FILE NO. 33-5186
FILE NO. 811-4651
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
---------
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 23 (X)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 23 (X)
---------
JOHN HANCOCK STRATEGIC SERIES
(Exact Name of Registrant as Specified in Charter)
101 Huntington Avenue
Boston, Massachusetts 02199-7603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, (617) 375-1700
---------
THOMAS H. DROHAN
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and Address of Agent for Service)
---------
It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b) of Rule 485
( ) on (date) pursuant to paragraph (b) of Rule 485
( ) 75 days after filing pursuant to paragraph (a) of Rule 485
(X) on August 30, 1996 pursuant to paragraph (a) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
The Registrant will file the notice required by Rule 24f-2 for the most recent
fiscal year of John Hancock Strategic Income Fund on or about July 26, 1996. The
Registrant filed the notice required by Rule 24f-2 for the most recent fiscal
year of John Hancock Sovereign U.S. Government Income Fund on or about December
26, 1996.
<PAGE>
<TABLE>
<CAPTION>
Item Number Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
<S> <C> <C>
1 Front Cover Page *
2 Overview; Investor Expenses; *
3 Financial Highlights *
4 Overview; Goal and Strategy; Portfolio *
Securities; Risk Factors; Business
Structure; More About Risk
5 Overview; Business Structure; *
Manager/Subadviser; Investor Expenses
6 Choosing a Share Class; Buying Shares; *
Selling Shares; Transaction Policies;
Dividends and Account Policies;
Additional Investor Services
7 Choosing a Share Class; How Sales Charges *
are Calculated; Sales Charge Deductions
and Waivers; Opening an Account; Buying
Shares; Transaction Policies; Additional
Investor Services
8 Selling Shares; Transaction Policies; *
Dividends and Account Policies
9 Not Applicable *
10 * Front Cover Page
11 * Table of Contents
12 * Organization of the Fund
13 * Investment Objectives and Policies;
Certain Investment Practices;
Investment Restrictions
14 * Those Responsible for Management
15 * Those Responsible for Management
16 * Investment Advisory; Subadvisory
and Other Services; Distribution
Contract; Transfer Agent Services;
Custody of Portfolio; Independent
Auditors
17 * Brokerage Allocation
18 * Description of Fund's Shares
19 * Net Asset Value; Additional
Services and Programs
20 * Tax Status
21 * Distribution Contract
22 * Calculation of Performance
23 * Financial Statements
</TABLE>
<PAGE>
JOHN HANCOCK
INCOME FUNDS
[JOHN HANCOCK'S GRAPHIC LOGO. A CIRCLE, DIAMOND, TRIANGLE AND A CUBE]
- --------------------------------------------------------------------------------
PROSPECTUS
AUGUST 30, 1996
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:
- - are not bank deposits
- - are not federally insured
- - are not endorsed by any bank or government agency
- - are not guaranteed to achieve their goal(s)
Some of these funds may invest up to 100% 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.
GOVERNMENT INCOME FUND
HIGH YIELD BOND FUND
INTERMEDIATE MATURITY
GOVERNMENT FUND
LIMITED-TERM GOVERNMENT FUND
SOVEREIGN BOND FUND
SOVEREIGN U.S. GOVERNMENT INCOME FUND
STRATEGIC INCOME FUND
[JOHN HANCOCK FUNDS LOGO]
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
A fund-by-fund look at GOVERNMENT INCOME FUND 4
goals, strategies, risks,
expenses and financial HIGH YIELD BOND FUND 6
history.
INTERMEDIATE MATURITY GOVERNMENT FUND 8
LIMITED-TERM GOVERNMENT FUND 10
SOVEREIGN BOND FUND 12
SOVEREIGN U.S. GOVERNMENT INCOME FUND 14
STRATEGIC INCOME FUND 16
Policies and instructions YOUR ACCOUNT
for opening, maintaining
and closing an account in Choosing a share class 18
any income fund.
How sales charges are calculated 18
Sales charge reductions and waivers 19
Opening an account 20
Buying shares 21
Selling shares 22
Transaction policies 24
Dividends and account policies 24
Additional investor services 25
Details that apply to the FUND DETAILS
income funds as a group.
Business structure 26
Sales compensation 27
More about risk 29
Types of investment risk 29
FOR MORE INFORMATION BACK COVER
<PAGE>
OVERVIEW
- --------------------------------------------------------------------------------
GOAL OF THE INCOME FUNDS
John Hancock income funds seek current income, but not at the expense of total
return. Some of the funds also invest for stability of principal. Each fund
employs its own strategy and has 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
John Hancock income funds may be appropriate for investors who:
- - are seeking a regular stream of income
- - are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
- - want to diversify their portfolios
- - are seeking a mutual fund for the income portion of an asset allocation
portfolio
- - are in or nearing retirement
Income funds may NOT be appropriate if you:
- - are investing for maximum return over a long time horizon
- - require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock income funds are managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Mutual Life Insurance Company and manages more than $19 billion in assets.
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT]
GOAL AND STRATEGY The fund's particular investment goals and the strategies it
intends to use in pursuing those goals.
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER]
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.
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS]
RISK FACTORS The major risk factors associated with the fund.
[A GRAPHIC IMAGE OF A GENERIC PERSON]
PORTFOLIO MANAGEMENT The individual or group (including subadvisers, if any)
designated by the investment adviser to handle the fund's day-to-day management.
[A GRAPHIC IMAGE OF A PERCENT SYMBOL]
EXPENSES The overall costs borne by an investor in the fund, including sales
charges and annual expenses.
[A GRAPHIC IMAGE OF A DOLLAR SIGN]
FINANCIAL HIGHLIGHTS A table showing the fund's financial performance for up to
ten years, by share class. There is also a bar graph of year-by-year total
return, which is intended to show the fund's volatility in recent years.
<PAGE>
GOVERNMENT INCOME FUND
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: JHGIX CLASS B: TSGIX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT]
The fund seeks to earn a high level of current income consistent with
preservation of capital. To pursue this goal, the fund invests primarily in U.S.
Government and agency securities of any maturity, as described below. Stability
of share price is a secondary goal.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER]
Under normal circumstances, the fund invests at least 80% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include
Treasuries, mortgage-backed securities such as Ginnie Maes and Fannie Maes, and
repurchase agreements and forward commitments involving these securities.
For liquidity and flexibility, the fund may place up to 20% of net 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 asset-backed securities, foreign
government securities and leveraged investments, and may engage in other
investment practices. Investments in asset-backed and foreign government
securities must be in the two highest and four highest categories,
respectively, or if unrated, be of comparable quality. Up to 10% of assets may
be invested in bonds rated as low as B.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS]
As with most income 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 debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
29. Other factors may affect the market price and yield of the fund's
securities, including investor demand and domestic and worldwide economic
conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON]
Barry H. Evans, leader of the fund's portfolio management team since 1995, is a
senior vice president of the adviser. He joined John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SYMBOL]
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.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
================================================================================
<S> <C> <C>
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
- --------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
================================================================================
<S> <C> <C>
Management fee 0.63% 0.63%
- --------------------------------------------------------------------------------
12b-1 fee(3) 0.25% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.27% 0.27%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.15% 1.90%
- --------------------------------------------------------------------------------
</TABLE>
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%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
================================================================================
<S> <C> <C> <C> <C>
Class A shares $56 $80 $105 $178
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $69 $90 $123 $203
- --------------------------------------------------------------------------------
Assuming no redemption $19 $60 $103 $203
- --------------------------------------------------------------------------------
</TABLE>
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) May include carry-over of reimbursable costs from previous year(s). Amounts
shown are the fund's current annual maximums for 12b-1 fees. 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 GOVERNMENT INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN]
The figures below have been audited by the fund's independent auditors,
VOLATILITY, AS INDICATED BY CLASS B YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<S> <C>
1988 2.40
1989 10.22
1990 3.71
1991 14.38
1992 8.81
1993 9.86
1994 (6.42)
1995 14.49
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1994(1) 1995(2)
================================================================================
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------
Net asset value, beginning of period $ 8.85 $ 8.75
- --------------------------------------------------------------------------------
Net investment income (loss) 0.06 0.72
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.10) 0.57
- --------------------------------------------------------------------------------
Total from investment operations (0.04) 1.29
- --------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------
Dividends from net investment income (0.06) (0.72)
- --------------------------------------------------------------------------------
Net asset value, end of period $ 8.75 $ 9.32
- --------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3,4) (%) (0.45) 15.32
- --------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) (0.46) 15.28
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 223 470,569
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.12 1.19
- --------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net
assets (%) 0.71 7.38
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) 92 102
- --------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted) ($) 0.0 N/A
- --------------------------------------------------------------------------------
Average daily amount of debt outstanding during
the period (000s omitted) ($) 349 N/A
- --------------------------------------------------------------------------------
Average monthly number of shares outstanding during
the period (000s omitted) ($) 28,696 N/A
- --------------------------------------------------------------------------------
Average daily amount of debt outstanding per share
during the period ($) 0.01 N/A
- --------------------------------------------------------------------------------
Average brokerage commission rate ($)(6) N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1988(1) 1989 1990 1991 1992
===================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.58 $ 10.01 $ 9.98 $ 9.37 $ 9.79
- -------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.69(7) 0.98 0.88 0.89 0.80
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.45) (0.01) (0.54) 0.40 0.03
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.24 0.97 0.34 1.29 0.83
- -------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.64) (1.00) (0.95) (0.87) (0.79)
- -------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.17) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.81) (1.00) (0.95) (0.87) (0.79)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.01 $ 9.98 $ 9.37 $ 9.79 $ 9.83
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3,4) (%) 2.40 10.22 3.71 14.38 8.81
- -------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) -- -- -- -- 8.66
- -------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------------
Net assets end of period (000s omitted) ($) 6,966 26,568 64,707 129,014 225,540
- -------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets (%) 2.76 2.82 2.04 2.00 2.00
- -------------------------------------------------------------------------------------------------------------------
Ratio of interest expense to average net assets (%) -- -- -- -- 0.15
- -------------------------------------------------------------------------------------------------------------------
Ratio of total expenses to average net assets (%) 2.76 2.82 2.04 2.00 2.15
- -------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets (%) (1.38) (0.82) (0.04) -- --
- -------------------------------------------------------------------------------------------------------------------
Ratio of net expenses to average net assets (%) 1.38 2.00 2.00 2.00 2.15
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.34 9.64 9.22 9.09 8.03
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 174 151 83 162 112
- -------------------------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(8) ($) -- -- -- -- 0
- -------------------------------------------------------------------------------------------------------------------
Average daily amount of debt outstanding during the
period (000s omitted)(8) ($) -- -- -- -- 6,484
- -------------------------------------------------------------------------------------------------------------------
Average monthly number of shares outstanding during
the period (000s omitted) ($) -- -- -- -- 18,572
- -------------------------------------------------------------------------------------------------------------------
Average daily amount of debt outstanding per share
during the period(8) ($) -- -- -- -- 0.35
- -------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(6) N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995(2)
===============================================================================================
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.83 $ 10.05 $ 8.75
- -----------------------------------------------------------------------------------------------
Net investment income (loss) 0.70 0.65 0.65
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.24 (1.28) 0.57
- -----------------------------------------------------------------------------------------------
Total from investment operations 0.94 (0.63) 1.22
- -----------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------
Dividends from net investment income (0.72) (0.65) (0.65)
- -----------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.02) --
- -----------------------------------------------------------------------------------------------
Total distributions (0.72) (0.67) (0.65)
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.05 $ 8.75 $ 9.32
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3,4) (%) 9.86 (6.42) 14.49
- -----------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) 9.85 (6.43) 14.47
- -----------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets end of period (000s omitted) ($) 293,413 241,061 226,954
- -----------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets (%) 2.00 1.93 1.89
- -----------------------------------------------------------------------------------------------
Ratio of interest expense to average net assets (%) 0.01 0.01 0.02
- -----------------------------------------------------------------------------------------------
Ratio of total expenses to average net assets (%) 2.01 1.94 1.91
- -----------------------------------------------------------------------------------------------
Ratio of expense reimbursement to average net assets (%) -- -- --
- -----------------------------------------------------------------------------------------------
Ratio of net expenses to average net assets (%) 2.01 1.94 1.91
- -----------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.06 6.98 7.26
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 138 92 102
- -----------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(8) ($) 0 0 0
- -----------------------------------------------------------------------------------------------
Average daily amount of debt outstanding during the
period (000s omitted)(8) ($) 503 349 N/A
- -----------------------------------------------------------------------------------------------
Average monthly number of shares outstanding during
the period (000s omitted) ($) 26,378 28,696 N/A
- -----------------------------------------------------------------------------------------------
Average daily amount of debt outstanding per share
during the period(8) ($) 0.02 0.01 N/A
- -----------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(6) N/A N/A N/A
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Class A and Class B shares commenced operations on September 30, 1994 and
February 23, 1988, respectively. Financial highlights, including total
return, have not been annualized.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Excludes interest expense, which equals 0.04% for Class A for the year ended
October 31, 1995 and 0.15%, 0.01%, 0.01% and 0.02% for Class B for the years
ended October 31, 1992, 1993, 1994 and 1995, respectively.
(5) An estimated total return calculation which takes into consideration fee
reductions by the adviser during the periods shown.
(6) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(7) Based on the average of the shares outstanding at the end of each month.
(8) Debt outstanding consists of reverse repurchase agreements entered into
during the year.
GOVERNMENT INCOME FUND 5
<PAGE>
HIGH YIELD BOND FUND
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: N/A CLASS B: TSHYX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT]
The fund seeks to maximize current income without assuming undue risk. To pursue
this goal, the fund invests primarily in junk bonds, i.e. lower-rated,
higher-yielding debt securities.
Because the performance of junk bonds has historically been influenced by
economic conditions, the fund may rotate securities selection by business sector
according to the economic outlook.
The fund also seeks capital appreciation, but only when consistent with its
primary goal.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER]
Under normal circumstances, the fund invests at least 65% of assets in
securities rated lower than BBB/Baa, or if unrated, of equivalent quality. No
more than 10% of assets may be invested in securities rated as low as CC/Ca. Up
to 40% of assets may be invested in the securities of issuers in the electric
utility and telephone industries. For all other industries, the limitation is
25% of assets.
Types of securities include, but are not limited to, domestic and foreign
corporate bonds, debentures, notes, convertible securities, preferred stocks,
municipal obligations and government obligations.
For liquidity and flexibility, the fund may place up to 35% of net 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 and may engage in other investment
practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS]
Investors should expect greater fluctuations in share price, yield and total
return compared to less aggressive bond funds. These fluctuations, whether
positive or negative, may be sharp and unanticipated.
Issuers of junk bonds are typically in weak financial health and their ability
to repay interest or principal is uncertain. Compared to issuers of
investment-grade bonds, they are more likely to encounter financial difficulties
and to be materially affected by these difficulties when they do encounter them.
Junk bond markets may react strongly to adverse news about an issuer or the
economy, or to the perception or expectation of adverse news. Before you invest,
please read "More about risk" starting on page 29.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON]
Arthur N. Calavritinos, leader of the fund's portfolio management team since
1995, is a second vice president of the adviser. He joined John Hancock Funds in
1988.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SYMBOL]
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.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
================================================================================
<S> <C> <C>
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
- --------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
================================================================================
<S> <C> <C>
Management fee 0.58% 0.58%
- --------------------------------------------------------------------------------
12b-1 fee(3) 0.25% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.35% 0.35%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.18% 1.93%
- --------------------------------------------------------------------------------
</TABLE>
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%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
================================================================================
<S> <C> <C> <C> <C>
Class A shares $56 $81 $107 $182
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $70 $91 $124 $206
- --------------------------------------------------------------------------------
Assuming no redemption $20 $61 $104 $206
- --------------------------------------------------------------------------------
</TABLE>
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) May include carry-over of reimbursable costs from previous year(s). Amounts
shown are the fund's current annual maximums for 12b-1 fees. 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 HIGH YIELD BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN]
The figures below have been audited by the fund's independent auditors,
VOLATILITY, AS INDICATED BY CLASS B YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<S> <C>
1987 (0.10)
1988 9.77
1989 (4.51)
1990 (8.04)
1991 34.21
1992 11.56
1993 21.76
1994 (1.33)
1995 7.97
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1993(1) 1994 1995(2)
=============================================================================================
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 8.10 $ 8.23 $ 7.33
- ---------------------------------------------------------------------------------------------
Net investment income (loss) 0.33 0.80(3) 0.72
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12)
- ---------------------------------------------------------------------------------------------
Total from investment operations 0.42 (0.03) 0.60
- ---------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------
Dividends from net investment income (0.29) (0.82) (0.73)
- ---------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.05) --
- ---------------------------------------------------------------------------------------------
Total distributions (0.29) (0.87) (0.73)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.23 $ 7.33 $ 7.20
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4,5) (%) 4.96 (0.59) 8.83
- ---------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.31 1.16 1.16
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 4.38 10.14 10.23
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 204 153 98
- ---------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(6) N/A N/A N/A
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(1) 1988 1989 1990 1991 1992
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.95 $ 9.94 $ 9.70 $ 8.14 $ 6.45 $ 7.44
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.01 1.07(3) 1.16 1.09 0.98 0.87
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.02) (0.14) (1.55) (1.68) 1.06 (0.04)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.01) 0.93 (0.39) (0.59) 2.04 0.83
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income -- (1.17) (1.14) (1.09) (0.98) (0.84)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- (0.03) (0.01) (0.07) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions -- (1.17) (1.17) (1.10) (1.05) (0.84)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.94 $ 9.70 $ 8.14 $ 6.45 $ 7.44 $ 7.43
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) (0.10) 9.77 (4.51) (8.04) 34.21 11.56
- ---------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) (0.41) 9.01 (4.82) (8.07) -- --
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 110 20,852 33,964 37,097 72,023 98,560
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.03 2.00 2.20 2.22 2.24 2.25
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(7) (%) 0.34 2.76 2.51 2.25 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 0.09 10.97 12.23 14.56 13.73 11.09
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) (0.22) 10.21 11.92 14.59 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 0 60 100 96 93 206
- ---------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(6) N/A N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1993 1994 1995(2)
================================================================================================
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 7.43 $ 8.23 7.33
- ------------------------------------------------------------------------------------------------
Net investment income (loss) 0.80 0.74(3) 0.67
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.75 (0.83) (0.13)
- ------------------------------------------------------------------------------------------------
Total from investment operations 1.55 (0.09) 0.54
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
Dividends from net investment income (0.75) (0.76) (0.67)
- ------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.05) --
- ------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- --
- ------------------------------------------------------------------------------------------------
Total distributions (0.75) (0.81) (0.67)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.23 $ 7.33 7.20
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 21.76 (1.33) 7.97
- ------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) -- -- --
- ------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 154,214 160,739 180,586
- ------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 2.08 1.91 1.89
- ------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(7) (%) -- -- --
- ------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 10.07 9.39 9.42
- ------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) -- -- --
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 204 153 98
- ------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(6) N/A N/A N/A
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Class A and Class B shares commenced operations on June 30, 1993 and October
26, 1987, respectively. Financial highlights, including total return, have
not been 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) An estimated total return calculation which takes into consideration fee
reductions by the adviser during the periods shown.
(6) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(7) Unreimbursed, without fee reduction.
HIGH YIELD BOND FUND 7
<PAGE>
INTERMEDIATE MATURITY GOVERNMENT FUND
REGISTRANT NAME: JOHN HANCOCK BOND TRUST
TICKER SYMBOL CLASS A: TAUSX CLASS B: TSUSX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT]
The fund seeks to earn a high level of current income consistent with
preservation of capital and maintenance of liquidity. To pursue this goal, the
fund invests primarily in U.S. Government securities of any maturity, as
described below. The fund's weighted average maturity is typically between three
and ten years.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER]
Under normal circumstances, the fund invests at least 65% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include Treasuries
and mortgage-backed securities such as Ginnie Maes and Fannie Maes. The fund may
invest up to 5% of assets in U.S. Government securities denominated in a foreign
currency.
For liquidity and flexibility, the fund may place up to 35% of net 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 corporate bonds and leveraged
investments, and may engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS]
As with most income 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 debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
29. Other factors may affect the market price and yield of the fund's securities
as well, including investor demand and domestic and worldwide economic
conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON] Roger Hamilton, leader of the fund's
portfolio management team since 1992, is a second vice president of the adviser.
He has worked in the investment business since 1980.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SYMBOL]
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.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
================================================================================
<S> <C> <C>
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
- --------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF NET ASSETS)
================================================================================
<S> <C> <C>
Management fee (after expense limitation)(3) 0.00% 0.00%
- --------------------------------------------------------------------------------
12b-1 fee(4) 0.25% 0.90%
- --------------------------------------------------------------------------------
Other expenses 0.50% 0.50%
- --------------------------------------------------------------------------------
Total fund operating expenses(4) 0.75% 1.40%
- --------------------------------------------------------------------------------
</TABLE>
(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).
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%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
================================================================================
<S> <C> <C> <C> <C>
Class A shares $37 $53 $70 $120
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $44 $64 $69 $118
- --------------------------------------------------------------------------------
Assuming no redemption $14 $44 $69 $118
- --------------------------------------------------------------------------------
</TABLE>
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(3) Reflects the investment adviser's temporary agreement to limit expenses
(except for 12b-1 and other class-specific expenses). Without this
limitation, management fees would have been 0.40% for each class, other
expenses would have been 0.72% for each class, and total fund operating
expenses would have been 1.37% for Class A and 2.02% for Class B.
(4) May include carry-over of reimbursable costs from previous year(s). Amounts
shown are the fund's current annual maximums for 12b-1 fees. Class B fee may
be increased from 0.90% to 1.00% after December 31, 1996. 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 INTERMEDIATE MATURITY GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN]
The figures below have been audited by the fund's independent auditors,
VOLATILITY, AS INDICATED BY CLASS A YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<S> <C>
1992 1.96(5)
1993 6.08
1994 2.51
1995 3.98
1996 5.58
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED MARCH 31, 1992(1) 1993 1994 1995(2) 1996
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.00(3) $ 10.03 $ 10.05 $ 9.89 $ 9.79
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.17 0.58 0.41 0.49 0.62
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16) (0.11) (0.08)
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.20 0.60 0.25 0.38 0.54
- --------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.17) (0.58) (0.41) (0.48) (0.64)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.03 $ 10.05 $ 9.89 $ 9.79 $ 9.69
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 1.96(5) 6.08 2.51 3.98 5.58
- --------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,6) 0.84(5) 5.53 2.27 3.43 4.81
- --------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 13,775 33,273 24,310 12,950 29,024
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(7) (%) 0.50(8) 0.50 0.75 0.75 0.75
- --------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(7,9) (%) 1.62(8) 1.05 0.99 1.50 1.52
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.47(8) 5.47 4.09 4.91 6.49
- --------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average assets(9) (%) 5.35(8) 4.92 3.85 4.36 5.72
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 1 186 244 341 251
- --------------------------------------------------------------------------------------------------------------------------
Fee reduction per share ($) 0.11(8) 0.06 0.02 0.05 0.07
- --------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(10) N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED MARCH 31, 1992(1) 1993 1994 1995(2) 1996
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.00(3) $ 10.03 $ 10.05 $ 9.89 $ 9.79
- -------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.15 0.51 0.34 0.43 0.57
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.03 0.02 (0.16) (0.11) (0.10)
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.18 0.53 0.18 0.32 0.47
- -------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.15) (0.51) (0.34) (0.42) (0.57)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.03 $ 10.05 $ 9.89 $ 9.79 $ 9.69
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) 1.80(5) 5.40 1.85 3.33 4.90
- -------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,6) 0.68(5) 4.85 1.61 2.78 4.13
- -------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 1,630 13,753 11,626 9,506 8,532
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(7) (%) 1.15(8) 1.15 1.40 1.40 1.40
- -------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(7,9) (%) 2.27(8) 1.70 1.64 2.15 2.17
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 5.85(8) 4.82 3.44 4.26 5.80
- -------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average assets(9) (%) 4.73(8) 4.27 3.20 3.71 5.03
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 1 186 244 341 251
- -------------------------------------------------------------------------------------------------------------------------
Fee reduction per share ($) 0.11(8) 0.06 0.02 0.05 0.08
- -------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(10) N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class A and Class B shares commenced operations on December 31, 1991.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(3) Initial price at commencement of operations.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Not annualized.
(6) An estimated total return calculation which takes into consideration fee
reductions by the adviser during the periods shown.
(7) Beginning on December 31, 1991 (commencement of operations) through March
31, 1995, the expenses used in the ratios represented the expenses of the
Fund plus expenses incurred indirectly from the Adjustable U.S. Government
Fund (the "Portfolio"), the mutual fund in which the Fund invested all of
its assets. The expenses used in the ratios for the fiscal year ended March
31, 1996 include the expenses of the Portfolio through September 22, 1995.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
INTERMEDIATE MATURITY GOVERNMENT FUND 9
<PAGE>
LIMITED-TERM GOVERNMENT FUND
REGISTRANT NAME: JOHN HANCOCK LIMITED-TERM GOVERNMENT FUND
TICKER SYMBOL CLASS A: JHNLX CLASS B: JHLBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT]
The fund seeks to provide current income and security of principal. To pursue
this goal, the fund invests primarily in U.S. Government and agency securities,
as described below. The fund's securities may be of any maturity, although a
substantial portion will typically have maturities of ten years or less.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER]
Under normal circumstances, the fund invests at least 80% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include Treasuries
and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
For liquidity and flexibility, the fund may place up to 20% of net 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 and may engage in other investment
practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS]
In seeking to maintain a relatively stable share price, the fund may sacrifice
opportunities for higher yields. At the same time, its share price will
fluctuate to some extent with changes in interest rates. To the extent that the
fund invests in mortgage-backed securities, it may also be subject to extension
and prepayment risks. These risks are defined in "More about risk" starting on
page 29.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON]
Barry H. Evans, leader of the fund's portfolio management team since 1995, is a
senior vice president of the adviser. He joined John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SYMBOL]
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.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
================================================================================
<S> <C> <C>
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
- --------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
================================================================================
<S> <C> <C>
Management fee 0.60% 0.60%
- --------------------------------------------------------------------------------
12b-1 fee(3) 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.47% 0.47%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.37% 2.07%
- --------------------------------------------------------------------------------
</TABLE>
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%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
================================================================================
<S> <C> <C> <C> <C>
Class A shares $44 $72 $103 $190
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $51 $85 $111 $198
- --------------------------------------------------------------------------------
Assuming no redemption $21 $65 $111 $198
- --------------------------------------------------------------------------------
</TABLE>
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) May include carry-over of reimbursable costs from previous year(s). Amounts
shown are the fund's current annual maximums for 12b-1 fees. 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 LIMITED-TERM GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN]
The figures below have been audited by the fund's independent auditors, Ernst &
Young LLP.
VOLATILITY, AS INDICATED BY CLASS A YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<S> <C>
1986 14.59
1987 (0.49)
1988 5.67
1989 11.59
1990 7.75
1991 12.54
1992 4.19
1993 7.13
1994 (1.31)
1995 11.23
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1986 1987 1988 1989 1990 1991
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.24 $ 9.71 $ 8.83 $ 8.56 $ 8.73 $ 8.61
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.83 0.78 0.77 0.79 0.74 0.67
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.47 (0.83) (0.28) 0.18 (0.11) 0.36
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.30 (0.05) 0.49 0.97 0.63 1.03
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.83) (0.83) (0.76) (0.80) (0.75) (0.67)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.83) (0.83) (0.76) (0.80) (0.75) (0.67)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.71 $ 8.83 $ 8.56 $ 8.73 $ 8.61 $ 8.97
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) 14.59 (0.49) 5.67 11.59 7.75 12.54
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 201,293 202,924 192,315 179,065 176,329 211,322
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.90 0.97 1.02 1.01 1.53 1.44
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 8.82 8.52 8.71 8.98 8.56 7.72
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 6 7 12 26 75 134
- --------------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(3) N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1992 1993 1994 1995
============================================================================================================
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 8.97 $ 8.77 $ 8.80 $ 8.31
- ------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.54 0.48 0.38(1) 0.50(1)
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.18) 0.14 (0.49) 0.42
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 0.36 0.62 (0.11) 0.92
- ------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.54) (0.48) (0.38) (0.50)
- ------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.02) (0.11) -- --
- ------------------------------------------------------------------------------------------------------------
Total distributions (0.56) (0.59) (0.38) (0.50)
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.77 $ 8.80 $ 8.31 $ 8.73
- ------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) 4.19 7.13 (1.31) 11.23
- ------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 259,170 262,903 218,846 198,681
- ------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.55 1.51 1.41 1.36
- ------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.13 5.34 4.39 5.76
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 185 175 155 105
- ------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(3) N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED DECEMBER 31, 1994(4) 1995
=====================================================================================
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------
Net asset value, beginning of period $ 8.77(5) $ 8.31
- -------------------------------------------------------------------------------------
Net investment income (loss) 0.30(1) 0.45(1)
- -------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment (0.46) 0.42
- -------------------------------------------------------------------------------------
Total from investment operations (0.16) 0.87
- -------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------
Dividends from net investment income (0.30) (0.45)
- -------------------------------------------------------------------------------------
Net asset value, end of period $ 8.31 $ 8.73
- -------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(2) (%) (1.84)(6) 10.60
- -------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 7,111 10,765
- -------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 2.12(7) 1.93
- -------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 3.70(7) 5.21
- -------------------------------------------------------------------------------------
Portfolio turnover rate (%) 155 105
- -------------------------------------------------------------------------------------
Average brokerage commission rate ($)(3) N/A N/A
- -------------------------------------------------------------------------------------
</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) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(4) Class B shares commenced operations on January 3, 1994.
(5) Initial price at commencement of operations.
(6) Not annualized.
(7) Annualized.
LIMITED-TERM GOVERNMENT FUND 11
<PAGE>
SOVEREIGN BOND FUND
REGISTRANT NAME: SOVEREIGN BOND FUND
TICKER SYMBOL CLASS A: JHNBX CLASS B: JHBBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT]
The fund seeks to generate a high level of current income consistent with
prudent investment risk. To pursue this goal, the fund invests in a diversified
portfolio of marketable debt securities. These securities are primarily
investment grade. The fund does not concentrate its investments in any
particular industry.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER]
Under normal circumstances, the fund invests at least 65% of assets in bonds or
debentures. Typically, at least three-quarters of these debt securities
(excluding commercial paper) will be: o securities rated among the four highest
Moody's or S&P rating categories at the time of purchase o if unrated, the
equivalent of the above o bank securities o U.S. Government and agency
securities
For liquidity and flexibility, the fund may place up to 35% of its net 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 dollar-denominated foreign
securities, asset-backed securities, junk bonds and leveraged investments, and
may engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS]
Investors should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities. To the extent that the
fund invests in mortgage-backed securities, it may also be subject to extension
and prepayment risks. These risks are defined in "More about risk" starting on
page 29. The longer the fund's average weighted maturity, the more it is likely
to be affected by a change in interest rates. Other factors that can affect
performance are economic news, investor demand and world political and economic
conditions. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON]
James K. Ho, leader of the fund's portfolio management team since 1988, is an
executive vice president and the senior fixed-income officer of the adviser. He
joined John Hancock Funds in 1985.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SYMBOL]
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.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
================================================================================
<S> <C> <C>
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
- --------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
================================================================================
<S> <C> <C>
Management fee 0.50% 0.50%
- --------------------------------------------------------------------------------
12b-1 fee(3) 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.35% 0.35%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.15% 1.85%
- --------------------------------------------------------------------------------
</TABLE>
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%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
================================================================================
<S> <C> <C> <C> <C>
Class A shares $56 $80 $105 $178
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $69 $88 $120 $199
- --------------------------------------------------------------------------------
Assuming no redemption $19 $58 $100 $199
- --------------------------------------------------------------------------------
</TABLE>
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) May include carry-over of reimbursable costs from previous year(s). Amounts
shown are the fund's current annual maximums for 12b-1 fees. 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 SOVEREIGN BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN]
The figures below have been audited by the fund's independent auditors,
VOLATILITY, AS INDICATED BY CLASS A YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<C> <C>
1986 13.67
1987 1.58
1988 9.82
1989 12.13
1990 6.71
1991 16.59
1992 8.08
1993 11.80
1994 (2.75)
1995 19.40
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1986 1987 1988 1989 1990 1991 1992
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.85 $15.89 $14.53 $14.51 $14.77 $14.33 $15.31
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 1.55 1.40 1.44 1.43 1.32 1.29 1.20
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.52 (1.17) (0.06) 0.27 (0.40) 0.98 (0.01)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.07 0.23 1.38 1.70 0.92 2.27 1.19
- ----------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (1.53) (1.53) (1.40) (1.44) (1.35) (1.29) (1.21)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on
investments sold and financial futures contracts (0.50) (0.06) -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- -- -- (0.01) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.03) (1.59) (1.40) (1.44) (1.36) (1.29) (1.21)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.89 $14.53 $14.51 $14.77 $14.33 $15.31 $15.29
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(1) (%) 13.67 1.58 9.82 12.13 6.71 16.59 8.08
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 1,152,407 1,095,208 1,103,691 1,110,394 1,103,391 1,249,980 1,386,260
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.72 0.82 0.82 0.80 1.31 1.27 1.44
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average
net assets (%) 9.65 9.32 9.77 9.68 9.18 8.81 7.89
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 163 159 66 64 92 90 87
- ----------------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(2) N/A N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED DECEMBER 31, 1993 1994 1995
=========================================================================================
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.29 $15.53 $13.90
- ---------------------------------------------------------------------------------------------
Net investment income (loss) 1.14 1.12 1.12
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.62 (1.55) 1.50
- ---------------------------------------------------------------------------------------------
Total from investment operations 1.76 (0.43) 2.62
- ---------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------
Dividends from net investment income (1.14) (1.12) (1.12)
- ---------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold
and financial futures contracts (0.38) (0.08) --
- ---------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- --
- ---------------------------------------------------------------------------------------------
Total distributions (1.52) (1.20) (1.12)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $15.53 $13.90 $15.40
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(1) (%) 11.80 (2.75) 19.40
- ---------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 1,505,754 1,326,058 1,535,204
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.41 1.26 1.13
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net
assets (%) 7.18 7 .74 7.58
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 107 85 103
- ---------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(2) N/A N/A N/A
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED DECEMBER 31, 1993(2) 1994 1995
=============================================================================================
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.90(4) $ 15.52 $ 13.90
- ---------------------------------------------------------------------------------------------
Net investment income (loss) 0.11 1.04 1.02
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
financial futures contracts -- (1.54) 1.50
- ---------------------------------------------------------------------------------------------
Total from investment operations 0.11 (0.50) 2.52
- ---------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------
Dividends from net investment income (0.11) (1.04) (1.02)
- ---------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold
and financial futures contracts (0.38) (0.08) --
- ---------------------------------------------------------------------------------------------
Total distributions (0.49) (1.12) (1.02)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $15.52 $ 13.90 $ 15.40
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(1) (%) 0.90(5) (3.13) 18.66
- ---------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.63(6) 1.78 1.75
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 0.57(6) 7.30 6.87
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 107 85 103
- ---------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(2) N/A N/A N/A
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(2) Per portfolio share traded. Required for fiscal years that began Spetember
1, 1995 or later.
(3) Class B shares commenced operations on November 23, 1993.
(4) Initial price at commencement of operations.
(5) Not annualized.
(6) Annualized.
SOVEREIGN BOND FUND 13
<PAGE>
SOVEREIGN U.S. GOVERNMENT INCOME FUND
REGISTRANT NAME: JOHN HANCOCK STRATEGIC SERIES
TICKER SYMBOL CLASS A: JHSGX CLASS B: FGOPX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT]
The fund seeks to provide as high level of income as is consistent with
long-term total return. To pursue this goal, the fund invests in U.S. Government
and agency securities, as described below.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER]
Under normal circumstances, the fund invests at least 65% of assets in
securities that are issued, or guaranteed as to principal and interest, by the
U.S. Government, its agencies or instrumentalities. These may include Treasuries
and mortgage-backed securities such as Ginnie Maes and Fannie Maes.
For liquidity and flexibility, the fund may place up to 35% of net 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 leveraged investments, and may
engage in other investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS]
As with most income investments, 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 debt securities (including U.S.
Government and mortgage-backed securities). To the extent that the fund invests
in mortgage-backed securities, it may also be subject to extension and
prepayment risks. These risks are defined in "More about risk" starting on page
29. Other factors may affect the market price and yield of the fund's
securities, including investor demand and economic conditions.
The U.S. Government does not guarantee the market value or the current yield of
government securities, nor does the government's guarantee in any way extend to
the fund itself. Please read "More about risk" carefully before investing.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON]
Barry H. Evans, leader of the fund's portfolio management team since 1995, is a
senior vice president of the adviser. He joined John Hancock Funds in 1986.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SYMBOL]
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.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
================================================================================
<S> <C> <C>
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
- --------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
================================================================================
<S> <C> <C>
Management fee 0.50% 0.50%
- --------------------------------------------------------------------------------
12b-1 fee(3) 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.32% 0.32%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.12% 1.82%
- --------------------------------------------------------------------------------
</TABLE>
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%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
================================================================================
<S> <C> <C> <C> <C>
Class A shares $56 $79 $104 $175
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $68 $87 $119 $195
- --------------------------------------------------------------------------------
Assuming no redemption $18 $57 $ 99 $195
- --------------------------------------------------------------------------------
</TABLE>
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) May include carry-over of reimbursable costs from previous year(s). Amounts
shown are the fund's current annual maximums for 12b-1 fees. 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 SOVEREIGN U.S. GOVERNMENT FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN]
The figures below have been audited by the fund's independent accountants,
VOLATILITY, AS INDICATED BY CLASS B YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<S> <C>
1987(5) 2.61
1987(6) 3.70(8)
1988 11.53(8)
1989 11.52(8)
1990 6.24(8)
1991 14.46
1992 7.58
1993 12.66
1994 (7.05)
1995 15.27
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED OCTOBER 31, 1992(1) 1993 1994 1995
===============================================================================================================
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.51 $ 10.29 $ 10.89 $ 9.24
- ---------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.64 0.68(2) 0.65 0.65
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
financial futures contracts (0.22) 0.61 (1.34) 0.77
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations 0.42 1.29 (0.69) 1.42
- ---------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.64) (0.68) (0.65) (0.65)
- ---------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.01) (0.31) --
- ---------------------------------------------------------------------------------------------------------------
Total distributions (0.64) (0.69) (0.96) (0.65)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.29 $ 10.89 $ 9.24 $ 10.01
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 5.33(4) 12.89 (6.66) 15.90
- ---------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 350,907 375,416 315,372 370,966
- ---------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.06(4) 1.30 1.23 1.17
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.11(4) 6.47 6.62 6.76
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 140 273 127 94
- ---------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(5) N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1987(6) 1987(7) 1988 1989 1990
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.00 $ 10.28 $ 9.45 $ 9.73 $ 10.01
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.56 0.48 0.78 0.81 0.85
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.36 (0.75) 0.28 0.25 (0.25)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.92 (0.27) 1.06 1.06 0.60
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.57) (0.48) (0.77) (0.77) (0.78)
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.07) (0.08) (0.01) (0.01) --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.64) (0.56) (0.78) (0.78) (0.78)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.28 $ 9.45 $ 9.73 $ 10.01 $ 9.83
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 2.61 3.70(8) 11.53(8) 11.52(8) 6.24(8)
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 164,001 170,030 161,163 144,756 133,778
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.26(4) 1.24 1.29 1.35 1.54
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets (%) N/A 1.32(4,8) 1.35(8) 1.58(8) 1.55(8)
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.56(4) 7.94(4) 8.09 8.34 8.54
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) N/A 7.86(4) 8.03 8.11 8.53
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 108(4) 83(4) 79 45 63
- -------------------------------------------------------------------------------------------------------------------------------
Fee reduction per share ($) N/A 0.01 0.01 0.02 0.01
- -------------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(5) N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED OCTOBER 31, 1991 1992 1993 1994 1995
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.83 $ 10.29 $ 10.28 $ 10.88 $ 9.23
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.85 0.76 0.66(2) 0.61 0.60
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
financial futures contracts 0.51 -- 0.61 (1.34) 0.77
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.36 0.76 1.27 (0.73) 1.37
- -----------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.90) (0.77) (0.66) (0.61) (0.60)
- -----------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- -- (0.01) (0.31) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (0.90) (0.77) (0.67) (0.92) (0.60)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.29 $ 10.28 $ 10.88 $ 9.23 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 14.46 7.58 12.66 (7.05) 15.27
- -----------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 164,347 197,032 244,133 196,899 130,824
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.51 1.55 1.51 1.64 1.72
- -----------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets (%) N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 8.53 7.35 6.23 6.19 6.24
- -----------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average
net assets(9) (%) N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 62 140 273 127 94
- -----------------------------------------------------------------------------------------------------------------------
Fee reduction per share ($) N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(5) N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
</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) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(6) For the period June 5, 1986 (commencement of operations) to March 31, 1987.
(7) For the period April 1, 1987 to October 31, 1987.
(8) Without reimbursement total return would have been lower.
(9) Unreimbursed, without fee reduction.
SOVEREIGN U.S. GOVERNMENT FUND 15
<PAGE>
STRATEGIC INCOME FUND
REGISTRANT NAME: JOHN HANCOCK STRATEGIC SERIES
TICKER SYMBOL CLASS A: JHFIX CLASS B: STIBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[A GRAPHIC IMAGE OF A BULLSEYE WITH AN ARROW IN THE MIDDLE OF IT]
The fund seeks a high level of current income. To pursue this goal, the fund
invests primarily in three sectors: o foreign government and corporate debt
securities o U.S. Government and agency securities o junk bonds, i.e
lower-rated, higher-yielding debt securities
Under normal circumstances, the fund's assets will be invested in all three
sectors. However, the weighting of assets among sectors will be adjusted to
reflect current or anticipated market behavior, and the fund reserves the right
to invest up to 100% of assets in any sector.
PORTFOLIO SECURITIES
[A GRAPHIC IMAGE OF A BLACK FOLDER THAT CONTAINS A COUPLE SHEETS OF PAPER]
The fund may invest in debt securities of all maturities and types, including
bonds, debentures, notes, preferred stock, mortgage-backed and asset-backed
securities and others. The fund may also invest up to 10% of its net assets in
U.S. or foreign equities.
For liquidity and flexibility, the fund may invest 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 leveraged investments, and may engage in other
investment practices.
RISK FACTORS
[A GRAPHIC IMAGE OF A LINE CHART WITH A SINGLE LINE THAT DEPICTS SOME PEAKS AND
VALLEYS]
Investors should expect fluctuations in share price, yield, and total return
that are above-average for bond funds. Typically, a rise in interest rates
causes a decline in the market value of debt securities. A fall in interest
rates can result in net lower yields from assets invested in mortgage-backed
securities. The longer the fund's average weighted maturity, the more it is
likely to be affected by a change in interest rates. Junk bond markets may react
strongly to adverse news about an issuer or the economy, or to the perception or
expectation of adverse news. To the extent that the fund invests in these types
of securities, it assumes the various risks associated with each one. In
addition, there is the risk that the asset weightings chosen by the fund
managers may result in share price declines or lost opportunities for gains.
Before you invest, please read "More about risk" starting on page 29.
PORTFOLIO MANAGEMENT
[A GRAPHIC IMAGE OF A GENERIC PERSON]
Frederick L. Cavanaugh, Jr., leader of the fund's portfolio management team
since 1986, is a senior vice president of the adviser. He joined John Hancock
Funds in 1986 and has worked in the investment business since 1973.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
[A GRAPHIC IMAGE OF A PERCENT SYMBOL]
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.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
================================================================================
<S> <C> <C>
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
- --------------------------------------------------------------------------------
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS A % OF NET ASSETS)
================================================================================
<S> <C> <C>
Management fee 0.46% 0.46%
- --------------------------------------------------------------------------------
12b-1 fee(3) 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.34% 0.34%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.10% 1.80%
- --------------------------------------------------------------------------------
</TABLE>
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%.
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
================================================================================
<S> <C> <C> <C> <C>
Class A shares $56 $78 $103 $173
- --------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------
Assuming redemption
at end of period $68 $87 $117 $193
- --------------------------------------------------------------------------------
Assuming no redemption $18 $57 $ 97 $193
- --------------------------------------------------------------------------------
</TABLE>
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) May include carry-over of reimbursable costs from previous year(s). Amounts
shown are the fund's current annual maximums for 12b-1 fees. 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 STRATEGIC INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
[A GRAPHIC IMAGE OF A DOLLAR SIGN]
The figures below have been audited by the fund's independent accountants,
VOLATILITY, AS INDICATED BY CLASS A YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%)
<TABLE>
<S> <C>
1987(1) 4.81(6)
1988 6.89
1989 9.72
1990 (7.36)
1991 12.31
1992 19.92
1993 6.81
1994 4.54
1995 9.33
1995(2) 7.30(6)
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED MAY 31, 1987(1) 1988 1989 1990 1991
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.00 $ 9.71 $ 9.24 $ 8.98 $ 7.33
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.79(3) 1.13(3) 1.12(3) 1.04(3) 0.93
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.29) (0.47) (0.26) (1.65) (0.13)
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.50 0.66 0.86 (0.61) 0.80
- --------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.79) (1.13) (1.12) (1.04) (0.93)
- --------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (0.79) (1.13) (1.12) (1.04) (0.93)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.71 $ 9.24 $ 8.98 $ 7.33 $ 7.20
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 4.81(6) 6.89 9.72 (7.36) 12.31
- --------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 30,260 67,140 95,430 80,890 79,272
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.00(3,7) 1.09(3) 1.33(3) 1.53(3) 1.75
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 10.87(3,7) 12.07(3) 12.28(3) 12.60(3) 13.46
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 207 67 125 81 60
- --------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(8) N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS A - YEAR ENDED MAY 31, 1992 1993 1994 1995 1995(2)
============================================================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 7.20 $ 7.78 $ 7.55 $ 7.17 $ 7.15
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.80 0.71 0.68 0.64 0.38
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts 0.52 (0.22) (0.33) (0.02) 0.17
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.32 0.49 0.35 0.62 0.55
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.74)(4) (0.72) (0.58)(4) (0.55) (0.38)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income -- -- (0.05) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- (0.10) (0.09) --
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.74) (0.72) (0.73) (0.64) (0.38)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.78 $ 7.55 $ 7.17 $ 7.15 $ 7.32
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) 19.92 6.81 4.54 9.33 7.30(6)
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 153,568 262,137 335,261 327,876 349,782
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.69 1.58 1.32 1.09 1.03(7)
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 10.64 9.63 8.71 9.24 9.40(7)
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 80 97 91 55 44
- ----------------------------------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(8) N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B - YEAR ENDED MAY 31, 1994(1) 1995 1995(2)
====================================================================================================
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 7.58(9) $ 7.17 $ 7.15
- ----------------------------------------------------------------------------------------------------
Net investment income (loss) 0.40 0.60(10) 0.36
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.41) (0.02) 0.16
- ----------------------------------------------------------------------------------------------------
Total from investment operations (0.01) 0.58 0.52
- ----------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------
Dividends from net investment income (0.32) (0.52) (0.35)
- ----------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.03) -- --
- ----------------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.05) (0.08) --
- ----------------------------------------------------------------------------------------------------
Total distributions (0.40) (0.60) (0.35)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.17 $ 7.15 $ 7.32
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(5) (%) (0.22)(6) 8.58 6.93(6)
- ----------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 77,691 134,527 159,164
- ----------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.91(7) 1.76 1.71(7)
- ----------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 8.12(7) 8.55 8.72(7)
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 55 44
- ----------------------------------------------------------------------------------------------------
Average brokerage commission rate ($)(8) N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Class A and Class B shares commenced operations on August 18, 1986 and
October 4, 1993, respectively.
(2) Six months ended November 30, 1995. (Unaudited.)
(3) Reflects expense limitations in effect during the years indicated. As a
result of these limitations, the Fund's expenses for the years ended May 31
1987, 1988, 1989 and 1990 reflect reductions of $0.0856, $0.0373, $0.0128
and $0.0073, respectively. Absent from the limitations, for the years ended
May 31, 1987, 1988, 1989 and 1990, the ratio of expenses to average net
assets would have been 2.17%, 1.49%, 1.47% and 1.62%, respectively, and the
ratio of net investment income to average net assets would have been 9.70%,
11.67%, 12.14% and 12.51% respectively.
(4) The dividend policy of the Fund was changed, effective August 1, 1991, from
one which utilized daily dividend declarations to one which declares
dividends monthly. Additionally, the dividend policy of the Fund was
changed, effective October 1, 1993, from one which declared dividends
monthly to daily dividend declarations.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(9) Initial price at commencement of operations.
(10) Based on the average of the shares outstanding at the end of each month.
STRATEGIC INCOME FUND 17
<PAGE>
YOUR ACCOUNT
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock income funds offer two classes of shares, Class A and Class B.
Each class has its own cost structure, allowing you to choose the one that best
meets your requirements. Your financial representative can help you decide.
CLASS A
- - Front-end sales charges, as described below. There are several ways to
reduce these charges, also described below.
- - Lower annual expenses than Class B shares.
CLASS B
- - No front-end sales charge; all your money goes to work for you right away.
- - Higher annual expenses than Class A shares.
- - A deferred sales charge, as described below.
- - Automatic conversion to Class A shares after either five years (Group 1) or
eight years (Group 2) (see below), thus reducing future annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Use the table below to find out which group the fund is in, then consult the
sales charge information for that group.
GROUP 1
- - Limited-Term Government
- - Intermediate Maturity Government
GROUP 2
- - Government Income
- - High-Yield Bond
- - Sovereign Bond
- - Sovereign U.S. Government Income
- - Strategic Income
Class A Sales charges are as follows:
CLASS A SALES CHARGES - GROUP 1
<TABLE>
<CAPTION>
AS A % OF AS A % OF YOUR
YOUR INVESTMENT OFFERING PRICE INVESTMENT
- ----------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------
</TABLE>
CLASS A SALES CHARGES - GROUP 2
<TABLE>
<CAPTION>
AS A % OF AS A % OF YOUR
YOUR INVESTMENT OFFERING PRICE INVESTMENT
- ----------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------
</TABLE>
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 (GROUPS 1 AND 2)
<TABLE>
<CAPTION>
YOUR INVESTMENT CDSC ON SHARES BEING SOLD
- ---------------------------------------------------------
<S> <C>
First $1M - $4,999,999 1.00%
- ---------------------------------------------------------
Next $1 - $5M above that 0.50%
- ---------------------------------------------------------
Next $1 or more above that 0.25%
- ---------------------------------------------------------
</TABLE>
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.
18 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 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
<TABLE>
<CAPTION>
YEARS AFTER CDSC ON GROUP 1 CDSC ON GROUP 2
PURCHASE SHARES BEING SOLD SHARES BEING SOLD
- ----------------------------------------------------------
<S> <C> <C>
1st year 3.0% 5.0%
- ----------------------------------------------------------
2nd year 2.0% 4.0%
- ----------------------------------------------------------
3rd year 2.0% 3.0%
- ----------------------------------------------------------
4th year 1.0% 3.0%
- ----------------------------------------------------------
5th year None 2.0%
- ----------------------------------------------------------
6th year None 1.0%
- ----------------------------------------------------------
7th or more years None None
- ----------------------------------------------------------
</TABLE>
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.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCING YOUR CLASS A SALES CHARGES There are several ways you can combine
multiple purchases of Class A shares in John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
- - 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.
- - 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.
- - Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section on your application, or contact
your financial representative or Investor Services to add these options to an
existing account (see the back cover of this prospectus).
GROUP INVESTMENT PROGRAM Allows established groups of four or more investors to
invest as a group. Each has an individual account, but for sales charge
purposes, their investments are lumped together, making the investors
potentially eligible for reduced sales charges. There is no charge, no
obligation to invest (although initial aggregate investments must be at least
$250), and you may terminate the program at any time.
To utilize: contact your financial representative or Investor Services to find
out how to qualify.
CDSC WAIVERS In general, the CDSC for either share class may be waived on shares
you sell for the following reasons:
- - to make payments through certain Systematic Withdrawal Plans
- - to make certain distributions from a retirement plan
- - because of shareholder death or disability
To utilize: contact your financial representative or Investor Services, or
consult the SAI (see the back cover of this prospectus).
REINSTATEMENT PRIVILEGE If you sell shares in a John Hancock fund, you may
invest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge. 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 Investor Services.
YOUR ACCOUNT 19
<PAGE>
WAIVERS FOR CERTAIN INVESTORS Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
- - government entities that are prohibited from paying mutual fund sales
charges
- - financial institutions or common trust funds investing $1 million or more
for non-discretionary accounts
- - selling brokers and their employees and sales representatives
- - financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
- - fund trustees and other individuals who are affiliated with these or other
John Hancock funds
- - individuals transferring assets to a John Hancock income fund from an
employee benefit plan that has John Hancock funds
- - member of an approved affinity group financial services plan
- - in the case of Limited-Term Government Fund, anyone investing the proceeds
from any non-John Hancock mutual fund, as long as that fund had sales
charges and the investor paid them; investors must supply a copy of the
redemption check or confirmation statement, and must remain invested in
Limited-Term Government Fund for at least 15 days
To utilize: if you think you may be eligible for a sales charge waiver, contact
Investor 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:
- non-retirement account: $1,000
- retirement account: $250
- group investments: $250
- Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Investor Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges
later on.
5 Make your initial investment using the table on the next page. You can
initiate any purchase, exchange or sale of shares through your financial
representative.
20 YOUR ACCOUNT
<PAGE>
BUYING SHARES
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY CHECK
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A BLANK CHECK.] - Make out a check for the investment - Make out a check for the investment
amount, payable to "John Hancock amount payable to "John Hancock Investor
Investor Services Corporation." Services Corporation."
- Deliver the check and your completed - Fill out the detachable investment slip
application to your financial from an account statement. If no slip is
representative, or mail to Investor available, include a note specifying the
Services (address below). fund name, your share class, your
account number, and the name(s) in which
the account is registered.
- Deliver the check and your investment
slip or note to your financial
representative, or mail to Investor
Services (address on below).
- ----------------------------------------------------------------------------------------------------------------------------
BY EXCHANGE
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A WITHE ARROW - Call your financial representative or - Call Investor Services to request an
OUTLINED IN BLACK THAT POINTS TO Investor Services to request an exchange.
THE RIGHT ABOVE A BLACK THAT POINTS exchange.
TO THE LEFT.]
- ----------------------------------------------------------------------------------------------------------------------------
BY WIRE
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A JAGGED WHITE - Deliver your completed application to - Instruct your bank to wire the amount of
ARROW OUTLINED IN BLACK THE POINTS your financial representative, or mail your investment to:
UPWARDS AT A 45 DEGREE ANGLE] it to Investor Services.
First Signature Bank & Trust
- Obtain your account number by calling Account # 900000260
your financial representative or Routing # 211475000
Investor Services. Specify the fund name, your share class,
your account number and the name(s) in
- Instruct your bank to wire the amount of which the account is registered. Your
your investment to: bank may charge a fee to wire funds.
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
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A TELEPHONE.] See "By wire" and "By exchange." - Verify that your bank or credit union is
a member of the Automated Clearing House
(ACH) system.
- Complete the "Invest-By-Phone" and "Bank
Information" sections on your Account
Privileges Application.
- Call Investor Services to verify that
these features are in place on your
account.
- Tell the Investor 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.
</TABLE>
ADDRESS
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116 BOSTON, MA 02205-9116
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 21
<PAGE>
SELLING SHARES
<TABLE>
<CAPTION>
DESIGNED FOR TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY LETTER
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF THE BACK OF - Accounts of any type. - Write a letter of instruction or stock
AN ENVELOPE.] power indicating the fund name, your
- Sales of any amount. 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.
- Include all signatures and any
additional documents that may be
required (see next page).
- Mail the materials to Investor Services.
- 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
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A TELEPHONE.] - Most accounts. - For automated service 24 hours a day
using your Touch-Tone phone, call the
- Sales of up to $100,000. John Hancock Funds EASI-Line at
1-800-338-8080.
- To place your order with a
representative at John Hancock Funds,
call Investor Services between 8 A.M.
and 4 P.M. on most business days.
- ----------------------------------------------------------------------------------------------------------------------------
BY WIRE OR ELECTRONIC FUNDS TRANSFER (EFT)
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A JAGGED WHITE - Requests by letter to sell any amount - Fill out the "Telephone redemption"
ARROW OUTLINED IN BLACK THE POINTS (accounts of any type). section of your new account application.
UPWARDS AT A 45 DEGREE ANGLE.]
- Requests by phone to sell up to $100,000 - To verify that the telephone redemption
(accounts with telephone redemption privilege is in place on an account, or
privileges). to request the forms to add it to an
existing account, call Investor
Services.
- Amounts of $1,000 or more will be wired
on the next business day. A $4 fee will
be deducted from your account.
- 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
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A WITHE ARROW - Accounts of any type. - Obtain a current prospectus for the fund
OUTLINED IN BLACK THAT POINTS TO into which you are exchanging by calling
THE RIGHT ABOVE A BLACK THAT POINTS - Sales of any amount. your financial representative or
TO THE LEFT.] Investor Services.
- Call Investor Services to request an
exchange.
- ----------------------------------------------------------------------------------------------------------------------------
BY CHECK
- ----------------------------------------------------------------------------------------------------------------------------
[A GRAPHIC IMAGE OF A BLANK CHECK.] - Government Income, Limited-Term - Request checkwriting on your new account
Government, Sovereign U.S. Government application.
and Strategic Income Funds only.
- Verify that the shares to be sold were
- Any account with checkwriting purchased more than 15 days earlier or
privileges. were purchased by wire.
- Sales of over $100. - Write a check for any amount over $100.
</TABLE>
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
ADDRESS
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116 BOSTON, MA 02205-9116
PHONE NUMBER
1-800-225-5291
OR CONTACT YOUR FINANCIAL REPRESENTATIVE
FOR INSTRUCTIONS AND ASSISTANCE.
22 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:
- - your address of record has changed within the past 30 days
- - you are selling more than $100,000 worth of shares
- - you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
- - a broker or securities dealer
- - a federal savings, cooperative or other type of bank
- - a savings and loan or other thrift institution
- - a credit union
- - a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
[A GRAPHIC IMAGE OF THE BACK OF AN ENVELOPE.]
<TABLE>
<CAPTION>
SELLER REQUIREMENTS FOR WRITTEN REQUESTS
- --------------------------------------------------------------------------------
<S> <C>
Owners of individual, joint, sole - Letter of instruction.
proprietorship, UGMA/UTMA (custodial
accounts for minors) or general partner - On the letter, the signatures and
accounts. titles of all persons authorized to
sign for the account, exactly as the
account is registered.
- Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Owners of corporate or association - Letter of instruction.
accounts.
- Corporate resolution, certified
within the past 90 days.
- On the letter and the resolution, the
signature of the person(s) authorized
to sign for the account.
- Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Owners or trustees of trust accounts. - Letter of instruction.
- On the letter, the signature(s) of
the trustee(s).
- 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 60
days.
- Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Joint tenancy shareholders whose - Letter of instruction signed by
co-tenants are deceased. surviving tenant.
- Copy of death certificate.
- Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Executors of shareholder estates. - Letter of instruction signed by
executor.
- Copy of order appointing executor.
- Signature guarantee if applicable
(see above).
- --------------------------------------------------------------------------------
Administrators, conservators, guardians - Call 1-800-225-5291 for instructions.
and other sellers or account types not
listed above.
- --------------------------------------------------------------------------------
</TABLE>
YOUR ACCOUNT 23
<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' 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, as described earlier.
EXECUTION OF REQUESTS Each fund is open on those days when the New York Stock
Exchange is open, typically Monday - Friday. Buy and sell requests are executed
at the next NAV to be calculated after your request is accepted by Investor
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, Investor Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or taxpayer ID number and other relevant information.
If these measures are not taken, Investor Services is 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 your John Hancock fund for shares of the
same class in any other John Hancock fund, generally without paying any
additional sales charges. Class B shares will continue to age from the original
date and will retain the same CDSC rate as they had before the exchange, except
that the rate will change to that of the new fund if the new fund's 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 change or cancel its exchange
privilege at any time, upon 60 days' notice to its shareholders. A fund may also
refuse any exchange order.
Merrill Lynch customers may exchange between Summit Cash Reserve accounts and
Class B shares of any John Hancock fund. When selling Class B shares, CDSC
calculations will be based only on the time their assets were invested in a John
Hancock fund.
CERTIFICATED SHARES Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Investor Services. Certificated
shares can only be sold by returning the certificates to Investor 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 calendar 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.
ELIGIBILITY BY STATE You may only invest in, or exchange into, fund shares that
are legally available in your state.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
ACCOUNT STATEMENTS In general, you will receive account statements as follows:
- - after every transaction (except a dividend reinvestment) that affects
your account balance
- - after any changes of name or address of the registered owner(s)
- - in all other circumstances, every quarter.
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS The funds generally declare dividends daily and pay them monthly.
Short- and long-term capital gains, if any, are distributed annually, typically
after the end of a fund's fiscal year. Your dividends begin accruing the day
after payment is received by the fund and continue through the day your shares
are actually sold.
24 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.
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, your fund's transfer agent 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) 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:
- - Complete the appropriate parts of your Account Privileges Application.
- - If you are using MAAP to open an account, make out a check ($25
minimum) for your first investment amount payable to "John Hancock
Investor Services Corporation." Deliver your check and application to
your financial representative or Investor Services.
SYSTEMATIC WITHDRAWAL PLAN May be used for routine bill payment or periodic
withdrawals from your account. To establish:
- - Make sure you have at least $5,000 worth of shares in your account.
- - 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).
- - 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.
- - Determine the schedule: monthly, quarterly, semi-annually, annually, or
in certain selected months.
- - Fill out the relevant part of the Account Privileges Application. To
add a Systematic Withdrawal Plan to an existing account, contact your
financial representative or Investor Services.
RETIREMENT PLANS John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, SARSEPs, TSAs, 401(k) plans, 403(b) plans and other
pension and profit-sharing plans. Using these plans, you can invest in any John
Hancock fund with a low minimum investment of $250 or, for some group plans, no
minimum investment at all. To find out more, call Investor Services at
1-800-225-5291.
YOUR ACCOUNT 25
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
HOW THE FUNDS ARE ORGANIZED Each John Hancock income fund is an open-end
management investment company or a series of such a company.
Each fund is supervised by a board of trustees or a board of directors, an
independent body which 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 that 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 income funds may include
individuals who are affiliated with the investment adviser. However, the
majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
[ A FLOW CHART THAT CONTAINS 8 RECTANGULAR-SHAPED BOXES AND ILLUSTRATES THE
HIERACHY OF HOW THE FUNDS ARE ORGANIZED. WITHIN THE FLOWCHART, THERE ARE 5
TIERS. THE TIERS ARE CONNECTED BY SHADED LINES.
SHAREHOLDERS REPRESENT THE FIRST TIER. THERE IS A SHADED VERTICAL ARROW ON THE
LEFT-HAND SIDE OF THE PAGE. THE ARROW HAS ARROWHEADS ON BOTH ENDS AND IS
CONTAINED WITHIN TWO HORIZONTAL, SHADED LINES. THIS IS MEANT TO HIGHLIGHT TIERS
TWO AND THREE WHICH FOCUS ON DISTRIBUTION AND SHAREHOLDER SERVICES.
FINANCIAL SERVICES FIRMS AND THEIR REPRESENTATIVES ARE SHOWN ON THE SECOND TIER.
PRINCIPAL DISTRIBUTOR AND TRANSFER AGENT ARE SHOWN ON THE THIRD TIER.
A SHADED VERTICAL ARROW ON THE RIGHT-HAND SIDE OF THE PAGE DENOTES THOSE
ENTITIES INVOLVED IN THE ASSET MANAGEMENT. THE ARROW HAS ARROWHEADS ON BOTH ENDS
AND IS CONTAINED WITHIN TWO HORIZONTAL, SHADED LINES. THIS FOURTH TIER INCLUDES
THE SUBADVISOR, INVESTMENT ADVISOR AND THE CUSTODIAN.
THE FIFTH TIER CONTAINS THE TRUSTEES/DIRECTORS.]
26 FUND DETAILS
<PAGE>
ACCOUNTING COMPENSATION The funds compensate the adviser for performing tax and
financial management services. Annual compensation for 1996 is estimated to be
0.01875% 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 that 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.
ADVERTISEMENT OF PERFORMANCE The funds may include figures for yield (where
appropriate) and total return in advertisements and other sales materials, as
follows:
DEFINITIONS OF PERFORMANCE MEASURES
MEASURE DEFINITION
Cumulative Overall dollar or percentage change of a hypothetical
total return investment over the stated time period.
Average Cumulative total return divided by the number of years in
annual total the period. The result is an average and is not the same as
return the actual year-to-year results.
Yield A measure of income, calculated by taking the net investment
income per share for a 30-day period, dividing it by the
offering price per share on the last day of the period (if
there is more than one offering price, the highest price is
used) and annualizing the result. While this is 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.
All performance figures assume that dividends are reinvested, and show the
effect of all applicable sales charges. Class A performance figures generally
are calculated using the maximum sales charge. Because each share class has its
own sales charge and fee structures, the classes have different performance
results.
INVESTMENT GOALS Except for Government Income Fund, High Yield Bond Fund and
Intermediate Maturity Government Fund, each fund's investment goal is
fundamental and may only be changed with shareholder approval.
- --------------------------------------------------------------------------------
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 fund in assets ("12b-1" refers to the
federal securities regulation that authorizes 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' respective boards. 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.
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.
From time to time, as an additional incentive to these firms, John Hancock Funds
may increase the reallowance on Class A shares to as much as the entire
front-end sales charge.
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. Firms affiliated
with John Hancock, which include Tucker Anthony, Sutro & Company and John
Hancock Distributors, may receive an additional fee of up to 0.05% a year of
their total eligible net assets.
FUND DETAILS 27
<PAGE>
CLASS A INVESTMENTS
<TABLE>
<CAPTION>
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>
GROUP 1 FUNDS
- --------------------------------------------------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------------------------------------------------
GROUP 2 FUNDS
- --------------------------------------------------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------------------------------------------------
REGULAR INVESTMENTS OF $1 MILLION OR MORE (GROUPS 1 AND 2)
- --------------------------------------------------------------------------------------------------------------------------
First $1M - $4,999,999 -- 1.00% 0.25% 1.24%
- --------------------------------------------------------------------------------------------------------------------------
Next $1 - $5M above that -- 0.50% 0.25% 0.74%
- --------------------------------------------------------------------------------------------------------------------------
Next $1 and more above that -- 0.25% 0.25% 0.49%
- --------------------------------------------------------------------------------------------------------------------------
Waiver investments(2) -- 0.00% 0.25% 0.25%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
CLASS B INVESTMENTS
<TABLE>
<CAPTION>
MAXIMUM
REALLOWANCE MAXIMUM
OR COMMISSION SERVICE FEE TOTAL COMPENSATION
(% OF OFFERING PRICE) (% OF NET INVESTMENT) (% OF OFFERING PRICE)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROUP 1 FUNDS
- ------------------------------------------------------------------------------------------
All amounts 2.75% 0.25% 3.00%
- ------------------------------------------------------------------------------------------
GROUP 2 FUNDS
- ------------------------------------------------------------------------------------------
All amounts 3.75% 0.25% 4.00%
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group that take advantage of the sales charge waivers
described earlier in this prospectus.
CDSC revenues collected by John Hancock Funds may be used to fund commission
payments when there is no initial sales charge.
28 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established the trustees --
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent 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
higher risk securities and investment practices, along with the risks associated
with them. The funds follow certain policies that may reduce these risks.
As with any bond fund, there is no guarantee that a John Hancock income fund
will earn income or show a positive total return over any period of time.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
CORRELATION RISK The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). 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.
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.
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.
- - HEDGED When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position which
the fund also holds, any loss generated by the derivative should be offset
by gains on the hedged investment, and vice versa. While hedging can reduce
or eliminate losses, it can also reduce or eliminate gains.
- - 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 securities and practices.
MARKET RISK The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them.
OPPORTUNITY RISK The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in other 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, 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.
FUND DETAILS 29
<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).
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
X No policy limitation on usage; fund
may be using currently
# Permitted, but has not typically
been used
- -- Not permitted
<TABLE>
<CAPTION>
GOVERNMENT INCOME HIGH YIELD BOND INTERMEDIATE MATURITY GOV'T
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment practices
BORROWING; REVERSE REPURCHASE AGREEMENTS The borrowing of money 33.3 33.3 33.3
from banks or through reverse repurchase agreements. Leverage,
credit risks.
MORTGAGE DOLLAR ROLL TRANSACTIONS The sale of mortgage-backed X X(1) X
securities with the commitment to buy back similar securities
at a future date. Credit, interest rate, leverage, market,
opportunity risks.
REPURCHASE AGREEMENTS The purchase of a security that must X X X
later be sold back to the issuer at the same price plus interest.
Credit risk.
SECURITIES LENDING The lending of securities to financial 33 33 33.3
institutions, which provide cash or government securities as
collateral. Credit risk.
SHORT-TERM TRADING Selling a security soon after purchase. A X X X
portfolio engaging in short-term trading will have higher
turnover and transaction expenses. Market risk.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase or X X X
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 -- X --
governments or companies. Credit, currency, interest rate,
market, political risks.
IN-KIND, DELAYED AND ZERO COUPON DEBT SECURITIES Securities X X X
offering non-cash or delayed-cash payment. Their prices are
typically more volatile than those of conventional debt
securities. Credit, interest rate, market risks.
RESTRICTED AND ILLIQUID SECURITIES Securities not traded on 10 10 15
the open market. May include illiquid Rule 144A securities.
Liquidity, valuation, market risks.
- ------------------------------------------------------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
ASSET-BACKED SECURITIES Securities backed by unsecured debt, 35 X 35
such as credit card debt; these securities are often
guaranteed or over-collateralized to enhance their credit
quality. Credit, interest rate risks.
MORTGAGE-BACKED SECURITIES Securities backed by pools of X X X
mortgages, including passthrough certificates, PACs, TACs
and other senior classes of collateralized mortgage
obligations (CMOs). Credit, extension, prepayment, interest
rate risks.
PARTICIPATION INTERESTS Securities representing an interest -- 10(3) --
in another security or in bank loans. Credit, interest rate,
liquidity, valuation risks.
RIGHTS AND WARRANTS Securities offering the right, or 5 5 5
involving the promise, to buy or sell certain securities at a
future date. Market risk.
<CAPTION>
LIMITED-TERM GOVERNMENT SOVEREIGN BOND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment practices
BORROWING; REVERSE REPURCHASE AGREEMENTS The borrowing of money 33.3 33.3
from banks or through reverse repurchase agreements. Leverage,
credit risks.
MORTGAGE DOLLAR ROLL TRANSACTIONS The sale of mortgage-backed X X
securities with the commitment to buy back similar securities
at a future date. Credit, interest rate, leverage, market,
opportunity risks.
REPURCHASE AGREEMENTS The purchase of a security that must X X
later be sold back to the issuer at the same price plus interest.
Credit risk.
SECURITIES LENDING The lending of securities to financial 33.3 33
institutions, which provide cash or government securities as
collateral. Credit risk.
SHORT-TERM TRADING Selling a security soon after purchase. A X X
portfolio engaging in short-term trading will have higher
turnover and transaction expenses. Market risk.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase or X X
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 -- 25
governments or companies. Credit, currency, interest rate,
market, political risks.
IN-KIND, DELAYED AND ZERO COUPON DEBT SECURITIES Securities X X
offering non-cash or delayed-cash payment. Their prices are
typically more volatile than those of conventional debt
securities. Credit, interest rate, market risks.
RESTRICTED AND ILLIQUID SECURITIES Securities not traded on 15 15
the open market. May include illiquid Rule 144A securities.
Liquidity, valuation, market risks.
- ------------------------------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
ASSET-BACKED SECURITIES Securities backed by unsecured debt, 35 X
such as credit card debt; these securities are often
guaranteed or over-collateralized to enhance their credit
quality. Credit, interest rate risks.
MORTGAGE-BACKED SECURITIES Securities backed by pools of X X
mortgages, including passthrough certificates, PACs, TACs
and other senior classes of collateralized mortgage
obligations (CMOs). Credit, extension, prepayment, interest
rate risks.
PARTICIPATION INTERESTS Securities representing an interest -- 15(3)
in another security or in bank loans. Credit, interest rate,
liquidity, valuation risks.
RIGHTS AND WARRANTS Securities offering the right, or 5 5
involving the promise, to buy or sell certain securities at a
future date. Market risk.
<CAPTION>
SOVEREIGN U.S. GOV'T INCOME STRATEGIC INCOME
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment practices
BORROWING; REVERSE REPURCHASE AGREEMENTS The borrowing of money 33.3 33.3
from banks or through reverse repurchase agreements. Leverage,
credit risks.
MORTGAGE DOLLAR ROLL TRANSACTIONS The sale of mortgage-backed X X
securities with the commitment to buy back similar securities
at a future date. Credit, interest rate, leverage, market,
opportunity risks.
REPURCHASE AGREEMENTS The purchase of a security that must X X
later be sold back to the issuer at the same price plus interest.
Credit risk.
SECURITIES LENDING The lending of securities to financial 30 33.3
institutions, which provide cash or government securities as
collateral. Credit risk.
SHORT-TERM TRADING Selling a security soon after purchase. A X X
portfolio engaging in short-term trading will have higher
turnover and transaction expenses. Market risk.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase or X X
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 5 X
governments or companies. Credit, currency, interest rate,
market, political risks.
IN-KIND, DELAYED AND ZERO COUPON DEBT SECURITIES Securities X X
offering non-cash or delayed-cash payment. Their prices are
typically more volatile than those of conventional debt
securities. Credit, interest rate, market risks.
RESTRICTED AND ILLIQUID SECURITIES Securities not traded on 15 15
the open market. May include illiquid Rule 144A securities.
Liquidity, valuation, market risks.
- ----------------------------------------------------------------------------------------------------------------
UNLEVERAGED DERIVATIVE SECURITIES
ASSET-BACKED SECURITIES Securities backed by unsecured debt, 35 X
such as credit card debt; these securities are often
guaranteed or over-collateralized to enhance their credit
quality. Credit, interest rate risks.
MORTGAGE-BACKED SECURITIES Securities backed by pools of X X
mortgages, including passthrough certificates, PACs, TACs
and other senior classes of collateralized mortgage
obligations (CMOs). Credit, extension, prepayment, interest
rate risks.
PARTICIPATION INTERESTS Securities representing an interest -- 15(3)
in another security or in bank loans. Credit, interest rate,
liquidity, valuation risks.
RIGHTS AND WARRANTS Securities offering the right, or # 5
involving the promise, to buy or sell certain securities at a
future date. Market risk.
</TABLE>
(1) Covered rolls only.
(2) No more than 25% of the fund`s assets will be invested in government
securities of any one foreign country.
(3) Part of the 15% limitation on illiquid securities.
(4) Applies to purchase options only.
30 FUND DETAILS
<PAGE>
HIGHER RISK SECURITIES AND PRACTICES (CONT'D)
<TABLE>
<CAPTION>
GOVERNMENT INCOME HIGH YIELD BOND INTERMEDIATE MATURITY GOV'T
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LEVERAGED DERIVATIVE SECURITIES
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.
- - HEDGED. Currency, hedged leverage, correlation, -- X --
liquidity, opportunity risks.
- - SPECULATIVE. Currency, speculative leverage, -- -- --
liquidity risks.
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.
- - Futures and related options. Interest rate, X X X
currency, market, hedged or speculative leverage,
correlation, liquidity, opportunity risks.
- - Options on securities and indices. Interest rate, 5(4) 5(4) 5(4)
currency, market, hedged or speculative leverage,
correlation, liquidity, credit, opportunity risks.
STRUCTURED SECURITIES Indexed and/or leveraged 10 10 10
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 such
movements in a conventional fashion. Credit, interest
rate, extension, prepayment, market, speculative
leverage, liquidity, valuation risks.
SWAPS, CAPS, FLOORS, COLLARS OTC contracts involving X X X
the right or obligation to receive or make payments
based on two different income streams. Correlation,
credit, currency, interest rate, hedged or speculative
leverage, liquidity, valuation risks.
<CAPTION>
LIMITED-TERM GOVERNMENT SOVEREIGN BOND
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
LEVERAGED DERIVATIVE SECURITIES
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.
- - HEDGED. Currency, hedged leverage, correlation, -- X
liquidity, opportunity risks.
- - SPECULATIVE. Currency, speculative leverage, -- --
liquidity risks.
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.
- - Futures and related options. Interest rate, X X
currency, market, hedged or speculative leverage,
correlation, liquidity, opportunity risks.
- - Options on securities and indices. Interest rate, 5(4) 5(4)
currency, market, hedged or speculative leverage,
correlation, liquidity, credit, opportunity risks.
STRUCTURED SECURITIES Indexed and/or leveraged 10 10
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 such
movements in a conventional fashion. Credit, interest
rate, extension, prepayment, market, speculative
leverage, liquidity, valuation risks.
SWAPS, CAPS, FLOORS, COLLARS OTC contracts involving X X
the right or obligation to receive or make payments
based on two different income streams. Correlation,
credit, currency, interest rate, hedged or speculative
leverage, liquidity, valuation risks.
<CAPTION>
SOVEREIGN U.S. GOV'T INCOME STRATEGIC INCOME
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
LEVERAGED DERIVATIVE SECURITIES
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.
- - HEDGED. Currency, hedged leverage, correlation, -- X
liquidity, opportunity risks.
- - SPECULATIVE. Currency, speculative leverage, -- X
liquidity risks.
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.
- - Futures and related options. Interest rate, X X
currency, market, hedged or speculative leverage,
correlation, liquidity, opportunity risks.
- - Options on securities and indices. Interest rate, 5(4) 5(4)
currency, market, hedged or speculative leverage,
correlation, liquidity, credit, opportunity risks.
STRUCTURED SECURITIES Indexed and/or leveraged 10 X
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 such
movements in a conventional fashion. Credit, interest
rate, extension, prepayment, market, speculative
leverage, liquidity, valuation risks.
SWAPS, CAPS, FLOORS, COLLARS OTC contracts involving X X
the right or obligation to receive or make payments
based on two different income streams. Correlation,
credit, currency, interest rate, hedged or speculative
leverage, liquidity, valuation risks.
</TABLE>
ANALYSIS OF FUNDS WITH 5% OR MORE IN JUNK BONDS
<TABLE>
<CAPTION>
Quality rating
(S&P/Moody's)(1) High Yield Bond Fund Sovereign Bond Fund Strategic Income Fund
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT-GRADE BONDS
- ----------------------------------------------------------------------------------------------------
AAA/Aaa 2.0% 42.2% 25.13%
- ----------------------------------------------------------------------------------------------------
AA/Aa 0.0% 9.1% 8.4%
- ----------------------------------------------------------------------------------------------------
A/A 0.0% 14.6% 4.2%
- ----------------------------------------------------------------------------------------------------
BBB/Baa 1.7% 12.5% 1.4%
- ----------------------------------------------------------------------------------------------------
JUNK BONDS
- ----------------------------------------------------------------------------------------------------
BB/Ba 14.7% 11.1% 8.11%
- ----------------------------------------------------------------------------------------------------
B/B 63.7% 7.8% 41.1%
- ----------------------------------------------------------------------------------------------------
CCC/Caa 5.6% 0.2% 1.5%
- ----------------------------------------------------------------------------------------------------
CC/Ca 0.0% 0.0% 0.0%
- ----------------------------------------------------------------------------------------------------
C/C 0.0% 0.0% 0.0%
- ----------------------------------------------------------------------------------------------------
D/D 0.0% 0.0% 0.1%
- ----------------------------------------------------------------------------------------------------
% of portfolio in bonds 87.7% 97.5% 92.1%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Rated by S&P or Moody n Rated by the advisor
(1) 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 31
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
income funds:
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from the portfolio manager 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/ semi-annual report is included in the SAI.
The Statement of Additional Information has been filed with the Securities and
Exchange Commission and is incorporated by reference (is legally a part of this
prospectus).
To request a free copy of the current annual/semi-annual report or the SAI,
please write or call:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, MA 02205-9116
Telephone: 1-800-225-5291
TDD: 1-800-544-6713
[JOHN HANCOCK'S GRAPHIC
LOGO. A CIRCLE, DIAMOND,
TRIANGLE AND A CUBE]
JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 Huntington Avenue
Boston, Massachusetts 02199-7603
[JOHN HANCOCK SCRIPT LOGO]
(C) 1996 John Hancock Funds, Inc.
INCPN 8/96
<PAGE>
JOHN HANCOCK SOVEREIGN U.S. GOVERNMENT INCOME FUND
Class A and Class B Shares
Statement of Additional Information
August 30, 1996
This Statement of Additional Information provides information about John
Hancock Sovereign U.S. Government Income Fund (the "Fund"), in addition to the
information that is contained in the combined Taxable Bond Fund's Prospectus
dated August 30, 1996 (the "Prospectus"). The Fund is a series portfolio of John
Hancock Strategic Series.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund............................................. 2
Investment Objectives and Policies................................... 2
Certain Investment Practices ........................................ 13
Investment Restrictions.............................................. 15
Tax Status........................................................... 17
Those Responsible for Management..................................... 23
Investment Advisory and Other Services............................... 32
Distribution Contract................................................ 33
Net Asset Value...................................................... 35
Initial Sales Charge on Class A Shares............................... 36
Deferred Sales Charge on Class B Shares.............................. 37
Special Redemptions.................................................. 39
Additional Services and Programs..................................... 39
Description of the Fund's Shares..................................... 41
Calculation of Performance........................................... 43
Brokerage Allocation................................................. 44
Distributions........................................................ 46
Transfer Agent Services.............................................. 47
Custody of Portfolio................................................. 47
Independent Auditors................................................. 48
Financial Statements................................................. 48
Appendix A........................................................... A-1
Description of Bond Ratings.................................. A-1
Commercial Paper Ratings..................................... A-2
<PAGE>
ORGANIZATION OF THE FUND
John Hancock Strategic Series (the "Trust") is a diversified open-end
management investment company organized as a Massachusetts business trust on
April 16, 1986. The Trustees have authority to issue an unlimited number of
shares of beneficial interest of separate series without par value. To date, two
series of John Hancock Strategic Series (the "Trust") have been authorized for
sale to the public by the Board of Trustees: the Fund (formerly Freedom
Government Income Fund), created on January 16, 1986, and John Hancock Strategic
Income Fund, created April 16, 1986.
The investment adviser for the Fund is John Hancock Advisers, Inc. (the
"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 goals,
strategies and risks discussed in the Prospectus.
The Adviser believes that a high current income consistent with long-term
total return may be derived from: (i) interest income from securities issued,
guaranteed or otherwise backed by the United States government, its agencies or
instrumentalities ("Government Securities"); (ii) income from premiums from
expired put and call options on Government Securities written by the Fund; (iii)
net gains from closing purchase and sale transactions with respect to options on
Government Securities; and (iv) net gains from sales of portfolio securities on
exercise of options or otherwise.
Since interest yields on Government Securities and opportunities to realize
net gains from options transactions may vary from time to time because of
general economic and market conditions and many other factors, it is anticipated
that the Fund's share price and yield will fluctuate, and there can be no
assurance that the Fund's objective will be achieved.
Government Securities
Under normal circumstances, the Fund will invest at least 65% of its total
assets in Government Securities. The Government Securities that may be purchased
by the Fund include, but are not limited to:
U.S. Treasury Securities. The Fund may invest in U.S. Treasury securities,
including Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. Government and
differ primarily in their interest rates, the lengths of their maturities and
the times of their issuance.
Securities Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. The Fund may also invest in securities issued by agencies of
the U.S. Government or instrumentalities established or sponsored by the U.S.
Government. The obligations, including those which are guaranteed by Federal
agencies or instrumentalities, may or may not be backed by the "full faith and
credit" of the United States. In the case of securities not backed by the full
faith and credit of the United States, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may not
be able to assert a claim against the United States itself in the event the
agency or instrumentality does not meet its commitments. Securities in which the
Fund may invest but which are not backed by the full faith and credit of the
2
<PAGE>
United States include but are not limited to obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation ("FHLMC") and the United
States Postal Service, each of which has the right to borrow from the United
States Treasury to meet its obligations, and obligations of the Federal Farm
Credit System, the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Banks, the obligations of which may only be satisfied by the
individual credit of the issuing agency. Obligations of the Government National
Mortgage Association ("GNMA"), the Farmers Home Administration and the
Export-Import Bank are backed by the full faith and credit of the United States.
Securities of International Bank for Reconstruction and Development
The Fund may also purchase obligations of the International Bank for
Reconstruction and Development ("World Bank"), which, while technically not a
U.S. Government agency or instrumentality, has the right to borrow from the
participating countries, including the United States.
The Fund may invest in Government Securities of all maturities: short-term,
intermediate-term and long-term.
Up to 5% of the Fund's net assets may be invested in Government Securities
denominated in foreign currencies.
The principal of and/or interest on certain Government Securities that the
Fund may purchase could be increased or diminished as a result of changes in the
value of the U.S. dollar relative to the value of foreign currencies. The value
of portfolio securities denominated in foreign currencies may be affected
favorably or unfavorably by changes in the exchange rate between foreign
currencies and the U.S. dollar. In order to limit the risk inherent in this type
of security, it is the current policy of the Fund not to purchase any such
security if after the purchase more than 5% of its net assets (taken at market
value) would be invested in securities denominated in foreign currencies.
The Fund may, for temporary defensive purposes and without limitation, hold
cash and invest in short-term (less than one year) instruments, including
securities rated in the three highest categories by Standard & Poor's Rating
Group ("Standard & Poor's") or Moody's Investor's Service, Inc. ("Moody's")
(i.e., rated at the time of purchase AAA, AA or A by Standard & Poor's or Aaa,
Aa or A by Moody's), debt securities of corporations (such as commercial paper,
notes, bonds or debentures), certificates of deposit of domestic banks, or
repurchase agreements with respect to Government Securities, including
repurchase agreements that mature in more than seven days. In the event these
securities are subsequently downgraded below such ratings, the Adviser will
consider this event in its determination of whether the Fund should continue to
hold the securities. The Fund may also invest in collateralized mortgage-backed
obligations that are issued or sponsored by a government agency. See Appendix A
to this Statement of Additional Information for a description of the various
ratings of investment grade debt securities.
Mortgage-Related Securities
The Fund may invest in mortgage-backed securities, including those
representing an undivided ownership interest in a pool of mortgage loans, e.g.,
securities of the GNMA and pass-through securities issued by the FHLMC and FNMA.
3
<PAGE>
GNMA Certificates. Certificates of the Government National Mortgage Association
("GNMA Certificates") are mortgage-backed securities, which evidence an
undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that the principal is paid back monthly by the borrower over the term
of the loan rather than returned in a lump sum at maturity. GNMA Certificates
that the Fund purchases are the "modified pass-through" type. "Modified
pass-through" GNMA Certificates entitle the holder to receive a share of all
interest and principal payments paid and owed on the mortgage pool, net of fees
paid to the "issuer" and GNMA, regardless of whether or not the mortgagor
actually makes the payment.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or the Farmers' Home
Administration ("FMHA"), or guaranteed by the Veterans Administration ("VA").
The GNMA guarantee is backed by the full faith and credit of the United States.
The GNMA is also empowered to borrow without limit from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the contractual maturity of the mortgages in the pool.
Foreclosures impose no risk to principal investment because of the GNMA
guarantee. Because they represent the underlying mortgages, GNMA Certificates
may not be an effective means of locking in long-term interest rates due to the
need for the Fund to reinvest scheduled and unscheduled principal payments. At
the time principal payments or prepayments are received by the Fund, prevailing
interest rates may be higher or lower than the current yield of the Fund's
portfolio.
Statistics published by the FHA indicate that the average life of
single-family dwelling mortgages with 25 to 30-year maturities, the type of
mortgages backing the vast majority of GNMA Certificates, is approximately 12
years. However, because prepayment rates of individual mortgage pools vary
widely, it is not possible to predict accurately the average life of a
particular issue of GNMA Certificates.
Yield Characteristics of GNMA Certificates. The coupon rate of interest on GNMA
Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, by the amount of the fees
paid to GNMA and the issuer.
The coupon rate by itself, however, does not indicate the yield which will
be earned on GNMA Certificates. First, GNMA Certificates may be issued at a
premium or discount, rather than at par, and, after issuance, GNMA Certificates
may trade in the secondary market at a premium or discount. Second, interest is
earned monthly, rather than semiannually as with traditional bonds; monthly
compounding raises the effective yield earned. Finally, the actual yield of a
GNMA Certificate is influenced by the prepayment experience of the mortgage pool
underlying it. For example, if the higher- yielding mortgages from the pool are
prepaid, the yield on the remaining pool will be reduced. Prepayments of
principal by mortgagors (which can be made at any time without penalty) may
increase during periods when interest rates are falling.
FHLMC Securities. The Federal Home Loan Mortgage Corporation was created in 1970
through enactment of Title III of the Emergency Home Finance Act of 1970. Its
purpose is to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates ("PCs") and guaranteed mortgage certificates
("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the underlying
4
<PAGE>
pool. The FHLMC guarantees timely payment of interest on PCs and the full return
of principal.
GMC's also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments.
FNMA Securities. The Federal National Mortgage Association was established in
1938 to create a secondary market in mortgages insured by the FHA.
FNMA Issued Guaranteed Mortgage Pass-through Certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FNMA guarantees timely payment of interest on FNMA
Certificates and the full return of principal.
Collateralized Mortgage-Backed Obligations ("CMO's"). CMOs are
fully-collateralized bonds which are the general obligations of the issuer
thereof, either the U.S. Government or a U.S. Government instrumentality. Such
bonds generally are secured by an assignment to a trustee (under the indenture
pursuant to which the bonds are issued) of collateral consisting of a pool of
mortgages. Payments with respect to the underlying mortgages generally are made
to the trustee under the indenture. Payments of principal and interest on the
underlying mortgages are not passed through to the holders of the CMOs as such
(i.e. the character of payments of principal and interest is not passed through,
and therefore payments to holders of CMOs attributable to interest paid and
principal repaid on the underlying mortgages do not necessarily constitute
income and return of capital, respectively, to such holders), but such payments
are dedicated to payment of interest on and repayment of principal of the CMOs.
CMOs often are issued in two or more classes with varying maturities and stated
rates of interest. Because interest and principal payments on the underlying
mortgages are not passed through to holders of CMOs, CMOs of varying maturities
may be secured by the same pool of mortgages, the payments on which are used to
pay interest on each class and to retire successive maturities in sequence.
Unlike other mortgage-backed securities (discussed above), CMOs are designed to
be retired as the underlying mortgages are repaid. In the event of prepayment on
such mortgages, the class of CMO first to mature generally will be paid down.
Therefore, although in most cases the issuer of CMOs will not supply additional
collateral in the event of such prepayment, there will be sufficient collateral
to secure CMOs that remain outstanding.
Inverse Floating Rate Securities. The Fund may invest in inverse floating rate
securities. It is the current intention of the Fund to invest no more than 5% of
its net assets in inverse floating rate securities. The interest rate on an
inverse floating rate security resets in the opposite direction from the market
rate of interest to which the inverse floating rate security is indexed. An
inverse floating rate security may be considered to be leveraged to the extent
that its interest rate varies by a multiple of the index rate of interest. A
higher degree of leverage in the inverse floating rate security is associated
with greater volatility in the market value of such security.
The inverse floating rate securities that the Fund may invest in include
but are not limited to, an inverse floating rate class of a government agency
issued CMO and a government agency issued yield curve note. Typically, an
inverse floating rate class of a CMO is one of two components created from the
cash flows from a pool of fixed rate mortgages. The other component is a
floating rate security in which the amount of interest payable varies directly
with a market interest rate index. A yield curve note is a fixed income security
that bears interest at a floating rate that is reset periodically based on an
interest rate benchmark. The interest rate resets on a yield curve note in the
opposite direction from the interest rate benchmark.
5
<PAGE>
Mortgage-backed securities have stated maturities of up to thirty years
when they are issued, depending upon the length of the mortgages underlying the
securities. In practice, however, unscheduled or early payments of principal and
interest on the underlying mortgages may make the securities' effective maturity
shorter than this, and the prevailing interest rates may be higher or lower than
the current yield of the Fund's portfolio at the time the Fund receives these
payments for reinvestment. Mortgage-backed securities may have less potential
for capital appreciation than comparable fixed-income securities due to the
likelihood of increased prepayments of mortgages as interest rates decline. If
the Fund buys mortgage-backed securities at a premium, mortgage foreclosures and
prepayments of principal by mortgagors (which may be made at any time without
penalty) may result in some loss of the Fund's principal investment, to the
extent of the premium paid.
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.
Options
Writing Covered Options on Government Securities
The Fund may write (sell) covered call options and covered put options on
all or any part of the Fund's portfolio of Government Securities. The Fund may
write (i.e., sell) options which are traded on registered securities exchanges
("Exchanges") and may also write options on Government Securities which are
traded over-the-counter. A call option gives the purchaser of the option the
right to buy, and the writer the obligation to sell, the underlying security at
the exercise price if the option is exercised during the option period.
Conversely, a put option gives the purchaser the right to sell, and the writer
the obligation to buy (if the option is exercised) the underlying security at
the exercise price during the option period. The Fund may also write straddles
(combinations of covered puts and calls on the same underlying security).
The Fund writes only "covered" options. This means that as long as the Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option, except that, in the case of call options on
U.S. Treasury Bills, the Fund might own U.S. Treasury Bills of a different
series from those underlying the call option, but with a principal amount
corresponding to the option contract amount and a maturity date no later than
that of the securities deliverable under the call option. See "Risk Factors
Applicable to Options" below.
The Fund will be considered "covered" with respect to a put option it
writes if, as long as it is obligated as the writer of a put option, it deposits
and maintains with its Custodian, cash, Government Securities or other
high-grade debt obligations having a value equal to or greater than the exercise
price of the option.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time that the writer effects a closing purchase
transaction by purchasing an option covering the same underlying security and
having the same exercise price and expiration date ("of the same series") as the
one previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to deliver the
6
<PAGE>
underlying security in the case of a call option, the writer of the option is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "OCC"), an
institution created to interpose itself between buyers and sellers of options.
Technically, the OCC assumes the other side of every purchase and sale
transaction on an Exchange and, by doing so, gives its guarantee to the
transaction.
The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities alone. In return for the premium, the
covered call option writer has given up the opportunity for profit from a price
increase in the underlying security above the exercise price as long as the
option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of the premium, so long as the price of the underlying security remains above
the exercise price, but assumes an obligation to purchase the underlying
security from the buyer of the put option at the exercise price, even though the
security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then- market value of the underlying
security.
Because the Fund can write only covered options, it may at times be unable
to write additional options unless it sells a portion of its portfolio holdings
to obtain new debt securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.
To the extent that a secondary market is available on the Exchanges, the
covered option writer may close out options it has written prior to the
assignment of an exercise notice by purchasing, in a closing purchase
transaction, an option of the same series as the option previously written. If
the cost of such a closing purchase, plus transaction costs, is greater than the
premium received upon writing the original option, the writer will incur a loss
in the transaction.
The extent to which the Fund may write covered call and put options and
enter into so-called "straddle" transactions may be limited by the requirements
of the Internal Revenue Code of 1986, as amended (the "Code") for qualification
as a regulated investment company and the Fund's intention to qualify as such.
Purchasing Put Options on Government Securities
The Fund may purchase put options on optionable Government Securities in
anticipation of a price decline in the underlying security. This contemplates
the purchase of put options at a time when the Fund does not own the underlying
security and it seeks to benefit from an anticipated decline in the market price
of the underlying security. If the put option is not sold when it has remaining
value, and if the market price of the underlying security remains equal to or
greater than the exercise price during the life of the put option, the Fund will
lose its entire investment in the put option. Further, unless the put option is
sold in a closing sale transaction, in order for the purchase of a put option to
be profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs.
7
<PAGE>
The Fund may also purchase put options ("protective puts") to protect its
holdings in an underlying security against a substantial decline in market
value. Such hedge protection is provided only during the life of the put option
when the Fund as the holder of the put option is able to sell the underlying
security at the exercise price regardless of any decline in the underlying
security's market price. By using put options in this manner, the Fund will
reduce any profit it might otherwise have realized in its underlying security by
the premium paid for the put option and by transaction costs.
The Fund will not invest more than 5% of its net assets in put options.
Risk Factors Applicable to Options
On Treasury Bonds and Notes. Because trading interest in Treasury Bonds and
Notes tends to center on the most recently auctioned issues, the Exchanges will
not indefinitely continue to introduce new series of options with expirations to
replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course, with the possible addition of a limited number of
new expirations as the original ones expire. Options trading on each series of
Bonds or Notes will thus be phased out as new options are listed on the more
recent issues, and a full range of expiration dates will not ordinarily be
available for every series on which options are traded.
On Treasury Bills. Because the deliverable Treasury Bill changes from week
to week, writers of Treasury Bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
Bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint. In addition, the Fund will maintain
in a segregated account with its custodian Treasury Bills maturing no later than
those which would be deliverable in the event of an assignment of an exercise
notice to ensure that it can meet its open options obligations.
Additional Risks of Options On Government Securities. The Fund may purchase
and sell options on Government Securities including securities issued by the
Government National Mortgage Association. Certain options on Government
Securities are traded "over-the-counter" rather than on an exchange. This means
that the Fund will enter into such options with particular broker-dealers who
make markets in these options. With respect to options not traded on an
exchange, there is the additional risk that the Fund may not be able to enter
into a closing transaction with the other party to the option on satisfactory
terms or that such other party may be unable to fulfill its contractual
obligations. However, the Adviser or JH Advisers International, as the case may
be, will enter into transactions in non-listed options only with responsible
dealers where it does not believe that the foregoing factors present a material
risk. There is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Fund's
ability to terminate options positions in Government Securities may involve the
risk that broker-dealers participating in such transactions will fail to meet
their obligations to the Fund. The Fund will purchase options on Government
Securities only from broker-dealers whose debt securities are investment grade
(as determined by the Board of Trustees).
Put and Call Options: General
A call option position may be closed out only on an exchange which provides
a secondary market for options of the same series or, in the case of an
over-the-counter option, only with the other party to the transaction. In
general, exchange-traded options are third-party contracts (i.e. performance of
the parties' obligations is guaranteed by an exchange or clearing corporation)
with standardized strike prices and expiration dates. Over-the-counter
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. There is no assurance that the Fund will be able to close out
options acquired or sold over-the-counter.
8
<PAGE>
The Fund will acquire only those over-the-counter options for which
management believes the Fund can receive on each business day at least two
separate bids or offers (one of which will be from an entity other than a party
to the option) or those over-the-counter options valued by an independent
pricing service. The Fund will write and purchase over-the-counter options only
with member banks of the Federal Reserve System and primary dealers in U.S.
Government securities or their affiliates which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million. The SEC has taken the position that over-the-counter options
are illiquid securities, subject to the restriction that illiquid securities are
limited to not more than 15% of the Fund's assets. The SEC, however, has a
partial exemption from the above restrictions on transactions in over-the-
counter options. The SEC allows the Fund to exclude from the 15% limitation on
illiquid securities a portion of the value of the over-the-counter options
written by the Fund, provided that certain conditions are met. First, the other
party to the over-the-counter options has to be a primary U.S. Government
securities dealer designated as such by the Federal Reserve Bank. Second, the
Fund would have an absolute contractual right to repurchase the over-the-counter
options at a formula price. If the above conditions are met, the Fund must treat
as illiquid only that portion of the over-the-counter option's value (and the
value of its underlying securities) which is equal to the formula price for
repurchasing the over-the-counter option, less the over-the-counter option's
intrinsic value.
Although the Fund will generally purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there can be no assurance that a liquid secondary market on an exchange
will exist for any particular option, or at any particular time. In the event
that no liquid secondary market exists, it might not be possible to effect
closing transactions in particular options. If the Fund cannot close out an
exchange-traded or over-the-counter option which it holds, it would have to
exercise such option in order to realize any profit and would incur transaction
costs on the purchase or sale of underlying assets. If the Fund, as a covered
call option writer, is unable to effect a closing purchase transaction, it will
not be able to sell the underlying assets until the option expires or it
delivers the underlying asset upon exercise. Accordingly, the Fund may run the
risk of either foregoing the opportunity to sell the underlying asset at a
profit or being unable to sell the underlying asset as its price declines.
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) an exchange may impose restrictions 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 or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the exchanges and the Options
Clearing Corporation have had only limited experience with the trading of
certain options and 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 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 put and call options activities of the Fund may affect its turnover
rate and the amount of brokerage commissions that it pays. The exercise of calls
written by the Fund may cause it to sell portfolio securities or other assets at
times and amounts controlled by the holder of a call, thus increasing the Fund's
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portfolio turnover rate and brokerage commission payments. The exercise of puts
purchased by the Fund may also cause the sale of securities or other assets,
also increasing turnover. Although such exercise is within the Fund's control,
holding a protective put might cause the Fund to sell the underlying securities
or other assets for reasons which would not exist in the absence of the put.
Holding a non-protective put might cause the purchase of the underlying
securities or other assets to permit the Fund to exercise the put.
The Fund will pay a brokerage commission each time it buys or sells a put
or call or buys or sells a security in connection with the exercise of a put or
call. Such commissions may be higher than those which would apply to direct
purchases or sales of securities.
The Fund's Custodian, or a securities depository acting for it, will act as
the Fund's escrow agent as to the securities on which it has written calls, or
as to other securities acceptable for such escrow, so that pursuant to the rules
of the Options Clearing Corporation and certain exchanges, no margin deposit
will be required of the Fund. Until the securities are released from escrow,
they cannot be sold by the Fund; this release will take place on the expiration
of the call or the Fund's entering into a closing purchase transaction. For
information on the valuation of the puts and calls, see "Net Asset Value."
Futures Contracts and Options on Futures
Financial Futures Contracts. To the extent set forth in the Prospectus, the Fund
may buy and sell futures contracts (and related options) on stocks, stock
indices, debt securities, currencies, interest rate indices, and other
instruments. The Fund may hedge its portfolio by selling or purchasing financial
futures contracts as an offset against the effects of changes in interest rates
or in security or foreign currency values. Although other techniques could be
used to reduce exposure to market fluctuations, the Fund may be able to hedge
its exposure more effectively and perhaps at a lower cost by using financial
futures contracts. The Fund may enter into financial futures contracts for
hedging and speculative purposes to the extent permitted by regulations of the
Commodity Futures Trading Commission ("CFTC").
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the CFTC. Futures contracts are
traded on these markets in a manner that is similar to the way a stock is traded
on a stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA")
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills, 90-day commercial paper, bank certificates of deposit and Eurodollar
certificates of deposit. It is expected that if other financial futures
contracts are developed and traded the Fund may engage in transactions in such
contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than the Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. The Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the Federal income tax considerations
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of transactions in financial futures contracts, see the information under the
caption "Tax Status" below.
At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
Government securities, known as "initial margin," ranging upward from 1.1% of
the value of the financial futures contract being traded. The margin required
for a financial futures contract is set by the board of trade or exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the financial futures contract which is returned to the Fund
upon termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. Each day, the futures contract is valued at the official settlement
price of the board of trade or exchange on which it is traded. Subsequent
payments, known as "variation margin," to and from the broker are made on a
daily basis as the market price of the financial futures contract fluctuates.
This process is known as "mark to market." Variation margin does not represent a
borrowing or lending by the Fund but is instead a settlement between the Fund
and the broker of the amount one would owe the other if the financial futures
contract expired. In computing net asset value, the Fund will mark to market its
open financial futures positions.
Successful hedging depends on a strong correlation between the market for
the underlying securities and the futures contract market for those securities.
There are several factors that will probably prevent this correlation from being
a perfect one, and even a correct forecast of general interest rate trends may
not result in a successful hedging transaction. There are significant
differences between the securities and futures markets which could create an
imperfect correlation between the markets and which could affect the success of
a given hedge. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for financial
futures and debt securities, including technical influences in futures trading
and differences between the financial instruments being hedged and the
instruments underlying the standard financial futures contracts available for
trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower-rated and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market or interest rate trends. The Fund will bear
the risk that the price of the securities being hedged will not move in complete
correlation with the price of the futures contracts used as a hedging
instrument. Although the Adviser believes that the use of financial futures
contracts will benefit the Fund, an incorrect market prediction could result in
a loss on both the hedged securities in the Fund's portfolio and the hedging
vehicle so that the Fund's return might have been better had hedging not been
attempted. However, in the absence of the ability to hedge, the Adviser might
have taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs. The
low margin deposits required for futures transactions permit an extremely high
degree of leverage. A relatively small movement in a futures contract may result
in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
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<PAGE>
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
Finally, although the Fund engages in financial futures transactions only
on boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, the Fund could be prevented from executing a buy
or sell order at a specified price or closing out a position due to limits on
open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If the Fund cannot close out a position, it must continue to
meet margin requirements until the position is closed.
Options on Financial Futures Contracts. To the extent set forth in the
Prospectus, the Fund may buy and sell options on financial futures contracts on
stocks, stock indices, debt securities, currencies, interest rate indices, and
other instruments. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers the futures contract to
the holder at the exercise price. The Fund would be required to deposit with its
custodian initial and variation margin with respect to put and call options on
futures contracts written by them. Options on futures contracts involve risks
similar to the risks of transactions in financial futures contracts. Also, an
option purchased by the Fund may expire worthless, in which case the Fund would
lose the premium it paid for the option.
Other Considerations. The Fund will engage in futures and options
transactions for bona fide hedging or other non-speculative purposes to the
extent permitted by CFTC regulations. The Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, the Fund's
futures transactions will be entered into for traditional hedging purposes
- --i.e., futures contracts will be sold to protect against a decline in the price
of securities that the Fund owns, or futures contracts will be purchased to
protect the Fund against an increase in the price of securities, or the currency
in which they are denominated, the Fund intends to purchase. As evidence of this
hedging intent, the Fund expect 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 contract 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.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Fund to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish nonhedging positions in futures contracts and options on futures
will not exceed 5% of the net asset value of the Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Fund will engage in transactions in options and futures contracts only to the
extent such transactions are consistent with the requirements of the Code for
maintaining its qualification as a regulated investment company for Federal
income tax purposes.
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When the Fund purchases financial futures contracts, or writes put options
or purchases call options thereon, cash or liquid, high grade debt securities
will be deposited in a segregated account with the Fund's custodian in an amount
that, together with the amount of initial and variation margin held in the
account of the broker, equals the market value of the futures contracts.
Portfolio Turnover
If the Fund writes a number of call options and the market prices of the
underlying securities appreciate, or if the Fund writes a number of put options
and the market prices of the underlying securities depreciate, there may be a
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. In addition, a higher rate of portfolio turnover
may, under certain circumstances, make it more difficult for the Fund to qualify
as a regulated investment company under the Code.
CERTAIN INVESTMENT PRACTICES
The following information supplements the discussion of the Fund's goals,
strategies and risks in the Prospectus.
Repurchase Agreements
A repurchase agreement is a contract under which a Fund acquires a security
for a relatively short period (usually not more than 7 days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). 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
will continuously monitor the creditworthiness of the parties with whom a 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, 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 and lack of access to
income during this period and the expense of enforcing its rights.
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
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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 may increase
the Fund's overall investment exposure and 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, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Trading of Securities
The Fund may trade those Government Securities which are not covering
outstanding options positions and are not on loan to broker-dealers if the
Fund's Adviser believes that there are opportunities to exploit differentials in
prices and yields or fluctuations in interest rates, consistent with its
investment objective.
Restricted Securities
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933 ("1933 Act"), including securities
offered and sold to "qualified institutional buyers" under Rule 144A under the
1933 Act. However, the Fund will not invest more than 15% of its assets in
illiquid investments, which include repurchase agreements maturing in more than
seven days, securities that are not readily marketable and restricted
securities. However, if the Board of Trustees determines, based upon a
continuing review of the trading markets for specific Rule 144A securities, that
they are liquid, then such securities may be purchased without regard to the 15%
limit. The Trustees may adopt guidelines and delegate to the 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.
The Fund may acquire other restricted securities including securities for
which market quotations are not readily available. These securities may be sold
only in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933.
Where registration is required, the Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
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will be priced at fair market value as determined in good faith by the Fund's
Trustees. If through the appreciation of restricted securities or the
depreciation of unrestricted securities, the Fund should be in a position where
more than 15% of the value of its assets is invested in illiquid securities
(including repurchase agreements which mature in more than seven days and
options which are traded over-the-counter and their underlying securities), the
Fund will bring its holdings of illiquid securities below the 15% limitation.
The Fund will not invest more than 5% of its total assets in Rule 144A
securities without first supplementing the prospectus and providing additional
information to shareholders.
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.
The composition and weighted average maturity of the Fund's portfolio will
vary from time to time, based upon the determination of the Adviser of how best
to further the Fund's investment objective.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The following investment restrictions will not be changed without approval
of a majority of the Fund's outstanding voting securities which, as used in the
Prospectus and this Statement of Additional Information, means approval by the
lesser of (1) 67% or more of the Fund's shares represented at a meeting if at
least 50% of the Fund's outstanding shares are present in person or by proxy at
the meeting or (2) 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 33 1/3% of the value of the Fund's total
assets (including the amount borrowed) less liabilities (not including the
amount borrowed).
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.)
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4. Senior Securities. Issue senior securities except as appropriate to
evidence indebtedness which the 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 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 in marketable warrants to purchase common stock,
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 the 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 up to 25% of the value of the Fund's total
assets may be invested without regard to these limitations.
7. 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.
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 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.
9. Making Loans. Make loans, except that the 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 30% of the total
assets of the 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 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.
Nonfundamental Investment Restrictions
The following restrictions are designated as nonfundamental and may be
changed by the Board of Trustees without shareholder approval.
The Fund may not:
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11. Options Transactions. Write, purchase, or sell puts, calls or
combinations thereof except that the Fund may write, purchase or sell puts and
calls on securities as described in the Prospectus.
12. Illiquid Securities. Purchase or otherwise acquire any security if, as
a result, more than 15% of the Fund's net assets (taken at current value) would
be invested in securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale. This
policy includes repurchase agreements maturing in more than seven days. This
policy does not include restricted securities eligible for resale pursuant to
Rule 144A under the Securities Act of l933 which the Board of Trustees or the
Adviser has determined under Board-approved guidelines are liquid.
13. 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.
14. Unseasoned Issuers. Purchase securities of any issuer with a record of
less than three years continuous operations, including predecessors, if such
purchase would cause the investments of the Fund in all such issuers to exceed
5% of the total assets of the Fund taken at market value, except this
restriction shall not apply to (i) obligations of the U.S. Government, its
agencies or instrumentalities and (ii) securities of such issuers which are
rated by at least one nationally recognized statistical rating organization.
15. Beneficial Ownership of Officers and Directors of Fund and Adviser.
Purchase or retain the securities of any issuer if those officers or trustees of
the Fund or officers or directors of the Adviser who each own beneficially more
than 1/2 of 1% of the securities of that issuer together own more than 5% of the
securities of such issuer.
16. Hypothecating, Mortgaging and Pledging Assets. Hypothecate, mortgage or
pledge any of its assets except as may be necessary in connection with permitted
borrowings and then not in excess of 5% of the Fund's total assets, taken at
cost. For the purpose of this restriction, (i) forward foreign currency exchange
contracts are not deemed to be a pledge of assets, (ii) the purchase or sale of
securities by the Fund on a when-issued or delayed delivery basis and collateral
arrangements with respect to the writing of options on debt securities or on
futures contracts are not deemed to be a pledge of assets; and (iii) the deposit
in escrow of underlying securities in connection with the writing of call
options is not deemed to be a pledge of assets.
17. 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).
18. 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
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Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds. The Fund may not purchase the shares of any closed-end investment
company except in the open market where no commission or profit to a sponsor or
dealer results from the purchase, other than customary brokerage fees.
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 (with the exception of Restriction 2
permitting the Fund to borrow up to 33 1/3% of the value of its total assets).
TAX STATUS
The Fund is treated as a separate entity for accounting and tax purposes.
The Fund has qualified and elected to be treated as a "regulated investment
company" under Subchapter M of the Code, and intends to continue to so qualify
for each taxable year. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification if 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% nondeductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to seek to avoid or minimize liability
for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities 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.
18
<PAGE>
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 options or futures 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 of shares of the Fund (including by exercise of the
exchange privilege) 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 and will be long-term or short-term, depending
upon the shareholder's tax holding period for the shares and subject to the
special rules described below. A sales charge paid in purchasing Class A shares
of the Fund cannot be taken into account for purposes of determining gain or
loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent Class A shares of the Fund or another John Hancock Fund
are subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the 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.
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 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 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 Fund, as noted above, and would not be distributed as such
to shareholders. The capital loss carryforwards for the Fund are as follows:
19
<PAGE>
$43,025,223 of capital loss carryforwards which will expire October 31, 1998 --
$282,637, October 31, 2002-- $16,549,431 and October 31, 2003 - - $26,193,155.
The Fund's dividends and distributions will not qualify for the corporate
dividends-received deduction.
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 rules applicable to certain options and futures contracts may also
require the Fund to recognize gain without a concurrent receipt of cash.
However, the Fund must distribute to shareholders for each taxable year
substantially all of its net income and net capital gains, including such income
or gain, to qualify as a regulated investment company and avoid liability for
any federal income or excise tax. Therefore, the Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing the cash, to satisfy these distribution
requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. The Fund will not seek to satisfy any
threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the
"IRS") all taxable distributions to shareholders, as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
20
<PAGE>
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gain. Certain of these transactions may also cause the
Fund to dispose of investments sooner than would otherwise have occurred.
Certain of the applicable tax rules may be modified if the Fund is eligible and
chooses to make one or more of certain tax elections that may be available.
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 and futures 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. 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.
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 Trust and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Trust are also officers and directors of the Adviser or officers and Directors
of the Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock
Funds").
The following table sets forth the principal occupation of employment of
the Trustees and principal officers of the Funds during the past five years:
21
<PAGE>
<TABLE>
<CAPTION>
Name, Address Positions Held Principal Occupation(s)
and Date of Birth With The Fund During the Past Five Years
- ----------------- ------------- --------------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief Executive
101 Huntington Avenue Officer, the Adviser and The
Boston, Massachusetts Berkeley Financial Group ("The
October 1944 Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited ("Advisers
International"); John Hancock
Funds; John Hancock Investor
Services Corporation ("Investor
Services") and Sovereign Asset
Management Corporation ("SAMCorp");
(herein after the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Investor Services
and SAMCorp are collectively
referred to as the "Affiliated
Companies"); Chairman, First
Signature Bank & Trust; Director,
John Hancock Freedom Securities
Corp., John Hancock Capital Corp.
and New England/Canada Business
Council; Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman John Hancock
Distributors, Inc. (until April,
1994).
- --------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
22
<PAGE>
Name, Address Positions Held Principal Occupation(s)
and Date of Birth With The Fund During the Past Five Years
- ----------------- ------------- --------------------------
Dennis S. Aronowitz Trustee (3) Professor of Law, Boston University
Boston University School of Law; Trustee, Brookline
Boston, Massachusetts Savings Bank.
June 1931
Richard P. Chapman, Jr. Trustee (1,3) President, Brookline Savings Bank;
160 Washington Street Director Federal Home Loan Bank of
Brookline, Massachusetts Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University
(education); Director, Depositors
Insurance Fund, Inc. (insurance).
William J. Cosgrove Trustee (3) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, New Jersey N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc., EVP
Resource Evaluation, Inc.
(consulting) (until October 1933);
Trustee, the Hudson City Savings
Bank (since 1995).
- --------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
23
<PAGE>
Name, Address Positions Held Principal Occupation(s)
and Date of Birth With The Fund During the Past Five Years
- ----------------- ------------- --------------------------
Douglas M. Costle Trustee (1,3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, Vermont 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991). Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee (3) Director of Santa Fe Ingredients
9449 Navy Blue Court Company of California, Inc. and
Las Vegas, NV 89117 Santa Fe Ingredients Company, Inc.
December 1928 (private food processing
companies); Director of Uranium
Resources, Inc.; President of
Stolar, Inc. (from 1987-1991) and
President of Albuquerque Uranium
Corporation (from 1985-1992);
Director of Freeport-McMoRan Copper
& Gold Company Inc., Hecla Mining
Company, Canyon Resources
Corporation and Original Sixteen to
One Mine, Inc. (from 1984-1987 and
from 1991 to 1995) (management
consultant).
- --------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
24
<PAGE>
Name, Address Positions Held Principal Occupation(s)
and Date of Birth With The Fund During the Past Five Years
- ----------------- ------------- --------------------------
Richard A. Farrell Trustee (3) President of Farrell, Healer & Co.
Farrell, Healer & (venture capital management firm)
Company, Inc. (since 1980); Prior to 1980, headed
160 Federal Street the venture capital group at Bank
23rd Floor of Boston Corporation.
Boston, MA 02110
November 1932
Gail D. Fosler Trustee (3) Vice President and Chief Economist,
4104 Woodbine Street The Conference Board (non-profit
Chevy Chase, MD economic and business research).
December 1947
William F. Glavin Trustee (3) President, Babson College; Vice
Babson College Chairman, Xerox Corporation (until
Horn Library June 1989); Director, Caldor Inc.,
Babson Park, MA 02157 Reebok, Ltd. (since 1994), and Inco
March 1931 Ltd.
*Anne C. Hodsdon Trustee and President (1, 2) President and Chief Operating
101 Huntington Avenue Officer, the Adviser; Executive
Boston, Massachusetts Vice President, the Adviser (until
April 1953 December 1994); Senior Vice
President; the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Dr. John A. Moore Trustee (3) President and Chief Executive
Institute for Evaluating Officer, Institute for Evaluating
Health Risks Health Risks (nonprofit
1101 Vermont Avenue N.W. institution) (since September
Suite 608 1989).
Washington, DC 20005
February 1939
- --------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
25
<PAGE>
Name, Address Positions Held Principal Occupation(s)
and Date of Birth With The Fund During the Past Five Years
- ----------------- ------------- --------------------------
Patti McGill Peterson Trustee (3) President, St. Lawrence University;
St. Lawrence University Director, Niagara Mohawk Power
110 Vilas Hall Corporation (electric utility) and
Canton, NY 13617 Security Mutual Life (insurance).
May 1943
John W. Pratt Trustee (3) Professor of Business
2 Gray Gardens East Administration at Harvard
Cambridge, MA 02138 University Graduate School of
September 1931 Business Administration (since
1961).
*Richard S. Scipione Trustee (1) General Counsel, the Life Company;
John Hancock Place Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
August 1937 Insurance Agency, Inc., John
Hancock Subsidiaries, Inc. and John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993).
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Fort Lauderdale, FL
November 1932
- --------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
26
<PAGE>
Name, Address Positions Held Principal Occupation(s)
and Date of Birth With The Fund During the Past Five Years
- ----------------- ------------- --------------------------
*Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment
101 Huntington Avenue Investment Officer (2) Officer, the Adviser; President,
Boston, Massachusetts the Adviser (until December 1994);
July 1938 Director, the Adviser, Advisers
International, John Hancock Funds,
Investor Services, SAMCorp. and NM
Capital; Senior Vice President, The
Berkeley Group.
*James B. Little Senior Vice President Senior Vice President, the Adviser,
101 Huntington Avenue and Chief Financial The Berkeley Group, John Hancock
Boston, Massachusetts Officer Funds and Investor Services; Senior
February 1935 Vice President and Chief Financial
Officer, each of the John Hancock
funds.
*John A. Morin Vice President Vice President [and Secretary] the
101 Huntington Avenue Adviser; Vice President, Investor
Boston, Massachusetts Services, John Hancock Funds and
July 1950 each of the John Hancock funds;
Compliance Officer, certain John
Hancock funds, Counsel, the Life
Company; Vice President and
Assistant Secretary, The Berkeley
Group.
- --------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
27
<PAGE>
Name, Address Positions Held Principal Occupation(s)
and Date of Birth With The Fund During the Past Five Years
- ----------------- ------------- --------------------------
*Susan S. Newton Vice President and Vice President and Assistant
101 Huntington Avenue Secretary Secretary, the Adviser; Vice
Boston, Massachusetts President and Secretary, certain
March 1950 John Hancock funds; Vice President
and Secretary, John Hancock Funds,
Investor Services and John Hancock
Distributors, Inc. (until 1994);
Secretary, SAMCorp; Vice President,
The Berkeley Group.
*James J. Stokowski Vice President and Vice President, the Adviser; Vice
101 Huntington Avenue Treasurer President and Treasurer, each of
Boston, Massachusetts the John Hancock funds.
November 1946
</TABLE>
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.
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 for the Fund's most recently
completed fiscal year. The three non-independent Trustees, Messrs. Boudreau and
Scipione and Ms. Hodsdon 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.
28
<PAGE>
Aggregate Compensation
Total
Compensation
From the Fund
and
John Hancock
Fund
From the Complex to
Independent Trustees Fund* Trustees1
- -------------------- ----- ---------
William A. Barron, III* $ 9,344 $ 41,750
Douglas M. Costle 9,344 41,750
Leland O. Erdahl 9,344 41,750
Richard A. Farrell 9,690 43,250
William F. Glavin 8,540 37,500
Patrick Grant* 9,805 43,750
Ralph Lowell, Jr.* 9,344 41,750
Dr. John A. Moore 9,344 41,750
Patti McGill Peterson 9,344 41,750
John W. Pratt 9,344 41,750
$93,433 $416,750
1 The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of calendar year ended December 31, 1995. As of
this date there were sixty-one funds in the John Hancock Fund Complex of
which the Independent Trustees served twelve.
* As of the date of this document, these persons no longer serve as Trustees
of the Fund.
As of December 31, 1995 the value of the aggregate accrued deferred
compensation amount from all Funds in the John Hancock Fund Complex for Mr.
Glavin was $32,061 under the John Hancock Deferred Compensation Plan for
Independent Trustees.
The Trustees and officers of the Fund may at times be the record holders of
in excess of 5% of shares of the Fund by virtue of holding shares in "street
name." As of May 17, 1996 the officers and trustees of the Trust as a group
owned less than 1% of the outstanding shares of each class of the Fund.
As of May 17, 1996, no person or entity owned beneficially or of record 5%
or more of the outstanding shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment adviser for the Fund is John Hancock Advisers, Inc., a
Massachusetts corporation (the "Adviser"), with offices at 101 Huntington
Avenue, Boston, Massachusetts 02199-7603. The Adviser is a registered investment
advisory firm which maintains a securities research department, the efforts of
which will be made available to the Fund.
29
<PAGE>
The Adviser was organized in 1968 and presently has more than $18 billion
in assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of approximately 1,080,000
shareholders. The Adviser is an affiliate of the Life Company, one of the most
recognized and respected financial institutions in the nation. With total assets
under management of more than $80 billion, the Life Company is one of the ten
largest life insurance companies in the United States, and carries high ratings
from Standard & Poor's and A.M. Best's. Founded in 1862, the Life Company has
been serving clients for over 130 years.
The Trust has entered into an investment advisory agreement (the "Advisory
Agreement") dated as of July 1, 1996 between the Trust and the Adviser. Pursuant
to the Advisory Agreement, the Adviser agreed to act as investment adviser and
manager to the Fund. As manager and investment adviser, the Adviser will: (a)
furnish continuously an investment program for the Fund and determine, subject
to the overall supervision and review of the Board of 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.
As compensation for its services under the Advisory Agreement, the Adviser
receives from the Fund a fee computed and paid monthly based upon the following
annual rates: 0.50% of the Fund's first $500 million of average daily net
assets, and 0.45% of average daily net assets in excess of that amount.
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 independent accountants, legal counsel,
transfer agents and dividend disbursing agents; 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.
The State of California imposes a limitation on the expenses of the Fund.
The Advisory Agreement provides that if, in any fiscal year, the total expenses
of the Fund (excluding taxes, interest, brokerage commissions and extraordinary
items, but including the management fee) exceed the expense limitations
applicable to the Fund imposed by the securities regulations of any state in
which it is then registered to sell shares, the Adviser will reduce its fee for
the Fund to the extent required by these limitations. Although there is no
certainty that any limitations will be in effect in the future, the California
limitation on an annual basis currently is 2.5% of the first $30 million of
average net assets, 2.0% of the next $70 million of net assets and 1.5% of the
remaining net assets.
30
<PAGE>
The Advisory Agreement was approved on March 5, 1996 by all of the
Trustees, including all of the Trustees who are not parties to the Advisory
Agreement or "interested persons" of any such party. The shareholders of the
Fund also approved the Advisory Agreement on June 26, 1996. The Advisory
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 Fund or by the Board of Trustees, and (ii)
by a majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" of any such party. The Advisory Agreement may be terminated
on 60 days written notice by any party and will terminate automatically if it is
assigned.
For the fiscal years ended October 31, 1993, 1994 and 1995, Freedom
Investment Trust paid the Adviser, on behalf of the Fund, an investment advisory
fee of $2,862,505, $2,839,185 and $2,514,147, respectively.
DISTRIBUTION CONTRACT
The Trust has entered into Distribution Agreements with John Hancock Funds,
Inc. and Freedom Distributors Corporation (together the "Distributors") whereby
the Distributors act as exclusive selling agent of the Fund, selling shares of
each class of the Fund on a "best efforts" basis. Shares of each class of the
Fund are sold to selected broker-dealers (the "Selling Brokers") who have
entered into selling agency agreements with the Distributors.
The Distributors accept 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 Class A or Class
B shares of the Fund, the Distributors and Selling Brokers receive compensation
in the form of a sales charge imposed, in the case of Class A shares at the time
of sale or, in the case of Class B shares, on a deferred basis. The sales
charges are discussed further in the Prospectus.
The Trustees have 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% for Class A and Class
B shares, respectively, of the Fund's 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 Distributors for their distribution expenses,
including but not limited to: (i) initial and ongoing sales compensation to
Selling Brokers and others (including affiliates of the Distributors) engaged in
the sale of Fund shares; (ii) marketing, promotional and overhead expenses
incurred in connection with the distribution of Fund shares; and (iii) with
respect to Class B shares only, interest expenses on unreimbursed distribution
expenses. The service fees will be used to compensate Selling Brokers for
providing personal and account maintenance services to shareholders. In the
31
<PAGE>
event the Distributors are not fully reimbursed for payments they make or
expenses they incur under the Class A Plan, these expenses will not be carried
beyond one year from the date they were incurred. In the event that the
Distributors are not fully reimbursed for expenses they incur under the Class B
Plan in any fiscal year, the Distributors may carry these expenses forward,
provided, however, that the Trustees may terminate the Class B Plan and thus the
Fund's obligation to make further payments at any time. Accordingly, the Fund
does not treat unreimbursed expenses relating to the Class B shares as a
liability. For the fiscal year ended October 31, 1995, an aggregate of
$5,318,736 of distribution expenses or 3.16% of the average net assets of the
Class B shares of the Fund was not reimbursed or recovered by the Distributors
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 meetings called for the purpose of voting
on such Plans.
Pursuant to the Plans, at least quarterly, the Distributors 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.
Each of the Plans provides that it will continue in effect only so long as
its continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. Each of the Plans provides that it may be
terminated without penalty, (a) by vote of a majority of the Independent
Trustees, (b) by a vote of a majority of the Fund's outstanding shares of the
applicable class in each case upon 60 day's written notice to the Distributors
and (c) automatically in the event of assignment. Each of the Plans further
provides that it may not be amended to increase the maximum amount of the fees
for the services described therein without the approval of a majority of the
outstanding shares of the class of the Fund which has voting rights with respect
to the Plan. And finally, each of the Plans provides that no material amendment
to the Plan will, in any event, be effective unless it is approved by a 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 shares of the Fund.
During the fiscal year ended October 31, 1995, the Fund paid the
Distributors the following amounts of expenses with respect to the Class A
shares and Class B shares of the Fund:
Expense Items Class A Class B
Advertising $ 63,551 $ 63,450
Printing and mailing of $ 4,397 $ 2,609
Prospectuses to new
shareholders
Expenses of Distributors $182,706 $190,722
32
<PAGE>
Compensation to Selling Brokers $754,114 $822,022
Interest, Other Finance Charges $ 0 $598,399
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.
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.
The Fund will not price its securities on the following national holidays:
New Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day. On any day an international
market is closed and the New York Stock Exchange is open, any foreign securities
will be valued at the prior day's close with the current day's exchange rate.
Trading of foreign securities may take place on Saturdays and U.S. business
holidays on which 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
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Fund's 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 Fund, owned by
the investor, or if John Hancock Investor Services Corporation ("Investor
Services") is notified by the investor's dealer or the investor at the time of
the purchase, the cost of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases of
Class A shares made at one time, the purchases will be combined if made by (a)
an individual, his or her spouse and their children under the age of 21,
purchasing securities for his, her or their own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
rgistered investment mangement company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee or officer of the Trust; a Director or officer of the Adviser and
its affiliates or Selling Brokers; employees or sales representatives of
any of the foregoing; retired officers, employees or Directors of any of
the foregoing; a member of the immediate family (spouse, children, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharings or other benefit plan for
the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
34
<PAGE>
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
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.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or current account value of the Class A shares already
held by such person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Prospectus) are also available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares and
shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. The reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention (the
"LOI"), which should be read carefully prior to its execution by an investor.
The Fund offers two options regarding the specified period for making
investments under the LOI. All investors have the option of making their
investments over a specified period of thirteen (13) months. Investors who are
using the Fund as a funding medium for a qualified retirement plan, however, may
opt to make the necessary investments called for by the LOI over a forty-eight
(48) month period. These qualified retirement plans include group IRA, SEP,
SARSEP, TSA, 401(k), ISA and Section 457 plans. Such an investment (including
accumulations and combinations) must aggregate $100,000 or more invested during
the specified period from the date of the LOI or from a date within ninety (90)
days prior thereto, upon written request to Investor Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
35
<PAGE>
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
the sales charge applicable will not be higher than that which would have
applied (including accumulations and combinations) had the LOI been for the
amount actually invested.
The LOI authorizes Investor Services to hold in escrow a number of Class A
shares (approximately 5% of the aggregate) sufficient to make up any difference
in sales charges on the amount intended to be invested and the amount actually
invested, until such investment is completed within the specified period, at
which time the escrow shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Investor Services to act as his or her
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional Class A shares and may be
terminated at any time.
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.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share
without the imposition of an initial sales charge so that the Fund will receive
the full amount of the purchase price.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions. No CDSC
will be imposed on shares derived from reinvestment of dividends or capital
gains distributions.
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 all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
36
<PAGE>
In determining whether a CDSC applies to a redemption, the calculation will
be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the 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. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please indicate
if you require the proceeds to equal the dollar amount requested. If not
indicated, only the specified dollar amount will be redeemed from your account
and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC (dividend
reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to the Distributors and are used in whole
or in part by the Distributors to defray their expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other plans
qualified under the Code) unless otherwise noted.
37
<PAGE>
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code after age 70 1/2.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans such as 401k, 403b, 457. In all
cases, the distribution must be free from penalty under the Code.
* Redemptions made to effect distributions from an Individual Retirement
Account either before age 59 1/2 or after age 59 1/2, as long as the
distributions are based on your life expectancy or the joint-and-last
survivor life expectancy of you and your beneficiary. These distributions
must be free from penalty under the Code.
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992.
For non-retirement accounts (please see above for retirement account
waivers):
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 10% of your account value at
the time you established your periodic withdrawal plan and 10% of the value
of subsequent investments (less redemptions) in that account at the time
you notify Investor Services. (Please note, this waiver does not apply to
periodic withdrawal plan redemptions of Class A shares that are subject to
a CDSC.)
Please see matrix for reference.
CDSC Waiver Matrix for Class B Funds
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived 10% of account
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Between 59 1/2 Only Life 10% of account
and 70 1/2 Waived Waived Waived Expectancy value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
38
<PAGE>
- ------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived for
rollover, or
annuity
payments. Not 10% of account
waived if paid Waived for Waived for Waived for value annually
directly to annuity annuity annuity in periodic
participant. payments payments payments payments
- ------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- ------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. If the shareholder were to sell
portfolio securities received in this fashion, he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
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. As described more fully in the Prospectus, the Fund permits
exchanges of shares of any class of the Fund for shares of the same class in any
other John Hancock fund offering that class.
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, John Hancock Intermediate Maturity Government Fund and
John Hancock Limited-Term 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.
Shares of each class may be exchanged only for shares of the same class in
another John Hancock fund.
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.
39
<PAGE>
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 also terminate or alter the terms of the
exchange privilege upon 60 days' notice to 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."
To make an exchange, the account registration in both the existing and new
account, must be identical. The exchange privilege is available only in states
where the exchange can be made legally.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the Fund
permits the establishment of a Systematic Withdrawal Plan. Payments under this
plan represent proceeds from the redemption of shares of the Fund. Since the
redemption price of the shares of the Fund may be more or less than the
shareholder's cost, depending upon the market value of the securities owned by
the Fund at the time of redemption, the distribution of cash pursuant to this
plan may result in realization of gain or loss for purposes of Federal, state
and local income taxes. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional Class A or Class B shares could be
disadvantageous to a shareholder because of the initial sales charge payable on
such purchases of Class A shares and the CDSC imposed on redemptions of Class B
shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Class A or Class B shares at the same time a Systematic
Withdrawal Plan is in effect. The Fund reserves the right to modify or
discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior
written notice to such shareholder, or to discontinue the availability of such
plan in the future. The shareholder may terminate the plan at any time by giving
proper notice to Investor 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 Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non- payment of any checks.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the processing date of any investment.
40
<PAGE>
Reinvestment Privilege. A shareholder who has redeemed Fund shares may, within
120 days after the date of redemption, reinvest without payment of a sales
charge any part of the redemption proceeds in shares of the same class of the
Fund or in any other John Hancock funds, 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 another 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. The Fund may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
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.
Class A and Class B shares of the Fund will be sold exclusively to members of
the public (other than the institutional investors described in the Prospectus)
at net asset value plus any applicable sales charge. A sales charge will be
imposed either at the time of the purchase, for Class A shares, or on a
contingent deferred basis, for Class B shares. For Class A shares, no sales
charge is payable at the time of purchase on investments of $1 million or more,
but for such investments a CDSC may be imposed in the event of certain
redemption transactions within one year of purchase.
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.
41
<PAGE>
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) Class A and Class B shares will
bear any other class expenses properly allocable to such class of shares,
subject to the requirements that the IRS imposes on mutual funds that have a
multiple-class structure. Similarly, the net asset value per share may vary
depending on whether Class A or Class B shares are purchased.
In the event of liquidation, shareholders 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 by the Trust, 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 shareholder held personally
liable by reason of being or having been a shareholder. Liability is therefore
limited to circumstances in which the Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
Pursuant to an order granted by the Securities and Exchange Commission, the
Fund has adopted a deferred compensation plan for its Independent Trustees which
allows Trustees' fees to be invested by the Fund in other John Hancock funds.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
42
<PAGE>
CALCULATION OF PERFORMANCE
The following information supplements the discussion in the Prospectus
regarding performance information.
Yield. Yield is determined separately for Class A and Class B shares. The yields
for the Class A and Class B shares of the Fund for the thirty days ended October
31, 1995 were 5.62% and 5.24%, 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:
Yield = 2 [(a-b + 1) 6-1]
---
cd
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.
To calculate interest earned (for the purpose of "a" above) on debt obligations,
the 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.
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.
43
<PAGE>
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 Fund's total
return and 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 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 performances.
BROKERAGE ALLOCATION
The 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 Fund, 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.
To the extent that the execution and price offered by more than one dealer
are comparable, the Adviser may, in its discretion, decide to effect
transactions in portfolio securities with dealers on the basis of the dealer's
sales of shares of the Fund or with dealers who provide the Fund or the Adviser
with services such as research and the provision of statistical or pricing
information. In addition, the Fund 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 Fund's portfolio transactions by such
broker or dealer. Any such research services would be available for use on all
44
<PAGE>
investment advisory accounts of the Adviser. The Fund may from time to time
allocate brokerage on the basis of sales of its shares. Review of compliance
with these policies, including evaluation of the overall reasonableness of
brokerage commissions paid, is made by the Board of Trustees.
The Adviser places all orders for purchases and sales of portfolio
securities of the Fund. In selecting broker-dealers, the Adviser may consider
research and brokerage services furnished to it. The Adviser may use this
research information in managing the Fund's assets, as well as assets of other
clients.
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 Fund 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, 1993, 1994 and 1995, the Fund
paid brokerage commissions in the amount of $3,000, $29,450 and $107,825,
respectively.
When the 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 the 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 the 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. An
Exchange may order the liquidation of positions found to be in violation of
these limits, and it may impose certain other sanctions.
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.
45
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The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Freedom Securities Corporation and its subsidiaries,
two of which, Tucker Anthony Incorporated ("Tucker Anthony"), John Hancock
Distributors, Inc. and Sutro & Company, Inc. ("Sutro"), are broker dealers
(together, "Affiliated Brokers"). The Trust's Boards of Trustees have
established that any portfolio transaction for the Fund may be executed through
Affiliated Brokers if, in the judgment of the Adviser, 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 Fund 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 the 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 the Fund in
the over-the-counter market. The 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, 1993, 1994 and 1995 no
brokerage commissions were paid to Affiliated Brokers in connection with the
portfolio transactions of the Fund.
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.
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.
DISTRIBUTIONS
The Fund declares dividends from net investment income daily and pays
dividends monthly. Distribution of net long-term capital gains, if any,
recognized on other portfolio investments for the fiscal year, which ends
October 31, will be made at least annually.
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<PAGE>
Quarterly each shareholder of the Fund will receive a statement setting
forth the amount of the monthly or daily dividends, as the case may be, paid
that month from net investment income for the preceding period. If any of such
monthly or daily dividends were made from sources other than (i) net income for
the current or preceding fiscal year, or accumulated undistributed net income,
or both (not including in either case profits or losses from the sale of
securities or other assets) or (ii) accumulated undistributed net profits from
the sale of securities or other assets (in each case determined in accordance
with generally accepted accounting principles), such statement will indicate
what portion of the distribution per share was made from the sources referred to
in (i) and (ii) above and from paid-in surplus or other capital sources.
A shareholder of the Fund will not be credited with a monthly or daily
dividend, as the case may be, until payment for shares purchased is received by
the Fund's transfer agent. Dividends normally will be paid in the form of
additional full and fractional shares at the net asset value determined on the
payment date, unless the shareholder elects to receive dividends in cash as
described in the Prospectus. If a shareholder redeems the entire value of his
account in the Fund, the amount of dividends declared but unpaid on his shares
through the date preceding the date of redemption will be paid on the next
succeeding dividend payment date.
The per share dividends on the Class B shares will be lower than the per
share dividends on the Class A shares of the Fund as a result of the higher
distribution fee applicable with respect to the Class B shares.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116 a wholly- owned indirect subsidiary of the Life Company is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
an annual fee of $20.00 for each Class A shareholder and $22.50 for each Class B
shareholder. 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 the 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, 24 Federal Street, Boston,
Massachusetts 02110. Under the custodian agreement, Investors Bank & Trust
Company performs custody, portfolio and fund accounting services. These expenses
are aggregated and charged to the Fund and allocated to each class on the basis
of their relative net asset value.
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INDEPENDENT AUDITORS
The independent auditors of the Fund are ___________________ , 160 Federal
Street, Boston, Massachusetts, 02110. _____________________audits and renders an
opinion on the Fund's annual financial statements and reviews the Fund's annual
Federal income tax return.
FINANCIAL STATEMENTS
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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.
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
A-1
<PAGE>
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.
- ------------
* 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.
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.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper Ratings
A-2
<PAGE>
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-3
<PAGE>
JOHN HANCOCK STRATEGIC INCOME FUND
Class A and Class B Shares
Statement of
Additional Information
August 30, 1996
This Statement of Additional Information provides information about John Hancock
Strategic Income Fund (the "Fund") in addition to the information that is
contained in the combined Taxable Bond Funds Prospectus dated August 30, 1996
(the "Prospectus"). The Fund is a series portfolio of John Hancock Strategic
Series (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
TABLE OF CONTENTS
Organization of the Fund 2
Investment Objective and Policies 2
Certain Investment Practices 2
Investment Restrictions 16
Those Responsible for Management 19
Investment Advisory and Other Services 27
Distribution Contract 30
Net Asset Value 32
Initial Sales Charge on Class A Shares 33
Deferred Sales Charge on Class B Shares 35
Special Redemptions 37
Additional Services and Programs 37
Description of the Fund's Shares 38
Tax Status 40
Calculation of Performance 45
Brokerage Allocation 47
Transfer Agent Services 49
Custody of Portfolio 49
Independent Accountants 49
Financial Statements 50
Appendix 51
<PAGE>
ORGANIZATION OF THE FUND
John Hancock Strategic Income Fund (the "Fund") is organized as a separate,
diversified series of John Hancock Strategic Series (the "Trust"), an open-end
investment management company organized in April 1986 as a Massachusetts
business trust under the laws of The Commonwealth of Massachusetts. The Trust
currently consists of two separate series: the Fund and John Hancock Sovereign
U.S. Government Income Fund. The Fund is managed by John Hancock Advisers, Inc.
(the "Adviser"). The Adviser is an indirect wholly-owned subsidiary of John
Hancock Mutual Life 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 investment objective of the Fund is a high level of current income. The Fund
will seek to achieve its investment objective by investing primarily in: (i)
foreign government and corporate debt securities, (ii) U.S. Government
securities and (iii) lower-rated high yield high risk debt securities of U.S.
issuers. There can be no assurance that the investment objective of the Fund
will be realized.
CERTAIN INVESTMENT PRACTICES
Lower Rated Securities. The higher yields and high income sought by the Fund are
generally obtainable from high yield risk securities in the lower rating
categories of the established rating services. These securities are rated Baa or
lower by Moody's Investors Service, Inc. ("Moody's") or BBB or lower by Standard
& Poor's Ratings Group ("Standard & Poor's"). The Fund may invest in securities
rated as low as Ca by Moody's or CC by Standard & Poor's, which may indicate
that the obligations are speculative to a high degree and in default. Lower
rated securities are generally referred to as 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 Standard & Poor's (the "Rating Agencies"), such as those ratings described
in this Statement of Additional Information, may not be changed by the Rating
Agencies in a timely fashion to reflect subsequent economic events. The credit
ratings of securities do not evaluate 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.
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
2
<PAGE>
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 Fund invests 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.
The Fund's investments in debt securities may include increasing rate note
securities, zero coupon bonds and payment-in-kind bonds. Zero coupon bonds have
a determined interest rate, but payment of the interest is deferred until
maturity of the bonds. Payment-in-kind securities pay interest in either cash or
additional securities, at the issuer's option, for a specified period. The
market prices of zero coupon and payment- in-kind bonds are affected to a
greater extent by interest rate changes, and thereby tend to be more volatile
than securities which pay interest periodically and in cash. Increasing rate
note securities are typically refinanced by the issuers within a short period of
time.
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, because of their lower acquisition cost tend to sell on a yield basis
approximating current interest rates during periods of high interest rates.
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 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.
Foreign Securities. The Fund may invest in debt obligations (which may be
denominated in the U.S. dollar or in non-U.S. currencies) issued or guaranteed
by foreign corporations, certain supranational entities (such as the World
3
<PAGE>
Bank), and foreign governments (including political subdivisions having taxing
authority) or their agencies or instrumentalities. The Fund may also invest in
debt securities that are issued by U.S. corporations and denominated in non-U.S.
currencies. 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 Fund may also invest in American Depository Receipts (ADRs). ADRs (sponsored
and unsponsored) are receipts typically issued by an American bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation, and are designed for trading in United States securities markets.
Issuers of 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 an unsponsored ADR.
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. Although the Fund may invest in any
country where the Adviser believes there is a potential to achieve the Fund's
investment objective, it presently expects to invest primarily in securities of
issuers in industrialized Western European countries (including Scandinavian
countries) and in Canada, Japan, Australia and New Zealand. Investments in
securities of issuers in non-industrialized countries generally involve more
risk and may be considered highly speculative.
The value of portfolio securities denominated in foreign currencies may increase
or decrease in response to changes in currency exchange rates. The Fund will
incur costs in connection with converting between currencies.
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 as well as to
enhance return or as a substitute for the purchase or sale of currency. Forward
foreign currency contracts are 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 transactions in forward foreign currency contracts may
involve hedging either specific transactions or portfolio positions. The Fund
will not attempt to hedge all of its foreign portfolio positions.
If the Fund enters into a forward contract to purchase foreign currency, its
custodian bank will segregate cash or liquid high-grade debt securities (i.e.
securities rated in one of the top three rating categories by Moody's or S&P, 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
4
<PAGE>
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.
There is no limitation on the value of the Fund's assets that may be committed
to forward contracts or on the term of a forward contract. In addition to the
risks described above, forward contracts are subject to the following additional
risks: (1) that a Fund's performance will be adversely affected by unexpected
changes in currency exchange rates; (2) that the counterparty to a forward
contract will fail to perform its contractual obligations; (3) that a Fund will
be unable to terminate or dispose of its position in a forward contract; and (4)
with respect to hedging transactions in forward contracts, that there will be
imperfect correlation between price changes in the forward contract and price
changes in the hedged portfolio assets.
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.
Global Risks. Investments in foreign securities may involve certain risks not
present in domestic investments due to exchange controls, less publicly
available information, more volatile or less liquid securities markets, and the
possibility of expropriation, confiscatory taxation or political, economic or
social instability. There may be difficulty in enforcing legal rights outside
the United States. Some foreign companies are not subject to the same uniform
financial reporting requirements, accounting standards and governmental
supervision as domestic companies, and foreign exchange markets are regulated
differently from the U.S. stock market. Security trading practices abroad may
offer less protection to investors such as the Fund. 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 Fund's shares and dividends. Finally, you should be aware that the
expense ratios of international funds generally are higher than those of
domestic funds, because there are greater costs associated with maintaining
custody of foreign securities and the increased research necessary for
international investing results in a higher advisory fee.
These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
5
<PAGE>
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 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. 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 these countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
U.S. Governmental Securities. Certain U.S. Government securities, including U.S.
Treasury bills, notes and bonds, and Government National Mortgage Association
mortgage-backed 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 instrumentalities such as the Federal Home
Loan Mortgage Corporation ("Freddie Macs"), the Federal National Mortgage
Association ("Fannie Maes") and the Student Loan Marketing Association ("Sallie
Maes"). No assurance can be given that the U.S. Government will provide
financial support to these Federal agencies, authorities, instrumentalities and
government sponsored enterprises in the future.
Mortgage-Backed Securities. Ginnie Maes, Freddie Macs and Fannie Maes are
mortgage- backed securities which provide monthly payments that are, in effect,
a "pass-through" of the monthly interest and principal payments (including any
pre-payments) made by the individual borrowers on the pooled mortgage loans.
Collateralized Mortgage Obligations ("CMOs"), in which the Fund may also invest,
are securities issued by a U.S. Government instrumentality that are
collateralized by a portfolio of mortgages or mortgage-backed securities. During
periods of declining interest rates, principal and interest on mortgage-backed
securities may be prepaid at faster-than-expected rates. The proceeds of these
prepayments typically can only be invested in lower-yielding securities.
Therefore, mortgage-backed securities may be less effective at maintaining
yields during periods of declining interest rates than traditional debt
securities of similar maturity. U.S. Government agencies and instrumentalities
include, but are not limited to, Federal Farm Credit Banks, Federal Home Loan
6
<PAGE>
Banks, the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association, and the Federal National Mortgage Association. Some obligations
issued by an agency or instrumentality may be supported by the full faith and
credit of the U.S. Treasury.
A real estate mortgage investment conduit, or REMIC, is a private entity formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property, and of issuing multiple classes of interests therein to investors
such as the Fund. The Fund may consider REMIC securities as possible investments
when the mortgage collateral is insured, guaranteed or otherwise backed by the
U.S. Government or one or more of its agencies or instrumentalities. The Fund
will not invest in "residual" interests in REMIC's because of certain tax
disadvantages for regulated investment companies that own such interests.
Risks of Mortgage-Backed Securities. Different types of mortgage-backed
securities are subject to different combinations of prepayment, extension,
interest rate and/or other market risks. Conventional mortgage pass-through
securities and sequential pay CMOs are subject to all of these risks, but are
typically not leveraged. PACs, TACs and other senior classes of sequential and
parallel pay CMOs involve less exposure to prepayment, extension and interest
rate risk than other mortgage-backed securities, provided that prepayment rates
remain within expected prepayment ranges or "collars."
The value of mortgage-backed securities may also change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage-backed securities market as a whole.
Non-government mortgage-backed securities may offer higher yields than those
issued by government entities, but also may be subject to greater price changes
than government issues.
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 securities. Structured
securities may also be more volatile, less liquid and more difficult to price
accurately than less complex fixed income investments.
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Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests are subject to its 15% limitation on investments in
illiquid securities. The Fund may purchase only those participation interests
that mature in 60 days or less, or, if maturing in more than 60 days, that have
a floating rate that is automatically adjusted at least once every 60 days.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including securities offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act. However, the Fund will not invest more than 15% of
its assets in illiquid investments, which include repurchase agreements maturing
in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Board of Trustees determines, based upon
a continuing review of the trading markets for specific Rule 144A securities,
that they are liquid, then such securities may be purchased without regard to
the 15% limit. The Trustees may adopt guidelines and delegate to the 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.
The Fund may acquire other restricted securities including securities for which
market quotations are not readily available. These securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933.
Where registration is required, the Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair market value as determined in good faith by the Fund's
Trustees. If through the appreciation of restricted securities or the
depreciation of unrestricted securities, the Fund should be in a position where
more than 15% of the value of its assets is invested in illiquid securities
(including repurchase agreements which mature in more than seven days and
options which are traded over-the-counter and their underlying securities), the
Fund will bring its holdings of illiquid securities below the 15% limitation.
Rights and Warrants. The Fund may invest up to 5% of its total assets (at the
time of purchase) in rights and warrants. However, this limitation does not
apply to those warrants or rights (i) acquired as part of a unit or attached to
other securities purchased by the Fund or (ii) acquired as part of a
distribution from the issuer.
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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.
Repurchase Agreements. A repurchase agreement is a contract under which the Fund
acquires a security for a relatively short period (usually not more than 7 days)
subject to the obligation of the seller to repurchase and the Fund to resell
such security at a fixed time and price (representing the Fund's cost plus
interest). The Fund will enter into repurchase agreements only with member banks
of the Federal Reserve System and with "primary dealers" in U.S. Government
securities. The 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 and lack of
access to income during this period and the expense of enforcing its rights.
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
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account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Borrowing. The Fund may borrow money in an amount that does not exceed 33% of
its total assets. Borrowing by the Fund involves leverage, which may exaggerate
any increase or decrease in the Fund's investment performance and in that
respect may be considered a speculative practice. The interest that the Fund
must pay on any borrowed money, additional fees to maintain a line of credit or
any minimum average balances required to be maintained are additional costs
which will reduce or eliminate any potential investment income and may offset
any capital gains. Unless the appreciation and income, if any, on the asset
acquired with borrowed funds exceed the cost of borrowing, the use of leverage
will diminish the investment performance of the Fund.
Financial Futures Contracts. To the extent set forth in the Prospectus, the Fund
may buy and sell futures contracts (and related options) on stocks, stock
indices, debt securities, currencies, interest rate indices, and other
instruments for hedging and speculative purposes. The Fund may hedge its
portfolio by selling or purchasing financial futures contracts as an offset
against the effects of changes in interest rates or in security or foreign
currency values. Although other techniques could be used to reduce exposure to
market fluctuations, the Fund may be able to hedge its exposure more effectively
and perhaps at a lower cost by using financial futures contracts. The Fund may
enter into financial futures contracts for hedging and speculative purposes to
the extent permitted by regulations of the Commodity Futures Trading Commission
("FTC"). The potential loss from futures transactions is potentially unlimited
and may exceed the amount of the premium received.
Financial futures contracts have been designed by boards of trade which have
been designated "contract markets" by the FTC. Futures contracts are traded on
these markets in a manner that is similar to the way a stock is traded on a
stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association ("GAMA")
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills, 90-day commercial paper, bank certificates of deposit and Eurodollar
certificates of deposit. It is expected that if other financial futures
contracts are developed and traded the Fund may engage in transactions in such
contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security and delivery
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month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than the Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. The Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the Federal income tax considerations
of transactions in financial futures contracts, see the information under the
caption "Tax Status" below.
At the time the Fund enters into a financial futures contract, it is required to
deposit with its custodian a specified amount of cash or U.S. Government
securities, known as "initial margin," ranging upward from 1.1% of the value of
the financial futures contract being traded. The margin required for a financial
futures contract is set by the board of trade or exchange on which the contract
is traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
financial futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. Each day, the
futures contract is valued at the official settlement price of the board of
trade or exchange on which it is traded. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. This process is known
as "mark to market." Variation margin does not represent a borrowing or lending
by the Fund but is instead a settlement between the Fund and the broker of the
amount one would owe the other if the financial futures contract expired. In
computing net asset value, the Fund will mark to market its open financial
futures positions.
Successful hedging depends on a strong correlation between the market for the
underlying securities or currencies and the futures contract market for those
securities or currencies. There are several factors that will probably prevent
this correlation from being a perfect one, and even a correct forecast of
general interest rate trends may not result in a successful hedging transaction.
There are significant differences between the securities, currencies and futures
markets which could create an imperfect correlation between the markets and
which could affect the success of a given hedge. The degree of imperfection of
correlation depends on circumstances such as variations in speculative market
demand for financial futures and debt securities, including technical influences
in futures trading and differences between the financial instruments being
hedged and the instruments underlying the standard financial futures contracts
available for trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower- rated and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
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<PAGE>
because of unexpected market or interest rate trends. The Fund will bear the
risk that the price of the securities or currencies being hedged will not move
in complete correlation with the price of the futures contracts used as a
hedging instrument. Although the Adviser believes that the use of financial
futures contracts will benefit the Fund, an incorrect market prediction could
result in a loss on both the hedged securities or currencies in the Fund's
portfolio and the hedging vehicle so that the Fund's return might have been
better had hedging not been attempted. However, in the absence of the ability to
hedge, the Adviser might have taken portfolio actions in anticipation of the
same market movements with similar investment results but, presumably, at
greater transaction costs. The low margin deposits required for futures
transactions permit an extremely high degree of leverage. A relatively small
movement in a futures contract may result in losses or gains in excess of the
amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
Finally, although the Fund engages in financial futures transactions only on
boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
could be reduced. In addition, the Fund could be prevented from executing a buy
or sell order at a specified price or closing out a position due to limits on
open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If the Fund cannot close out a position, it must continue to
meet margin requirements until the position is closed.
Options on Financial Futures Contracts. To the extent set forth in the
Prospectus, the Fund may buy and sell options on financial futures contracts on
stocks, stock indices, debt securities, currencies, interest rate indices, and
other instruments. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers the futures contract to
the holder at the exercise price. The Fund would be required to deposit with its
custodian initial and variation margin with respect to put and call options on
futures contracts written by them. Options on futures contracts involve risks
similar to the risks of transactions in financial futures contracts. Also, an
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<PAGE>
option purchased by the Fund may expire worthless, in which case the Fund would
lose the premium it paid for the option.
Other Considerations. The Fund will engage in futures and options
transactions for bona fide hedging or speculative purposes to the extent
permitted by CFTC regulations. The Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, the Fund's
futures transactions will be entered into for traditional hedging purposes
- --i.e., futures contracts will be sold to protect against a decline in the price
of securities, or the currency in which they are 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
denominated, that the Fund intends to purchase. As evidence of this hedging
intent, the Fund expects that on 75% or more of the occasions on which it takes
a long futures or option position (involving the purchase of futures contracts),
the Fund will have purchased, or will be in the process of purchasing equivalent
amounts of related securities or assets denominated in the related currency in
the cash market at the time when the futures contract 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.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits the Fund to elect to comply with a different test, under
which the aggregate initial margin and premiums required to establish nonhedging
positions in futures contracts and options on futures will not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
transactions in options and futures contracts only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for Federal income tax purposes.
When the Fund purchases financial futures contracts, or writes put options or
purchases call options thereon, cash or liquid, high grade debt securities will
be deposited in a segregated account with the Fund's custodian in an amount
that, together with the amount of initial and variation margin held in the
account of the broker, equals the market value of the futures contracts.
Options Transactions. To the extent set forth in the Prospectus, the Fund may
write listed and over-the-counter covered call options and covered put options
on securities, securities indices and currency in order to earn additional
income from the premiums received. In addition, the Fund may purchase listed and
over-the-counter call and put options. The extent to which covered options will
be used by the Fund will depend upon market conditions, the availability of
alternative strategies and the future movement of securities prices, interest
rates and currency exchange rates. The Fund may write covered listed and
over-the-counter call and put options on up to 100% of its net assets. In
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addition, the Fund may purchase listed and over-the-counter call and put options
on securities and currency with an aggregate value not exceeding 5% of the
Fund's total assets.
The Fund will write listed and over-the-counter call options only if they are
"covered," which means that the Fund owns or has the immediate right to acquire
the securities or currencies underlying the options without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio. A call option written by the Fund may also be "covered" if the Fund
holds on a share-for-share basis a covering call on the same securities or
currencies where (i) the exercise price of the covering call held is equal to or
less than the exercise price of the call written or the exercise price of the
covering call is greater than the exercise price of the call written, in the
latter case only if the difference is maintained by the Fund in cash, U.S.
Government securities, or high grade liquid debt obligations in a segregated
account with the Fund's custodian, and (ii) the covering call expires at the
same time as or later than the call written. The Fund will cover call options on
securities indices by maintaining an adequate degree of correlation between the
securities represented by the underlying index and the securities in all or part
of its portfolio If a covered call option is not exercised, the Fund would keep
both the option premium and the underlying security or currency. If the covered
call option written by the Fund is exercised and the exercise price, less the
transaction costs, exceeds the cost of the underlying security or currency, the
Fund would realize a gain in addition to the amount of the option premium it
received. If the exercise price, less transaction costs, is less than the cost
of the underlying security, the Fund's loss would be reduced by the amount of
the option premium.
As the writer of a covered put option, the Fund will write a put option only
with respect to securities or currency it intends to acquire for its portfolio
and will maintain in a segregated account with its custodian bank cash, U.S.
Government securities or high grade liquid debt securities with a value equal to
the price at which the underlying security or currency may be sold to the Fund
in the event the put option is exercised by the purchaser. The Fund may also
write a "covered" put option by purchasing on a share-for-share basis a put on
the same security or currency as the put written by the Fund if the exercise
price of the covering put held is equal to or greater than the exercise price of
the put written and the covering put expires at the same time as or later than
the put written.
When writing listed and over-the-counter covered put options on securities or
currency, the Fund would earn income from the premiums received. If a covered
put option is not exercised, the Fund would keep the option premium and the
assets maintained to cover the option. If the option is exercised and the
exercise price, including transaction costs, exceeds the market price of the
underlying security or currency, the Fund would realize a loss, but the amount
of the loss would be reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its obligation
prior to its exercise, it may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. The effect of the purchase is that the Fund's position will be offset
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by the Options Clearing Corporation. The Fund may not effect a closing purchase
transaction after it has been notified of the exercise of an option. There is no
guarantee that a closing purchase transaction can be effected. Although the Fund
will generally write only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange or board of trade will exist for any particular option or at any
particular time, and for some options no secondary market on an exchange may
exist.
In the case of a written call option, effecting a closing transaction will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In the case of a
written put option, it will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities or currency subject
to the option to be used for other investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option.
The Fund will realize a loss from a closing transaction if the cost of the
closing transaction is more than the premium received for writing the option.
However, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security or currency,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation in the value of the underlying security or
currency owned by the Fund.
Over-the-Counter Options. The Fund may engage in options transactions on
exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e., performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the- counter ("OTC") transactions are
two-party contracts with price and terms negotiated by the buyer and seller. The
Fund will acquire only those OTC options for which management believes the Fund
can receive on each business day at least two separate bids or offers (one of
which will be from an entity other than a party to the option) or those OTC
options valued by an independent pricing service. The Fund will write and
purchase OTC options only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or their affiliates which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million. The SEC has taken the position that OTC
options are subject to the Fund's 15% restriction on illiquid investments. The
SEC, however, allows the Fund to exclude from the 15% limitation on illiquid
securities a portion of the value of the OTC options written by the Fund,
provided that certain conditions are met. First, the other party to the OTC
options has to be a primary U.S. Government securities dealer designated as such
by the Federal Reserve Bank. Second, the Fund must have an absolute contractual
right to repurchase the OTC options at a formula price. If the above conditions
are met, the Fund may treat as illiquid only that portion of the OTC option's
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value (and the value of its underlying securities) which is equal to the formula
price for repurchasing the OTC option, less the OTC option's intrinsic value.
Time Deposits. The SEC considers time deposits with periods of greater than
seven days to be illiquid, subject to the restriction that illiquid securities
are limited to no more than 15% of the Fund's assets.
Defensive Investments. If the Adviser believes that the Fund should temporarily
assume a defensive investment posture due to unfavorable investment conditions,
the Fund may hold cash or invest all or part of its assets in short-term
instruments. These short-term instruments consist of corporate commercial paper
and other short-term commercial obligations that are rated, or issued by
companies with similar securities outstanding that are rated, at least A-3 by
Standard & Poor's or P-3 by Moody's, or, if unrated, considered by the Adviser
to be of comparable quality; obligations (including certificates of deposit,
time deposits, demand deposits and bankers' acceptances) of banks with
securities outstanding, U.S. Government securities; and repurchase agreements.
The Fund's temporary defensive investments may also include: debt obligations of
U.S. companies rated at least BBB or Baa by Standard & Poor's 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 Standard & Poor's or Moody's,
respectively; and other short-term investments which the Fund's Board of
Trustees determines 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 Board.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of a majority of the Fund's outstanding voting
securities which, as used in the Prospectus and this Statement of Additional
Information, means approval of the lesser of (1) the holders of 67% or more of
the shares represented at a meeting if the holders of more than 50% of the
Fund's outstanding shares are present in person or by proxy or (2) the holders
of more than 50% of the Fund's outstanding shares.
The Fund observes the fundamental restrictions listed in item (1) through (9)
below. The Fund may not:
(1) Issue senior securities, except as permitted by paragraphs (2), (6) and (7)
below. For purposes of this restriction, the issuance of shares of beneficial
interest in multiple classes or series, the purchase or sale of options, futures
contracts and options on futures contracts, forward foreign currency exchange
contracts, forward commitments and repurchase agreements entered into in
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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 in amounts exceeding 33 1/3% of the Fund's total assets
(including the amount borrowed) taken at market value. Interest paid on
borrowing will reduce income available to shareholders.
(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 of corporate or governmental entities secured by real
estate or marketable interests therein or securities issued by companies that
invest in real estate or interests therein.
(6) Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's total
assets taken at market value, (2) enter into repurchase agreements, and (3)
purchase all or a portion of an issue of publicly distributed debt securities,
bank loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase is made
upon the original issuance of the securities.
(7) Buy or sell commodity contracts, except futures contracts on securities,
securities indices and currency and options on such futures, forward foreign
currency exchange contracts, forward commitments, and repurchase agreements
entered into in accordance with the Fund's investment policies.
(8) Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets taken at
market value at the time of each investment. This limitation does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
(9) Purchase securities of an issuer (other than the U.S. Government, its
agencies or instrumentalities), if
(i) more than 5% of the Fund's total assets taken at market value would be
invested in the securities of such issuer, except that up to 25% of the Fund's
total assets may be invested in securities issued or guaranteed by any foreign
government or its agencies or instrumentalities, or,
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(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.
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.
Nonfundamental Investment Restrictions. The following investment restrictions
are designated as nonfundamental and may be changed by the Board of Trustees
without shareholders' 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
joint securities trading account.
(b) Purchase securities on margin (except that it may obtain such short-term
credits as may be necessary for the clearance of transactions in securities and
forward foreign currency exchange contracts and may make margin payments in
connection with transactions in futures contracts and options on futures) or
make short sales of securities 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.
(c) Purchase or hold securities of an issuer if, to the Fund's knowledge, one or
more of the Trustees or officers of the Fund or the directors or officers of the
Adviser individually owns beneficially more than 0.5% and together own
beneficially more than 5% of the securities of such issuer.
(d) Purchase a security if, as a result, (a) more than 10% of the Fund's assets
would be invested in securities of other investment companies, (b) such purchase
would result in more than 3% of the total outstanding voting securities of any
one such investment company being held by the Fund, or (c) more than 5% of the
Fund's assets would be invested in any one such investment company. The Fund may
not purchase securities of any open-end investment company except when such
purchase is part of a plan of merger, consolidation, reorganization or purchase
of substantially all of the assets of any other investment company.
(e) Purchase securities of any issuer which, together with any predecessor, has
a record of less than three years' continuous operations prior to the purchase
if such purchase would cause investments of the Fund in all such issuers to
exceed 5% of the value of the total assets of the Fund.
(f) Invest for the purpose of exercising control over or management of any
company.
18
<PAGE>
(g) Purchase warrants of any issuer, if, as a result of such purchases, more
than 2% of the Fund's total assets valued at the lower of cost or market value
would be invested in warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange or more than 5% of the total assets of
the Fund, valued as aforesaid, would be invested in warrants generally, whether
or not so listed; provided that for these purposes, warrants are to be valued at
the lesser of cost or market, but warrants acquired by the Fund in units with or
attached to debt securities shall be deemed to be without value.
(h) Purchase any security, including any repurchase agreement maturing in more
than seven days, which is not readily marketable, if more than 15% of the net
assets of the Fund, taken at market value, would be invested in such securities.
(The Staff of the Securities and Exchange Commission may consider
over-the-counter options to be illiquid securities subject to the 15% limit.)
(i) Purchase interests in oil, gas or other mineral leases or exploration
programs; however, this policy will not prohibit the acquisition of securities
of companies engaged in the production or transmission of oil, gas or other
minerals.
(j) 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.
In addition, the Fund complies with the following nonfundamental limitation on
its investments:
The Fund will not exercise any conversion, exchange or purchase rights
associated with corporate debt securities in the portfolio if, at the time, the
value of all equity interests would exceed 10% of the Fund's total assets taken
at market value.
In order to permit the sale of shares of the Fund in certain states, the
Trustees may, in their sole discretion, adopt investment restrictions or
policies more restrictive than those described above. Should the Trustees
determine that any such more restrictive policy is no longer in the best
interest of the Fund and its shareholders, the Fund may cease offering shares in
the state involved and the Trustees may revoke such restrictive policy.
Moreover, if the states involved shall no longer require any such restrictive
policy, the Trustees may, at their sole discretion, revoke such policy.
The Fund will not invest in real estate limited partnership interests.
19
<PAGE>
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 or the total costs of the Fund's
assets will not be considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees, who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and directors of the Adviser, or officers and directors of the
Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock Funds").
The following table sets forth the principal occupation or employment of the
Trustees and principal officers of the Fund during the past five years:
<TABLE>
<CAPTION>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief Executive
October 1944 Officer, the Adviser and The
Berkeley Financial Group ("The
Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited; ("Advisers
International"); John Hancock
Funds, Inc., ("John Hancock
Funds"), John Hancock Investor
Services Corporation ("Investor
Services") and Sovereign Asset
20
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
Management Corporation ("SAMCorp");
(hereinafter the Adviser, the
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Investor Services
and SAMCorp are collectively
referred to as the "Affiliated
Companies"); Chairman, First
Signature Bank & Trust; Director,
John Hancock Freedom Securities
Corp., John Hancock Capital Corp.
and New England/Canada Business
Council; Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April
1994).
Dennis S. Aronowitz Trustee (3) Professor of Law, Boston University
Boston University School of Law; Trustee, Brookline
Boston, Massachusetts Savings Bank.
June 1931
- ---------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
21
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
Richard P. Chapman, Jr. Trustee (1,3) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, Massachusetts Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University
(education); Director, Depositors
Insurance Fund, Inc. (insurance).
William J. Cosgrove Trustee (3) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, New Jersey 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).
- ---------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
22
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
Douglas M. Costle Trustee (1,3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, Vermont 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991). Dean Vermont Law
School (until 1991). Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee (3) Director of Santa Fe Ingredients
9449 Navy Blue Court Company of California, Inc. and
Las Vegas, NV 89117 Santa Fe Ingredients Company, Inc.
December 1928 (private food processing
companies); Director of Uranium
Resources, Inc.; President of
Stolar, Inc. (from 1987-1991) and
President of Albuquerque Uranium
Corporation (from 1985-1992);
Director of Freeport-McMoRan Copper
& Cold Company Inc., Hecla Mining
Company, Canyon Resources
Corporation and Original Sixteen to
One Mine, Inc. (from 1984-1987 and
from 1991 to 1995)(management
consultant).
- ---------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
23
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
Richard A. Farrell Trustee (3) President of Farrell, Healer & Co.,
Farrell, Healer & Company, Inc. (venture capital management firm)
160 Federal Street -- (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank
Boston, MA 02110 of Boston Corporation.
November 1932
Gail D. Fosler Trustee (3) Vice President and Chief Economist,
4104 Woodbine Street The Conference Board (non-profit
Chevy Chase, MD economic and business research).
December 1947
William F. Glavin Trustee (3) President, Babson College; Vice
Babson College Chairman, Xerox Corporation (until
Horn Library June 1989); Director, Caldor Inc.,
Babson Park, MA 02157 Reebok, Ltd. (since 1994), and Inco
March 1931 Ltd.
*Anne C. Hodsdon Trustee and President (1,2) President and Chief Operating
April 1953 Officer, the Adviser; Executive
Vice President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
- ---------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
24
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
Dr. John A. Moore Trustee (3) President and Chief Executive
Institute for Evaluating Officer, Institute for Evaluating
Health Risks Health Risks (nonprofit
1101 Vermont Avenue N.W. institution) ( since September
Suite 608 1989).
Washington, DC 20005
February 1939
Patti McGill Peterson Trustee (3) President, St. Lawrence University;
St. Lawrence University Director, Niagara Mohawk Power
110 Vilas Hall Corporation (electric utility) and
Canton, NY 13617 Security Mutual Life (insurance).
May 1943
John W. Pratt Trustee (3) Professor of Business
2 Gray Gardens East Administration at Harvard
Cambridge, MA 02138 University Graduate School of
September 1931 Business Administration (since
1961).
*Richard S. Scipione Trustee (1) General Counsel, the Life Company;
John Hancock Place Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
August 1937 Insurance Agency, Inc., John
Hancock Subsidiaries, Inc. and John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993).
- ---------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
25
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Lauderdale, FL
November 1932
The executive officers of the Trust and their principal occupations during the
past five years are set forth below. Unless otherwise indicated, the business
address of each is 101 Huntington Avenue, Boston, Massachusetts 02199.
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment
July 1938 Investment Officer (1) Officer, the Adviser; President,
the Adviser (until December 1994);
Director, the Adviser, Advisers
International, John Hancock Funds,
Investor Services, SAMCorp and NM
Capital; Senior Vice President, The
Berkeley Group.
James B. Little Senior Vice President, Senior Vice President, the Adviser,
February 1935 Chief Financial Officer The Berkeley Group, John Hancock
Funds, and Investor Services;
Senior Vice President and Chief
Financial Officer, each of the John
Hancock funds.
- ---------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
26
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrants During Past 5 Years
- ----------------- ---------------- -------------------
John A. Morin Vice President Vice President [and Secretary], the
July 1950 Adviser; Vice President, Investor
Services, John Hancock Funds and
each of the John Hancock funds;
Compliance Officer, certain John
Hancock funds; Counsel, John
Hancock Mutual Life Insurance
Company; Vice President and
Assistant Secretary, The Berkeley
Group.
Susan S. Newton Vice President Vice President and Assistant
March 1950 and Secretary Secretary, the Adviser; Vice
President and Secretary, certain
John Hancock funds; Vice President
and Secretary, John Hancock Funds;
Investor Services and John Hancock
Distributors (until 1994);
Secretary, SAMCorp; Vice President.
The Berkeley Group.
James J. Stokowski Vice President Vice President, the Adviser; Vice
November 1946 and Treasurer President and Treasurer, each of
the John Hancock funds.
</TABLE>
As of May 17, 1996, the officers and Trustees of the Fund as a group owned less
than 1% of the outstanding shares of the Fund and to the knowledge of the
registrant, no persons owned of record or beneficially 5% or more of any class
of the Fund's outstanding securities.
- ---------------
* An "interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee.
(2) A Member of Investment Committee of the Adviser.
(3) A Member of the Audit and Administration Committees.
27
<PAGE>
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
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 for the Fund's most recently completed
fiscal year. The three non-Independent Trustees, Messrs. Boudreau and Scipione
and Ms. Hodsdon, 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.
Total
Compensation From
the Fund and John
Aggregate Hancock Fund
Compensation Complex to
Independent Trustees From the Fund Trustees1
- -------------------- ------------- ---------
Dennis S. Aronowitz $ - $ 61,050
Richard P. Chapman+ - 62,800
William J. Cosgrove+ - 61,050
Gail D. Fosler - 60,800
Bayard Henry* - 58,850
Edward J. Spellman - 61,050
--------- --------
$ - $365,600
1 The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1995. As
of this date there were sixty-one funds in the John Hancock Fund Complex,
of which the Independent Trustees served sixteen.
* Mr. Henry retired from his position as a Trustee of the Fund effective
April 26, 1996.
+ As of December 31, 1995 the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Fund Complex for Mr.
Chapman was $54,681 and for Mr. Cosgrove was $54,243 under the John Hancock
Deferred Compensation Plan for Independent Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
The Fund receives investment advice from the Adviser. Investors should refer
below for a description of certain information concerning the investment
management contract.
Each of the Trustees and principal officers affiliated with the Fund who is also
an affiliated person of the Adviser is named above, together with the capacity
in which such person is affiliated with the Fund and the Adviser.
28
<PAGE>
The Trust, on behalf of the Fund, has entered into an investment management
contract with the Adviser. Under the investment management contract, the Adviser
provides the Fund with (i) a continuous investment program, consistent with the
Fund's stated investment objective and policies and (ii) supervision of all
aspects of the Fund's operations except those that are delegated to a custodian,
transfer agent or other agent. The Adviser is responsible for the management of
the Fund's portfolio assets.
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 of
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.
No person other than the Adviser and its directors and employees regularly
furnishes advice to the Fund with respect to the desirability of the Fund's
investing in, purchasing or selling securities. The Adviser may from time to
time receive statistical or other similar factual information, and information
regarding general economic factors and trends, from the Life Company and its
affiliates.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund (including fees of Trustees of the Trust
who are not "interested persons," as such term is defined in the Investment
Company Act, but excluding certain distribution related activities required to
be paid by the Adviser or John Hancock Funds) and the continuous public offering
of the shares of the Fund are borne by the Fund. Class expenses properly
allocable to either Class A shares or Class B shares will be borne exclusively
by such class of shares subject to conditions the Internal Revenue Service
imposes with respect to multiple-class structures.
As provided by the investment management contract, the Fund pays the Adviser
monthly an investment management fee, which is accrued daily, based on a stated
percentage of the Fund's average daily net assets as follows:
29
<PAGE>
Net Asset Value Annual Rate
--------------- -----------
First $100,000,000 0.60%
Next $150,000,000 0.45%
Next $250,000,000 0.40%
Next $150,000,000 0.35%
Amount over $650,000,000 0.30%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to re-impose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
If the total of all ordinary business expenses of the Fund for any fiscal year
exceeds limitations prescribed in any state in which shares of the Fund are
qualified for sale, the fee payable to the Adviser will be reduced and the
Adviser will make any additional arrangements necessary to eliminate remaining
excess expenses to the extent required by law. At this time, the most
restrictive limit on expenses imposed by a state applicable to the Fund requires
that expenses charged to the Fund in any fiscal year not exceed 2.5 % of the
first $30,000,000 of the Fund's average net asset value, 2% of the next
$70,000,000 of such net asset value and 1.5% of the remaining average net asset
value. When calculating the limit above, the Fund may exclude interest,
brokerage commissions and extraordinary expenses.
On May 31, 1996, the net assets of the Fund were $____________. For the years
ended May 31, 1994, 1995 and 1996 the Adviser received a fee of $1,657,249,
$2,007,777 and $____________, respectively.
Pursuant to its investment management contract, the Adviser is not liable to the
Fund or its shareholders for any error of judgment or mistake of law or for any
loss suffered by the Fund in connection with the matters to which the investment
management contract relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the performance of
its duties or from reckless disregard by the Adviser of its obligations and
duties under the investment management contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and presently has more than $18 billion in assets under
management in its capacity as investment adviser to the Fund and the other
mutual funds and publicly traded investment companies in the John Hancock group
of funds having a combined total of over [_________] shareholders. The Adviser
is an affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of $80
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries high ratings from S&P and A.M. Best. Founded in
30
<PAGE>
1862, the Life Company has been serving clients for over 130 years.
Under the investment management contract, the Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
The investment management contract continues in effect from year to year if
approved annually by vote of a majority of the Fund's Trustees who are not
interested persons of one of the parties to the contract, cast in person at a
meeting called for the purpose of voting on such approval, and by either the
Fund's Trustees or the holders of a majority of the Fund's outstanding voting
securities. The contract automatically terminates upon assignment and may be
terminated without penalty on 60 days' notice at the option of either party to
the contract or by vote of a majority of the outstanding voting securities of
the Fund.
In addition, 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 May 31, 1996, the Fund paid the Adviser $_______ for
services under this agreement.
DISTRIBUTION CONTRACT
The Fund has entered into a distribution contract with John Hancock Funds. Under
the contract, John Hancock Funds is obligated to use its best efforts to sell
shares of each class 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. In connection
with the sale of Class A and Class B shares, John Hancock Funds and Selling
Brokers receive compensation in the form of a sales charge imposed, in the case
of Class A shares at the time of sale, or, in the case of Class B shares, on a
deferred basis. The sales charges are discussed further in the Prospectus.
The Funds' Trustees adopted Distribution Plans with respect to Class A and Class
B shares pursuant to Rule 12b-1 under the Investment Company Act. Under the
Class A and Class B Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% and 1.00% for Class A and Class B,
respectively, of the Fund's average daily net assets allocated to the particular
class. In each case, up to 0.25% is for service expenses and the remaining
31
<PAGE>
amount is for distribution expenses. The distribution fees will be used to
reimburse John Hancock Funds for its distribution expenses, including but not
limited to: (i) initial and ongoing sales compensation to Selling Brokers and
others (including affiliates of John Hancock Funds) engaged in the sale of Fund
shares; (ii) marketing, promotional and overhead expenses incurred in connection
with the distribution of Fund shares; and (iii) with respect to Class B shares
only, interest expenses on reimbursed distribution expenses. The service fees
will be used to compensate Selling Brokers for providing personal and account
maintenance services to shareholders. In the event that John Hancock Funds is
not fully reimbursed for its payments or expenses under the Class A Plan, the
expenses will not be carried beyond one year from the date they were incurred.
These unreimbursed expenses under the Class B Plan will be carried forward
together with interest. For the fiscal year ended May 31, 1996 an aggregate of
$______ of distribution expenses, or __% of the average net assets of the Class
B shares of the Fund, was not reimbursed or recovered by John Hancock Funds
through the receipt of deferred sales charges or 12b-1 fees in prior periods.
The Trustees may terminate the Class B Plan and thus the Fund's obligation to
make further payments at any time. Accordingly, the Fund does not treat
unreimbursed expenses relating to the Class B shares as a liability of the Fund.
The Plans were approved by a majority of the voting securities of the applicable
class of shareholders. The Plans and all amendments have also been approved by a
majority of the Trustees, including a majority of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan (the "Independent Trustees"), by votes
cast in person at meetings called for the purpose of voting on such Plan.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis.
During the fiscal year ended May 31, 1996 the Fund paid John Hancock Funds the
following amounts of expenses with respect to the Class A shares and Class B
shares of the Fund:
<TABLE>
<CAPTION>
Expense Items
Printing and Interest
Mailing of Expense Carrying
Prospectus Compensation of John or Other
to New to Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A Shares
Class B Shares
</TABLE>
32
<PAGE>
Each of the Plans provides that it will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. Each of the Plans provides that it may be terminated
without penalty (a) by vote of a majority of the Independent Trustees, (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class upon
60 days' written notice to John Hancock Funds and (c) automatically in the event
of assignment. Each of the Plans further provides that it may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to the Plan. Each of the Plans
provides that no material amendment to the Plan will, in any event, be effective
unless it is approved by a majority vote of the Trustees and the Independent
Trustees of the Trust. The holders of Class A shares and Class B shares have
exclusive voting rights with respect to the Plan applicable to their respective
class of shares. In adopting the Plans, the Trustees concluded that, in their
judgment, there is a reasonable likelihood that each Plan will benefit the
holders of the applicable class of shares of the Fund.
When the Trust seeks an Independent Trustee to fill a vacancy or as a nominee
for election by shareholders, the selection or nomination of the Independent
Trustee is, under resolutions adopted by the Trustees contemporaneously with
their adoption of the Plans, committed to the discretion of the Committee on
Administration of the Trustees. The members of the Committee on Administration
are all Independent Trustees and are identified in this Statement of Additional
Information under the heading "Those Responsible for Management."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
33
<PAGE>
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.
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.
The Fund will not price its securities on the following national holidays: New
Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor
Day' Thanksgiving Day; and Christmas Day.
On any day an international market is closed and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which 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
Class A shares of the Fund are offered at a price equal to their net asset
value plus a sales charge which, at the option of the purchaser, may be imposed
either at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then they will only be issued for full shares. The Trustees reserve the
right to change or waive a Fund's minimum investment requirements and to reject
any order to purchase shares (including purchase by exchange) when in the
judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining the reduced sales charges
referred to generally in the Prospectus are described in detail below. In
calculating the sales charge applicable to current purchases of Class A shares
of the Fund, the investor is entitled to cumulate current purchases with the
greater of the current value (at offering price) of the Class A shares of the
Fund owned by the investor, or, if John Hancock Investor Services Corporation
("Investor Services") is notified by the investor's dealer or the investor at
the time of the purchase, the cost of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases of
Class A shares made at one time, the purchases will be combined if made by (a)
an individual, his spouse and their children under the age of 21, purchasing
securities for his or their own account, (b) a trustee or other fiduciary
purchasing for a single trust, estate or single fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
rgistered investment mangement company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
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<PAGE>
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, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharings or other benefit plan for
the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
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.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or current value of the Class A shares already held by
such persons.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and of all other John Hancock funds which carry a sales charge.
Letter of Intention. The reduced sales charges are also applicable to
investments in shares made over a specified period pursuant to a Letter of
Intention (the "LOI"), which should be read carefully prior to its execution by
an investor. The Fund offers two options regarding the specified period for
making investments under the LOI. All investors have the option of making their
investments over a specified period of thirteen (13) months. Investors who are
using the Fund as a funding medium for a qualified retirement plan, however, may
opt to make the necessary investments called for by the LOI over a forty-eight
(48) month period. These qualified retirement plans include group IRAs, SEP,
SARSEP, TSA, 401(k), and 457 plans. Such an investment (including accumulations
and combinations) must aggregate $100,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Investor Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period
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.
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<PAGE>
The LOI authorizes Investor Services to hold in escrow sufficient Class A shares
(approximately 5% of the aggregate) to make up any difference in sales charges
on the amount intended to be invested and the amount actually invested, until
such investment is completed within the specified period, at which time the
escrow 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 Investor Services to act as his attorney-in-fact to redeem
any escrowed Class A shares and adjust the sales charge, if necessary. An 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 that the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase prices, including Class B shares
derived from reinvestment of dividends or capital gains distributions. No CDSC
will be imposed on shares derived from reinvestment of dividends or capital
gains distributions.
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 the purpose of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
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. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
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<PAGE>
When requesting a redemption for a specific dollar amount please indicate
if you require the proceeds to equal the dollar amount requested. If not
indicated, only the specified dollar amount will be redeemed from your account
and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC (dividend
reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to the Distributors and are used in whole
or in part by the Distributors to defray their expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other plans
qualified under the Code) unless otherwise noted.
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<PAGE>
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code after age 70 1/2.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans such as 401k, 403b, 457. In all
cases, the distribution must be free from penalty under the Code.
* Redemptions made to effect distributions from an Individual Retirement
Account either before age 59 1/2 or after age 59 1/2, as long as the
distributions are based on your life expectancy or the joint-and-last
survivor life expectancy of you and your beneficiary. These distributions
must be free from penalty under the Code.
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992.
For non-retirement accounts (please see above for retirement account
waivers):
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 10% of your account value at
the time you established your periodic withdrawal plan and 10% of the value
of subsequent investments (less redemptions) in that account at the time
you notify Investor Services. (Please note, this waiver does not apply to
periodic withdrawal plan redemptions of Class A shares that are subject to
a CDSC.)
Please see matrix for reference.
CDSC Waiver Matrix for Class B Funds
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived 10% of account
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
Between 59 1/2 Only Life 10% of account
and 70 1/2 Waived Waived Waived Expectancy value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------
38
<PAGE>
- ------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived for
rollover, or
annuity
payments. Not 10% of account
waived if paid Waived for Waived for Waived for value annually
directly to annuity annuity annuity in periodic
participant. payments payments payments payments
- ------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- ------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services at the time you make your redemption. The waiver will be
granted once Investor Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in readily marketable
portfolio securities as prescribed by the Trustees. When the shareholder sells
portfolio securities received in this fashion he would incur a brokerage charge.
Any such securities would be valued for the purposes of making such payment at
the same value as used in determining net asset value. The Fund has, however,
elected to be governed by Rule 18f-1 under the Investment Company Act. 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. As described more fully in the Prospectus, the Fund permits
exchanges of shares of any class of the Fund for shares of the same class in any
other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Prospectus, the Fund
permits the establishment of a Systematic Withdrawal Plan. Payments under this
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<PAGE>
plan represent proceeds arising from the redemption of Fund shares. Since the
redemption price of the Fund shares may be more or less than the shareholder's
cost, depending upon the market value of the securities owned by the Fund at the
time of redemption, the distribution of cash pursuant to this plan may result in
realization of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional Class A or Class B shares of the Fund could be
disadvantageous to a shareholder because of the initial sales charge payable on
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 of the Fund at the same time that
a Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify
or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days'
prior written notice to such shareholder, or to discontinue the availability of
such plan in the future. The shareholder may terminate the plan at any time by
giving proper notice to Investor Services.
Monthly Automatic Accumulation Program (MAAP). This program is explained more
fully 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 Monthly Automatic Accumulation
Program may be revoked by Investor Services without prior notice if any check is
not honored by your bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by calling Investor
Services or upon written notice to Investor Services which is received at least
five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed shares of the Fund 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 in shares of any of the other John Hancock mutual funds, 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 mutual funds. If a CDSC was paid upon a redemption, a shareholder
may reinvest the proceeds from such redemption at net asset value in additional
shares of the class from which the redemption was made. Such shareholder's
account will be credited with the amount of any CDSC charged upon the prior
redemption and such 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. The Fund may modify or terminate the reinvestment
privilege at any time.
40
<PAGE>
A redemption or exchange of shares of the Fund is a taxable transaction for
Federal income tax purposes, even if the reinvestment privilege is exercised,
and any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the 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 one other
series. The Declaration of Trust also authorizes the Trustees to classify and
reclassify the shares of the Fund, or any new series of the Fund, into one or
more classes. As of the date of this Statement of Additional Information, the
Trustees have authorized the issuance of two classes of shares of the Fund,
designated as Class A and Class B.
Class A and Class B shares of the Fund represent an equal proportionate interest
in the aggregate net assets attributed to that class of the Fund. The holders of
Class A shares and Class B shares each have certain exclusive voting rights on
matters relating to their respective Rule 12b-1 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)
Class B shares will pay higher distribution and service fees than Class A shares
and (ii) each of Class A shares and Class B shares will bear any other class
expenses properly allocable to such class of shares, subject to the conditions
the Internal Revenue Service imposes with respect to multiple-class structures.
Similarly, the net asset value per share may vary depending on the class of
shares purchased. In the event of liquidation, shareholders are entitled to
share pro rata in proportion to the net asset value of the shares 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 Trust has no intention of holding annual meetings of shareholders.
Trust shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares, and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
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<PAGE>
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. Liability is therefore
limited to circumstances in which the Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
Pursuant to an order granted by the Securities and Exchange Commission, the Fund
has adopted a deferred compensation plan for its independent Trustees, which
allows Trustees' fees to be invested by the Fund in other John Hancock funds.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate entity
for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Code and
intends to continue to so qualify in the future. As such and by complying with
the applicable provisions of the Code regarding the sources of its income, the
timing of its distributions, and the diversification of its assets, the Fund
will not be subject to Federal income tax on taxable income (including net
realized capital gains) which is distributed to shareholders annually in
accordance with the timing requirements of the Code.
The Fund will be subject to a four percent non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to seek to avoid or minimize liability
for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
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<PAGE>
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, and foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to the Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments or derivatives held for
less than three months, which gain is limited under the Code to less than 30% of
its gross income for each taxable year, and may under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed the Fund's investment company taxable income computed without
regard to such 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. 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"), subject to certain provisions and limitations contained in the
Code. Specifically, 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
43
<PAGE>
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 qualified foreign income 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 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 income 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 income taxes paid by the Fund
and (ii) the portion of Fund dividends which represents income from each foreign
country. If the Fund does not satisfy the 50% requirement described above or
otherwise does not make the 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 net realized capital gains, if any, in any given year will vary
depending upon the Adviser's current investment strategy and whether the Adviser
believes it to be in the best interest of the Fund to dispose of portfolio
securities that will generate capital gains or engage in certain other
transactions or derivatives. 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 such 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 (or portions thereof) in reality represent a return of a portion
of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the exchange
privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
90 days after their purchase to the extent Class A shares of the Fund or another
John Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. Such disregarded load will
44
<PAGE>
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.
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 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 has _________ of capital loss carry-forwards, which
expire as follows: May 31, 1998-__________, May 31, 1999- _____________, May 31,
2002-______________ and May 31, 2003-____________, available to offset future
net capital gains.
Only a small portion, if any, of the distributions from the Fund may qualify for
the dividends-received deduction for corporations, subject to the limitations
applicable under the Code. The qualifying portion is limited to properly
designated distributions attributed to dividend income (if any) the Fund
receives from certain stock in U.S. domestic corporations and the deduction is
subject to holding period requirements and debt-financing limitations under the
Code.
45
<PAGE>
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 to 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.
The Fund is required to accrue income on any debt securities that have more than
a de minimus amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options, futures contracts, and forward
contracts may also require the Fund to recognize income or gain without a
concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or may have to leverage itself by borrowing the cash, to
satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. The Fund will not seek to satisfy any
threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
46
<PAGE>
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.
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into futures, options, foreign currency
positions, and forward foreign currency transactions. Certain payments received
by the Fund with respect to loan participations, such as commitment fees or
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 foreign currency forward 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 certain foreign
currency forwards, options and futures, as ordinary income or loss) and timing
of some gains and losses realized by the Fund. Also, certain of the Fund's
losses on its transactions involving options, futures or forward contracts
and/or offsetting or successor portfolio positions may be deferred rather than
being taken into account currently in calculating the Fund's taxable income or
gain. Certain of these transactions may also cause the Fund to dispose of
investments sooner than would otherwise have occurred. These transactions may
therefore affect the amount, timing and character of the Fund's distributions to
shareholders. Certain of the applicable tax rules may be modified if the Fund is
eligible and choose to make one or more of certain tax elections that may be
available. The Fund will take into account the special tax rules applicable to
options, futures or forward contracts 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 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
47
<PAGE>
under an applicable tax treaty) on amounts treated as ordinary dividends from
the Fund and, unless an effective IRS Form W-8 or authorized substitute for Form
W-8 is on file, to 31% backup withholding on certain other payments from the
Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
Provided that the Fund qualifies as a regulated investment company under the
Code, it will also not be required to pay any Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended May 31, 1996 the Fund's annualized yields for Class
A and Class B shares of the Fund were ___% and __%. The average annual total
returns on Class A shares of the Fund for the 1 year, 5 year and life-of-fund
period ended May 31, 1996 were __%, ___% and ___%, respectively. The total
returns for the 1-year and since inception on October 4, 1993 periods for Class
B shares were _____% and ___%.
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:
Yield = 2 ([(a-b) + 1 ] 6-1)
---
cd
Where:
a = dividends and interest earned during the period.
b = 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.
The Fund's 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:
48
<PAGE>
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-fund periods.
This calculation assumes the maximum sales charge of 4.5% is included in the
initial investment and 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
load 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 4.5% sales charge on Class A
shares and the CDSC on Class B shares into account. Excluding the Fund's sales
charge on Class A shares and the CDSC on Class B shares from a total return
calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on approximately 1,700 fixed income 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.
Comparisons may also be made to bank certificates of deposit, ("CD's") which
differ from mutual funds, such as the Fund, in several ways. The interest rate
established by the sponsoring bank is fixed for the term of a CD. There are
penalties for early withdrawal from CDs, and the principal on a CD is insured.
49
<PAGE>
Performance rankings and ratings reported periodically in national financial
publications such as Money Magazine, Forbes, Business Week, The Wall Street
Journal, Micropal, Inc., Morningstar, Stanger's and Barron's may also be
utilized.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the officers of the Fund
pursuant to recommendations 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 Fund. Orders for
purchases and sales of securities are placed in a manner which, in the opinion
of the officers of the Fund, will offer the best price and market for the
execution of each such transaction. Purchases from underwriters of portfolio
securities may include a commission or commissions paid by the issuer, and
transactions with dealers serving as market maker reflect a "spread." Debt
securities are generally traded on a net basis through dealers acting for their
own account as principals and not as brokers; no brokerage commissions are
payable on such transactions.
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
Company or other advisory clients of the Adviser, and, conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
50
<PAGE>
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 Fund's officers will be primarily responsible for
the allocation of the Fund's brokerage business, their policies and practices in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees. For the years ended on May 31, 1994, 1995 and
1996, the Fund paid negotiated brokerage commissions in the amount of $32,337,
$2,751 and $________, 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 fiscal year ended May 31, 1996,
the Fund directed no commissions to compensate brokers for research services
such as industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. ("Distributors"), a broker-dealer
and John Hancock Freedom Securities Corporation and its two broker-dealer
subsidiaries, Tucker Anthony Incorporated ("Tucker Anthony") and Sutro &
Company, Inc. ("Sutro") ("each an 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
Tucker Anthony, Sutro and Distributors. During the year ending May 31, 1996, the
Fund did not execute any portfolio transactions with Affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the Investment
Company Act. Commissions paid to an Affiliated Broker must be at least as
favorable as those which the Trustees believe to be contemporaneously charged by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold. A transaction would not be placed with an
Affiliated Broker if the Fund would have to pay a commission rate less favorable
than the Affiliated Broker's contemporaneous charges for comparable transactions
for its other most favored, but unaffiliated, customers, except for accounts for
which the Affiliated Broker acts as clearing broker for another 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 Brokers as a
basis for negotiating commissions at a rate higher than that determined in
accordance with the above criteria. The Fund will not effect principal
transactions with Affiliated Brokers.
51
<PAGE>
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation , P.O. Box 9116, Boston, MA
02205-9116, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
an annual fee of $20.00 per shareholder account for Class A shares and $22.50
per shareholder account for Class B shares, 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 Investors Bank & Trust Company, 24 Federal Street, Boston,
MA 02110. Under the custodian agreement, Investors Bank & Trust Company performs
custody, portfolio and fund accounting services.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Fund are _____________________, 160 Federal
Street, Boston, Massachusetts 02110. __________________audits and renders an
opinion on the Fund's annual financial statements, and reviews the Fund's annual
Federal income tax return.
FINANCIAL STATEMENTS
52
<PAGE>
APPENDIX
As described in the Statement of Additional Information, the debt securities
offering the high current income sought by the Fund are ordinarily in the lower
rating categories (that its, rated Baa or lower by Moody's or BBB or lower by
Standard & Poor's, or are unrated).
Moody's describes its lower ratings for corporate bonds as follows:
Bonds that 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 represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Standard & Poor's describes its lower ratings for corporate bonds as follows:
Debt rated BBB is regarded as having 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
53
<PAGE>
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Moody's describes its three highest ratings for commercial paper as follows:
Issuers rated P-1 (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics: (1) leading market
positions in well- established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate reliance on
debt and ample asset protection; (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.
Standard & Poor's describes its three highest ratings for commercial paper as
follows:
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
54
<PAGE>
Quality Distribution
The average weighted quality distribution of the Fund's portfolio for the fiscal
year ended May 31, 1996 was as follows:
<TABLE>
<CAPTION>
Y-T-D Rating Rating
Average % of Assigned % of Assigned % of
Security Rating Value Portfolio by Adviser Portfolio by Service Portfolio
- --------------- ----- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA
AA
A
BAA
BA
B
CAA
CA
C
D -------- ----- -------- ----- -------- -----
Debt Securities -----%
Equity Securities -----%
Short-Term
Securities -------- -----%
Total Portfolio -----%
Other Assets-Net --------
Net Assets $
</TABLE>
55
<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement:
Not Applicable
(b) Exhibits:
The exhibits to this Registration Statement are listed in the Exhibits
Index hereto and are incorporated herein by reference.
Item 25. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with Registrant.
Item 26. Number of Holders of Securities
As of May 17, 1996 the number of record holders of shares of Registrant was
as follows:
<TABLE>
<CAPTION>
Number of
Series Title of Class Record Holders
------ -------------- --------------
<S> <C> <C>
John Hancock Strategic Income Fund Class A Shares 29,919
Class B Shares 11,872
John Hancock Sovereign U.S. Government Fund Class A Shares 47,863
Class B Shares 12,726
</TABLE>
Item 27. Indemnification
(a) Indemnification provisions relating to the Registrant's Trustees,
officers, employees and agents is set forth in Article VII of the Registrant's
By Laws included as Exhibit 2 herein.
(b) Under Section 12 of the Distribution Agreement, John Hancock Funds,
Inc. ("John Hancock Funds" ) has agreed to indemnify the Registrant and its
Trustees, officers and controlling persons against claims arising out of certain
acts and statements of John Hancock Funds.
C-1
<PAGE>
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company
("the Insurance Company") provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the of the Insurance Company who serves as a Trustee or
officer of the Registrant at the direction or request of the Insurance Company
against litigation expenses and liabilities incurred while acting as such,
except that such indemnification does not cover any expense or liability
incurred or imposed in connection with any matter as to which such person shall
be finally adjudicated not to have acted in good faith in the reasonable belief
that his action was in the best interests of the Insurance Company. In addition,
no such person will be indemnified by the Insurance Company in respect of any
liability or expense incurred in connection with any matter settled without
final adjudication unless such settlement shall have been approved as in the
best interests of the Insurance Company either by vote of the Board of Directors
at a meeting composed of directors who have no interest in the outcome of such
vote, or by vote of the policyholders. The Insurance Company may pay expenses
incurred in defending an action or claim in advance of its final disposition,
but only upon receipt of an undertaking by the person indemnified to repay such
payment if he should be determined not to be entitled to indemnification.
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc.("the Adviser") provide as follows:
"Section 9.01. Indemnity: Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
Corporation or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws of John
Hancock Funds, the Adviser, or the Insurance Company or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
C-2
<PAGE>
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Advisers
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
Item 29. Principal Underwriters
(a) John Hancock Funds acts as principal underwriter for the Registrant and also
serves as principal underwriter or distributor of shares for John Hancock Cash
Reserve, Inc., John Hancock Bond Fund, John Hancock Current Interest, John
Hancock Series, Inc., John Hancock Tax-Free Bond Fund, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Limited Term
Government Fund, John Hancock Sovereign Investors Fund, Inc., John Hancock
Special Equities Fund, John Hancock Sovereign Bond Fund, John Hancock Tax-Exempt
Series, John Hancock Strategic Series, John Hancock Technology Series, Inc.,
John Hancock World Fund, John Hancock Investment Trust, John Hancock
Institutional Series Trust, Freedom Investment Trust, Freedom Investment Trust
II and Freedom Investment Trust III.
(b) The following table lists, for each director and officer of John Hancock
Funds, the information indicated.
C-3
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. Director, Chairman, President and Trustee, Chairman and Chief
101 Huntington Avenue Chief Executive Officer Executive Officer
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief Compliance
P.O. Box 111 Officer
Boston, Massachusetts
Robert G. Freedman Director Chairman and Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
Stephen M. Blair Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Thomas H. Drohan Senior Vice President Senior Vice President and
101 Huntington Avenue Secretary
Boston, Massachusetts
James W. McLaughlin Senior Vice President None
101 Huntington Avenue and
Boston, Massachusetts Chief Financial Officer
David A. King Director None
101 Huntington Avenue
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
C-4
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
William S. Nichols Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
John A. Morin Vice President and Secretary Vice President
101 Huntington Avenue
Boston, Massachusetts
Susan S. Newton Vice President Vice President
101 Huntington Avenue and Compliance Officer
Boston, Massachusetts
Christopher M. Meyer Second Vice President and None
101 Huntington Avenue Treasurer
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John Goldsmith Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
C-5
<PAGE>
Richard O. Hansen Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster L. Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington avenue
Boston, Massachusetts
Michael T. Carpenter Senior Vice President None
1000 Louisiana Street
Houston, Texas
Anthony P. Petrucci Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
Keith Harstein Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
</TABLE>
C-6
<PAGE>
(c) None.
Item 30. Location of Accounts and Records
The Registrant maintains the records required to be maintained by it under
Rules 31a-1 (a), 31a-1(b), and 31a-2(a) under the Investment Company Act of
1940 at its principal executive offices at 101 Huntington Avenue, Boston
Massachusetts 02199-7603. Certain records, including records relating to
Registrant's shareholders and the physical possession of its securities,
may be maintained pursuant to Rule 31a-3 at the main offices of
Registrant's Transfer Agent and Custodian.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus with respect to a series of the Registrant is delivered with a
copy of the latest annual report to shareholders with respect to that
series upon request and without charge.
(d) Registrant undertakes to comply with Section 16(c) of the Investment
Company Act of 1940, as amended which relates to the assistance to be
rendered to shareholders by the Trustees of the Registrant in calling a
meeting of shareholders for the purpose of voting upon the question of the
removal of a trustee.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston, and the Commonwealth of Massachusetts on the
12th day of June 1996.
JOHN HANCOCK STRATEGIC SERIES
By:___________________________
Edward J. Boudreau, Jr.*
Chairman
Pursuant to the requirements of the Securities Act of 1933, the
Registration has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
- ------------------------ Chairman
Edward J. Boudreau, Jr.* (Principal Executive Officer)
/s/ James B. Little
- ------------------------ Senior Vice President and Chief June 12, 1996
James B. Little Financial Officer (Principal
Financial and Accounting Officer)
- ------------------------ Trustee
Dennis S. Aronowitz*
- ------------------------ Trustee
Richard P. Chapman, Jr.*
- ------------------------ Trustee
William J. Cosgrove*
- ------------------------ Trustee
Gail D. Fosler*
- ------------------------ Trustee
Anne C. Hodsdon
- ------------------------ Trustee
Richard S. Scipione*
- ------------------------ Trustee
Edward J. Spellman*
*By: /s/ Thomas H. Drohan
-------------------- June 12, 1996
Thomas H. Drohan
(Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
John Hancock Strategic Series
EXHIBIT INDEX
Exhibit No. Exhibit Description
99.B1 Amended and Restated Declaration of Trust of Registrant
dated September 21, 1993*
99.B1.1 Instrument Establishing and Designating John Hancock Utilities Fund
as an Additional Series at the Registrant and Establishing and
Designating Class A and Class B Shares of such Series dated
January 31, 1994.*
99.B1.2 Instrument Establishing and Designating Class A and Class B Shares
of John Hancock Independence Diversified Core Equity Fund dated
May 1, 1995.*
99.B1.3 Amendment to Declaration of Trust dated September 7, 1993.*
99.B2 Amended and Restated By-Laws of Registrant as adopted on
December 8, 1993.*
99.B2.1 Amendment to By-Laws dated December 13, 1994.*
99.B4 Specimen share certificate for the Registrant.*
99.B5 Investment Management Contract between John Hancock Strategic Income
Fund and John Hancock Advisers, Inc. dated January 1, 1994.*
99.B5.1 Investment Management Contract between John Hancock Utilities Fund
and John Hancock Advisers, Inc. dated February 1, 1994.*
99.B5.2 Form of Investment Management Contract between John Hancock
Independence Diversified Core Equity Fund and John Hancock Advisers,
Inc.*
99.B5.3 Form of Sub-Investment Management Contract among John Hancock
Independence Diversified Core Equity Fund, John Hancock Advisers,
Inc. and Independence Investment Associates, Inc.*
99.B6 Distribution Agreement between Registrant and John Hancock Funds,
Inc. (formerly named John Hancock Broker Distribution Services,
Inc.) dated August 1, 1991.*
99.B6.1 Amendment to Distribution Agreement between Registrant and John
Hancock Funds, Inc. dated February 1, 1994.*
99.B6.2 Form of Soliciting Dealer Agreement between John Hancock Funds, Inc.
and Selected Dealers.*
99.B6.3 Form of Financial Institution Sales and Service Agreement between
John Hancock Funds, Inc. and Selected Financial Institutions.*
99.B7 None
99.B8 Master Custodian Agreement between John Hancock Mutual Funds
(including Registrant) and Investors Bank & Trust Company dated
December 15, 1992.*
99.B9 Transfer Agency and Service Agreement between Registrant and John
Hancock Investor Service Corporation (formerly named John Hancock
Fund Services, Inc.) dated January 1, 1991.*
99.B9.1 Amendment to Transfer Agency and Service Agreement*
99.B9.2 Accounting and Legal Services Agreement between John Hancock
Advisers, Inc. and Registrant as of January 1, 1996.+
99.B10 None
99.B11 None
<PAGE>
99.B12 Not applicable.
99.B13 None
99.B14 None
99.B15 Class A Distribution Plan between John Hancock Strategic Income Fund
and John Hancock Funds, Inc.**
99.B15.1 Class B Distribution Plan between John Hancock Strategic Income and
John Hancock Funds, Inc.*
99.B15.2 Class A Distribution Plan between John Hancock Utilities Fund and
John Hancock Funds, Inc.*
99.B15.3 Class B Distribution Plan between John Hancock Utilities Fund and
John Hancock Funds, Inc.*
99.B15.4 Class A Distribution Plan between John Hancock Independence
Diversified Core Equity Fund and John Hancock Funds, Inc.*
99.B15.5 Class B Distribution Plan John Hancock Independence Diversified Core
Equity Fund and John Hancock Funds, Inc.*
99.B16 Schedule for Computation of Yield and Total Return.*
99.B17 Powers of Attorney dated May 5, 1987, June 24, 1986, November 15,
1988, October 23, 1990, October 15, 1991 and January 1, 1994.*
99.27 Not applicable.
* Previously filed electronically with post-effective amendment number 21
(file nos. 811-4651, 33-5186 on June 29, 1995, accession number
0000950146-95-000353.
** Previously filed with post-effective amendment number 22 (file nos.
811-4651; 33-5186) on February 9, 1996, accession number
0000950146-96-000307.
+ Filed herewith.
