
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average of the daily
net assets of the Fund as follows:
Net Asset Value Annual Rate
First $250 million 1.00%
Next $250 million 0.80%
Next $250 million 0.75%
Amounts over $750 million 0.625%
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 fiscal years ended October 31, 1997, 1996 and 1995, the Adviser's
management fee were $150,931, $121,360 and $80,348, respectively. After expense
reductions by the Adviser, the Adviser received no management fees for the
fiscal years ended October 31, 1997, 1996 and 1995.
The Fund and the Adviser have entered into a sub-investment management contract
with the Sub-Adviser (the "Sub-Advisory Agreement") under which the Sub-Adviser,
subject to the review of the Trustees and the overall supervision of the
Adviser, is responsible for providing the Fund with advice with respect to that
portion of the assets invested in countries other than the United States and
Canada. The Sub-Adviser, with offices located at 34 Dover Street, London,
England W1X 3RA, is a wholly-owned subsidiary of the Adviser formed in 1987 to
provide international investment research and advisory services to U.S.
institutional clients. As compensation for its services under the Sub-Advisory
Agreement, the Sub-Adviser receives from the Adviser a portion of its monthly
fee equal to 0.70% on an annual basis of the average daily net asset value of
the Fund for each calendar month up to $200 million of average daily net assets;
and 0.6375% on an annual basis of the average daily net asset value over $200
million. The Fund is not responsible for paying the Sub-Adviser's fee.
The Adviser has agreed to limit the Fund's expenses (excluding 12b-1 and
transfer agent expenses) to 0.90% of the Fund's average daily net assets. The
Adviser reserves the right to terminate this limitation in the future.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or 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 for the Fund or for other funds or clients for which the Adviser
renders investment advice arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or
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 its Advisory Agreement and the Sub-Advisory Agreement, neither the
Adviser nor Sub-Advisers is liable to the Fund or its shareholders for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the Agreement relate, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser or
25
<PAGE>
Sub-Advisers in the performance of their duties or from reckless disregard by
them of their obligations and duties under applicable Agreements.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement, Sub-Advisory Agreement and the
Distribution Agreement (discussed below) was approved by all Trustees. The
Advisory Agreement, Sub-Advisory Agreement and the Distribution Agreement, will
continue in effect from year to year, provided that its continuance is approved
annually both (i) by the holders of a majority of the outstanding voting
securities of the Trust or by the Trustees, and (ii) by a majority of the
Trustees who are not parties to the Agreement or "interested persons" of any
such parties. Both agreements may be terminated on 60 days written notice by any
party or by vote of a majority to 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 October 31, 1996 and 1997, the
Fund paid the Adviser $826 and $2,771, respectively for services under this
Agreement.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser, the
Subadvisers and the Fund have adopted extensive restrictions on personal
securities trading by personnel of the Adviser, the Subadvisers and their
respective affiliates. In the case of the Adviser, 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. A Subadviser's restrictions may differ
where appropriate, as long as they maintain the same intent. 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 an applicable sales charge, if any. In connection
with the sale of Fund shares, John Hancock Funds and Selling Brokers receive
compensation from a sales charge imposed, in the case of Class A shares, at the
time of sale. In the case of Class B or Class C shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended October 31, 1995, 1996 and 1997 were $21,905, $29,259 and $
41,697, respectively. Of such amounts $3,910, $4,638 and $6,635 respectively,
26
<PAGE>
were retained by John Hancock Funds in 1995, 1996, and 1997. The remainder of
the underwriting commissions were reallowed to dealers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of
1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B
and Class C shares, respectively, of the Fund's average daily net assets
attributable to shares of that class. However, the service fee will not exceed
0.25% of the Fund's average daily net assets attributable to each class of
shares. The distribution fees will be used to reimburse John Hancock Funds for
their distribution expenses, including but not limited to: (i) initial and
ongoing sales compensation to Selling Brokers and others (including affiliates
of John Hancock Funds) engaged in the sale of Fund shares; (ii) marketing,
promotional and overhead expenses incurred in connection with the distribution
of Fund shares; and (iii) with respect to Class B and Class C shares only,
interest expenses on unreimbursed distribution expenses. The service fees will
be used to compensate Selling Brokers and others for providing personal and
account maintenance services to shareholders. In the event that John Hancock
Funds is not fully reimbursed for payments or expenses they incur under the
Class A Plan, these expenses will not be carried beyond twelve months from the
date they were incurred. Unreimbursed expenses under the Class B and Class C
Plans will be carried forward together with interest on the balance of these
unreimbursed expenses. The Fund does not treat unreimbursed expenses under the
Class B and Class C Plans as a liability of the Fund because the Trustees may
terminate the Class B and/or Class C Plans at any time. For the fiscal year
ended October 31, 1997, an aggregate of $460,399 of distribution expenses or
4.90% of the average net assets of the Class B shares of the Fund, was not
reimbursed or recovered by John Hancock Funds through the receipt of deferred
sales charges or Rule 12b-1 fees in prior periods. Class C shares of the Fund
did not commence operations until June 1, 1998; therefore, there are no
unreimbursed expenses to report.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provide the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
Independent Trustees. The Plans provide that they may be terminated without
penalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority of the Fund's outstanding shares of the applicable class upon 60
days' written notice to John Hancock Funds, and (c) automatically in the event
of assignment. The Plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to that Plan. Each plan provides that
no material amendment to the Plans will 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, Class B and Class C shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that the Plans will benefit the holders of the applicable class of
shares of the Fund.
27
<PAGE>
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of Trustees.
From time to time, the Fund may participate in joint distribution activities
with other Funds and the costs of those activities will be borne by each Fund in
proportion to the relative net asset value of the participating Funds.
During the fiscal year ended October 31, 1997, the Fund paid John Hancock Funds
the following amount of expenses in connection with their services for the Fund.
Class C shares of the Fund did not commence operations until June 1, 1998;
therefore, there are no expenses to report.
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of Interest, Carrying
Prospectuses to Compensation to Expenses of John or Other
Advertising New Selling Brokers Hancock Funds Finance Charges
Shareholders
<S> <C> <C> <C> <C>
Class A shares $ 3,012 $ 1,295 $ 6,371 $ 6,405 $ --
Class B shares $10,202 $ 3,485 $23,943 $22,695 $33,663
</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 categories for which no sales are reported and
other securities traded over-the-counter are generally valued at the mean
between the current closing bid and asked prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Trustees believe accurately reflects fair value.
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<PAGE>
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 the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value, plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share 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 owned by the
investor, or if John Hancock Signature Services, Inc. ("Signature Services"),
the Fund's transfer agent, 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 CDSC to various individuals and institutions as follows:
oA 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,
grandparents, mother, father, sister, brother, mother-in-law, father-in-law,
daughter, son-in-law, niece, nephew, grandparents and domestic partner) of any
of the foregoing; or any fund, pension, profit sharing or other benefit plan for
the individuals described above.
oA 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.
oA 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.
oRetirement 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.
oRetirement plans investing through the PruArray Program sponsored by Prudential
Securities.
29
<PAGE>
oExisting full service clients of the Life Company who were group annuity
contract holders as of September 1,1994, and participant directed retirement
plans with at least 100 eligible employees at the inception the Fund account.
Each of these investors may purchase Class A shares with no initial sales
charges. However, if the shares are redeemed within 12 months after the end of
the calendar years in which the purchase was made, a CDSC will be imposed at the
following rate:
Amount Invested CDSC Rate
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
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 being invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments
made pursuant to a Letter of Intention (the "LOI"), which should be read
carefully prior to its execution by an investor. The Fund offers two options
regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
retirement plan, however, may opt to make the necessary investments called for
by the LOI over a forty-eight (48) month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and
Section 457 plans. Non-qualified and retirement plans investments cannot be
combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) must
aggregate $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
30
<PAGE>
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 shares
(approximately 5% of the aggregate) to make up any difference in sales charges
on the amount intended to be invested and the amount actually invested, until
such investment is completed within the specified period, at which time the
escrowed Class A shares will be released. If the total investment specified in
the LOI is not completed, the Class A shares held in escrow may be redeemed and
the proceeds used as required to pay the sales charge as may be due. By signing
the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so the Fund will receive
the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B or Class C shares being redeemed. No
CDSC will be imposed on increases in account value above the initial purchase
prices, including all shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service retirement 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 this number of
years from the time of any payment for the purchase of both Class B and Class C
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 for Class B or one year CDSC
redemption period for Class C, or those you acquired through dividend and
capital gain reinvestment, and next from the shares you have held the longest
during the six-year period for Class B shares. For this purpose, the amount of
any increase in a share's value above its initial purchase price is not regarded
as a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
31
<PAGE>
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:
oProceeds of 50 shares redeemed at $12 per share (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
oMinus proceeds of 10 shares not subject to CDSC (dividend reinvestment)
(120.00)
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the lot not just the shares
being redeemed.
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 and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase. See the Prospectus for additional information
regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C 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. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemption of Class B or Class C shares where the process are used to
purchase a John Hancock Declaration Variable Annuity.
* Redemptions of Class B ( but not Class C) shares made under a periodic
withdrawal plan, or redemptions for fees charged by planners or
advisors for advisory services, as long as your annual redemptions do
not exceed 12% of your account value 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 or Class C 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
32
<PAGE>
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A or Class C shares by retirement plans that
invested through the PruArray Program sponsored by Prudential
Securities.
For Retirement Accounts (such as Traditional, Roth, and Education IRAs, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans under the Code) unless
otherwise noted:
* Redemptions made to effect mandatory 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 plans that purchased shares
prior to May 15, 1995.
33
<PAGE>
CDSC Waiver Matrix for Class B and Class C
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, PSP)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- -------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
perodic
payments
- -------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for 12% of
and 70 1/2 Life account
Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments
- -------------------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72t) or 12% (72t) or 12% (72t) or (72t) or annually in
of account of account 12% of 12% of periodic
value value account account payments
annually in annually in value value
periodic periodic annually in annually in
payments payments periodic periodic
payments payments
- -------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- -------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- -------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- -------------------------------------------------------------------------------------------
Return of 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 a 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
34
<PAGE>
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares of
the Fund could be disadvantageous to a shareholder because of the initial sales
charge payable on such purchases of Class A shares and the CDSC imposed on
redemptions of Class B and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase shares at the same time a
Systematic Withdrawal 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:
35
<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 processing date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
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
shareholder action. As of the date of this Statement of Additional Information,
the Trustees have authorized shares of the Fund and five other series. The
Trustees have authority, without the necessity of a shareholder vote, to
36
<PAGE>
classify the shares of any series into one or more classes. As of the date of
this Statement of Additional Information, the Trustees have authorized the
issuance of three classes of shares of the Fund, designated as Class A, Class B
and Class C.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets allocable to that class of the Fund. Holders of each
class of shares have certain exclusive voting rights on matter relating to their
respective distribution plans. The different plans of the Fund may bear
different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class of shares will be borne
exclusively by that class, (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares and (iii) each class of shares
will bear any class expenses properly attributable to that class of shares,
subject to the conditions the Internal Revenue Service imposes with respect to
multiple-class structures. Similarly, the net asset value may vary depending on
which class of shares are purchased. No interest will be paid on uncashed
dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to such
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with a request for a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations 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 Fund 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 starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. 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
37
<PAGE>
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 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 realized 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
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as capital gain. (Net capital
gain is the excess (if any) of net long-term capital gain over net short-term
capital loss, and investment company taxable income is all taxable income and
capital gains, other than those gains and losses included in computing net
capital gain, after reduction by deductible expenses.) As a result of federal
tax legislation enacted on August 5, 1997 (the "Act"), gain recognized after May
6, 1997 from the sale of a capital asset is taxable to individual (noncorporate)
investors at different maximum federal income tax rates, depending generally
upon the tax holding period for the asset, the federal income tax bracket of the
taxpayer, and the dates the asset was acquired and/ or sold. The Treasury
Department has issued guidance under the Act that enables the Fund to pass
through to its shareholders the benefits of the capital gains rates enacted in
the Act. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances. Some
distributions may be paid in January but may be taxable to shareholders as if
they had been received on December 31 of the previous year. 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 (including an option to acquire stock such as is
inherent in a convertible bond) of certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and 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 these
passive foreign investment 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. An election may be
38
<PAGE>
available to ameliorate these adverse tax consequences, but could require the
Fund to recognize taxable income or gain without the concurrent receipt of cash.
These investments could also result in the treatment of associated capital gains
as ordinary income. The Fund may limit and/or manage its investments in passive
foreign investment companies or make an available election to minimize its tax
liability or maximize its return from these investments.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency options, foreign currency forward contracts, foreign
currencies, or payables or receivables denominated in a foreign currency are
subject to Section 988 of the Code, which generally causes such gains and losses
to be treated as ordinary income and losses and may affect the amount, timing
and character of distributions to shareholders. Transactions in foreign
currencies that are not directly related to the Fund's investment in stock or
securities, including speculative currency positions could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed the Fund's investment company taxable income computed without
regard to such loss the resulting overall ordinary loss for such year would not
be deductible by the Fund or its shareholders in future years.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits or deductions
with respect to foreign income taxes or certain other foreign taxes ("qualified
foreign taxes") paid by the Fund, subject to certain provisions and limitations
contained in the Code, if the Fund so elects. If more than 50% of the value of
the Fund's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Fund may file an election with the
Internal Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include in ordinary gross income (in addition to taxable
dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received by
them, and (ii) treat such respective pro rata portions as foreign taxes paid by
them.
If the Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable income, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit for such foreign
taxes may be required to treat a portion of dividends received from the Fund as
a separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax-exempt shareholders will ordinarily not benefit from
this election. Each year (if any) that the Fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified foreign taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income from each foreign country.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities and/ or engage in options, futures or forward transactions
that will generate capital gains. At the time of an investor's purchase of Fund
shares, a portion of the purchase price is often attributable to realized or
unrealized appreciation in the Fund's portfolio or undistributed taxable income
of the Fund. Consequently, subsequent distributions on those 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
39
<PAGE>
below the investor's cost for such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands. A sales charge paid in purchasing
Class A shares of the Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares within 90
days after their purchase to the extent shares of the Fund or another John
Hancock Fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. This disregarded charge will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired. Also, any loss realized on a redemption or exchange will 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 automatic dividend reinvestments. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department guidance issued to
implement the Act may contain additional rules for determining the tax treatment
of sales of Fund shares held for various periods, including the treatment of
losses on the sales of shares held for six months or less that are
recharacterized as long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the 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 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 shares
of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset its net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed as such to
shareholders. The Fund has does not have any capital loss carry forwards.
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 or constructive sale rules applicable to certain options, futures,
40
<PAGE>
forward, short sales or other transactions may also require the Fund to
recognize income or gain without a concurrent receipt of cash. Additionally,
some countries restrict repatriation which may make it difficult or impossible
for the Fund to obtain cash corresponding to its earnings or assets in those
countries. However, the Fund must distribute to shareholders for each taxable
year substantially all of its net income and net capital gains, including such
income or gain, to qualify as a regulated investment company and avoid liability
for any federal income or excise tax. Therefore, the Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash,
or borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
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 advisors about the applicability of the backup withholding provisions.
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 any share of stock 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)
during a prescribed period extending before and after each such dividend and
distributed and properly designated by the Fund may be treated as qualifying
dividends. Because the Fund is not generally anticipated to invest a significant
portion of its assets in the stock of such U.S. corporations, it is unlikely
that a substantial portion of its distributions will qualify for the dividends
received deduction. Corporate shareholders must meet the holding period
requirements stated above with respect to their shares of the Fund for each
dividend 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
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 and to
the extent such basis would be reduced below zero, that current recognition of
income would be required.
41
<PAGE>
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into options, futures, foreign currency
positions, and foreign currency forward contracts.
Certain options, futures and forward foreign currency contracts 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 foreign currency
contracts, as ordinary income or loss) and timing of some capital gains and
losses realized by the Fund. Additionally, the Fund may be required to recognize
gain, but not loss, if an option, short sales or other transaction is treated as
a constructive sale of an appreciated financial position in the Fund's
portfolio. 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 gains. 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. The Fund will take into
account the special tax rules (including consideration of available elections)
applicable to options, futures or forward contracts in order to minimize any
potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
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.
The Fund anticipates that, 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 for Class A shares of the Fund for the 1 year
period ended October 31, 1997 and from commencement of operations on January 3,
1994 was (8.06%) and (1.32%), respectively.
42
<PAGE>
The average annual total return for Class B shares of the Fund for the 1 year
period ended October 31, 1997 and from commencement of operations on January 3,
1994 was (8.67%) and (1.49%), respectively. Class C shares of the Fund commenced
operations on June 1, 1998; therefore, there is no average annual total return
to report.
Total return is computed by finding the average annual compounded rate of return
over the 1 year, 5 years and life-of-fund periods that would equate the initial
amount invested to the ending redeemable value according to the following
formula:
n _______
T = \ / ERV /P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made
at the beginning of the 1 year and life of the fund periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, 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 also
assumes that all dividends and distributions are reinvested at net asset value
on the reinvestment dates during the period. The "distribution rate" is
determined by annualizing the result of dividing the declared dividends of the
Fund during the period stated by the maximum offering price or net asset value
at the end of the period. 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 of time. 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 period of
time. Total returns may be quoted with or without taking the Fund's sales charge
on Class A shares or the CDSC on Class B or Class C shares into account.
Excluding the Fund's sales charge on Class A shares and the CDSC on Class B or
Class C shares from a total return calculation produces a higher total return
figure.
From time to time, in reports and promotional literature, the Fund's total
return will be compared to indices of mutual funds such as Lipper Analytical
Services, Inc.'s "Lipper - Mutual Fund 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
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JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S will also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta". Beta is a reflection of the market related risk of the Fund by
showing how responsive the Fund is to the market.
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 an investment committee of the
Adviser, which consists of officers and directors of the Adviser and affiliates,
and officers and Trustees who are interested persons of the Trust. Orders for
purchases and sales of securities are placed in a manner which, in the opinion
of the officers of the Adviser, will offer the best price and market for the
execution of each such transaction. Purchases from underwriters of portfolio
securities may include a commission or commissions paid by the issuer and
transactions with dealers serving as market makers reflect a "spread." Debt
securities are generally traded on a net basis through dealers acting for their
own account as principals and not as brokers; no brokerage commissions are
payable on these 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 such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and in the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser or Sub-Adviser,
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 or Sub-Adviser. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser or 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 or
Sub-Adviser, and, conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser or 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.
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While the Adviser and Sub-Adviser 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 years ending October 31, 1997, 1996
and 1995, negotiated brokerage commissions were paid on portfolio transactions
in the amount of $102,299, $20,984 and $47,714, 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 such price is reasonable in light
of the services provided and to such policies as the Trustees may adopt from
time to time. During the fiscal year ended October 31, 1997, the Fund directed
in the amount of $3,954 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 Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. During the
years ending October 31, 1997, 1996 and 1995, the Fund did not execute any
portfolio transitions with any Affiliated Broker.
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 Broker, has, as an investment adviser to
the Fund, the obligation to provide investment management services, which
includes elements of research and related investment skills such research and
related skills will not be used by the Affiliated 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 the securities
to be sold or purchased for the Fund with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston MA
02217- 1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent of the Fund. The Fund pays Signature Services
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an annual fee of $19.00 for each Class A shareholder account, $21.50 for each
Class B shareholder account and $20.50 for each Class C shareholder account. The
Fund also pays certain out-of- pocket expenses and these expenses are aggregated
and charged to the Fund and allocated to each class on the basis of their
relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. Under the custodian agreement, State Street Bank
and Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts 02110. Price Waterhouse LLP audits and renders an
opinion of the Fund's annual financial statements and reviews the Fund's annual
Federal income tax return.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
Standard & Poor's Bond Ratings
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.
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.
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
probable credit status upon completion of that act or fulfillment of that
condition.
A-2
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FINANCIAL STATEMENTS
F-1
