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. 28 (X)
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 28 (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
---------
SUSAN S. NEWTON
Vice President and Secretary
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199
(Name and Address of Agent for Service)
---------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
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 October 1, 1998 pursuant to paragraph (a) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
<PAGE>
JOHN HANCOCK
Income Funds
[Logo] Prospectus
October 1, 1998
- --------------------------------------------------------------------------------
As with all mutual funds, the Securities and Exchange Commission has not judged
whether these funds are good investments or whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
Government Income Fund
High Yield Bond Fund
Intermediate Maturity
Government Fund
Sovereign Bond Fund
Sovereign U.S. Government Income Fund
Strategic Income Fund
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue, Boston, Massachusetts 02199-7603
<PAGE>
Contents
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
A fund-by-fund summary Government Income Fund 4
of goals, strategies, risks,
performance and expenses. High Yield Bond Fund 6
Intermediate Maturity Government Fund 8
Sovereign Bond Fund 10
Sovereign U.S. Government Income Fund 12
Strategic Income Fund 14
Policies and instructions for Your account
opening, maintaining and
closing an account in any Choosing a share class 16
income fund.
How sales charges are calculated 16
Opening an account 17
Buying shares 18
Selling shares 19
Transaction policies 21
Dividends and account policies 21
Additional investor services 22
Further information on the Fund details
income funds.
Business structure 23
Financial highlights 24
For more information back cover
</TABLE>
<PAGE>
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Your expenses The overall costs borne by an investor in the fund,
including sales charges and annual expenses.
JOHN HANCOCK INCOME FUNDS
These funds seek current income without sacrificing total return. Some of the
funds also invest for stability of principal. Each fund has its own strategy and
its own risk/reward profile. Please understand that mutual funds are not bank
deposits and are not insured or endorsed by any bank, government agency or the
FDIC. Because you could lose money by investing in these funds, be sure to read
all risk disclosure carefully before investing.
WHO MAY WANT TO INVEST
These funds may be appropriate for investors who:
o are seeking a regular stream of income
o are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
o want to diversify their portfolios
o are seeking a mutual fund for the income portion of an asset allocation
portfolio
o are retired or nearing retirement
Income funds may NOT be appropriate if you:
o are investing for maximum return over a long time horizon
o require absolute stability of your principal
THE MANAGEMENT FIRM
All John Hancock income funds are managed by John Hancock Advisers, Inc. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Mutual Life Insurance Company and manages more than $30 billion in assets.
<PAGE>
Government Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income consistent with
preservation of capital. Maintaining a stable share price is a secondary goal.
In pursuing these goals, the fund normally invests at least 80% of assets in
U.S. government and agency securities.
The fund may invest up to 20% of assets in certain higher risk securities. These
may include dollar-denominated foreign government securities and asset-backed
securities. They may also include high-yield debt securities of lower credit
quality -- junk bonds -- that are rated no lower than B and their unrated
equivalents. Junk bonds are limited to 10% of assets.
In managing its portfolio, the fund concentrates on sector allocation: deciding
which types of bonds to emphasize at a given time. The fund typically focuses on
mortgage-related securities and U.S. Treasuries. It generally uses higher risk
securities to enhance its current yields as well as to diversify its portfolio.
The fund generally keeps its overall duration (a common indicator of volatility)
similar to that of the bond market as a whole. The fund may use certain
derivatives, especially in managing its exposure to interest rate risk, although
it does not intend to use them extensively.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 20% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1995
Joined adviser in 1986
Began career in 1986
Seth Robbins, CFA
- ---------------------------------------
Second Vice President of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1985
Dawn Baillie
- ---------------------------------------
Joined team in 1998
Joined adviser in 1985
Began career in 1985
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
10.55% 6.98% 15.78% 5.30% 7.65% -5.29% 17.71% 1.29% 8.67%
Best quarter: up 6.57% thrid quarter 1991
Worst quarter: down 3.52% first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index
- --------------------------------------------------------------------------------
1 year 4.55% 3.67% 9.57%
- --------------------------------------------------------------------------------
5 years -- 5.43% 7.33%
- --------------------------------------------------------------------------------
10 years -- -- 8.87%
- --------------------------------------------------------------------------------
Index: Lehman Brothers Treasury Composite Index, an unmanaged index of
fixed-income securities that are similar, but not identical, to those in the
fund's portfolio.
4
<PAGE>
MAIN RISKS
[Clip Art] As with most bond funds, the major factor in this fund's performance
is interest rates. When interest rates rise, bond prices typically fall. The
longer the fund's duration, the more sensitive it may be to interest rate
movements. A fall in the worldwide demand for U.S. government securities could
also lower the prices of these securities.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's mortgage-backed and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could fall.
o Junk bonds and foreign securities could may make the fund more sensitive to
market or economic shifts in the U.S. and abroad.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.63% 0.63%
- --------------------------------------------------------------------------------
Distribution fee 0.25% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.21% 0.21%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.09% 1.84%
- --------------------------------------------------------------------------------
Expense reimbursement (may be changed or dropped) -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.09% 1.84%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B
- --------------------------------------------------------------------------------
Year 1 $556 $687 / $187
- --------------------------------------------------------------------------------
Year 3 $781 $879 / $579
- --------------------------------------------------------------------------------
Year 5 $1,024 $1,196 / $996
- --------------------------------------------------------------------------------
Year 10 $1,719 $1,960 / $1,960
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHGIX
CUSIP 41014P854
Newspaper GvIncA
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSGIX
CUSIP 41014P847
Newspaper GvIncB
SEC number 811-3006
5
<PAGE>
High Yield Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks to maximize current income without assuming undue
risk. Capital appreciation is a secondary goal. In pursuing these goals, the
fund normally invests at least 65% of assets in high-yield debt securities of
lower credit quality, commonly known as junk bonds. The fund may invest up to
30% of assets in junk bonds rated as low as CC/Ca and their unrated equivalents.
In managing its portfolio, the fund concentrates on industry allocation and
securities selection: deciding which types of industries to emphasize at a given
time, and which individual bonds to buy. The fund uses top-down analysis to
determine which industries may benefit from current and future changes in the
economy.
In choosing individual securities, the fund uses bottom-up research to find
securities that appear comparatively undervalued. The fund looks at the
financial condition of the issuers as well as the collateralization and other
features of the securities themselves. The fund also looks at companies'
financing cycles to determine which types of securities (for example, bonds,
preferred stocks or common stocks) to favor. The fund typically invests in a
broad range of industries, although it may invest up to 40% of assets in
electric utilities and telecommunications companies.
The fund may use certain higher risk investments, including derivatives and
restricted or illiquid securities, and may invest up to 20% of assets in stocks.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 35% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Arthur N. Calavritinos, CFA
- ---------------------------------------
Vice President of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1986
Frederick L. Cavanaugh, Jr.
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1988
Joined adviser in 1986
Began career in 1973
Janet Clay
- ---------------------------------------
Vice President of adviser
Joined team in 1998
Joined adviser in 1995
Began career in 1990
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
6.87% -5.05% -6.57% 33.84% 13.33% 21.40% -6.06% 14.53% 15.13% 16.88%
</TABLE>
Best quarter: up 13.37% first quarter 1991
Worst quarter: down 4.20% fourth quarter 1990
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index 1
- --------------------------------------------------------------------------------
1 year 12.46% 11.88% -- 12.76%
- --------------------------------------------------------------------------------
5 years -- 11.70% -- 11.64%
- --------------------------------------------------------------------------------
10 years -- 9.72% -- 11.65%
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers High Yield Bond Index, an unmanaged index of
fixed-income securities that are similar, but not identical, to those in the
fund's portfolio.
(1) Class C shares commenced operations on May 1, 1998.
6
<PAGE>
MAIN RISKS
[Clip Art] The major factor in this fund's performance is the economy. Junk bond
prices can fall on bad news about the economy, an industry or a company.
Investors should expect greater fluctuations in share price, yield and total
return than with less aggressive bond funds.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain industries or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o When interest rates rise, bond prices typically fall. The longer the fund's
duration (a common indicator of volatility), the more sensitive it may be to
interest rate movements.
o If interest rate movements cause the fund's callable securities to be paid off
substantially earlier or later than expected, the fund's share price or yield
could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00% 1.00%
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.52% 0.52% 0.52%
- --------------------------------------------------------------------------------
Distribution fee 0.25% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.20% 0.20% 0.20%
- --------------------------------------------------------------------------------
Total fund operating expenses 0.97% 1.72% 1.72%
- --------------------------------------------------------------------------------
Expense reimbursement
(may be changed or dropped) -- -- --
- --------------------------------------------------------------------------------
Actual operating expenses 0.97% 1.72% 1.72%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B Class C
- --------------------------------------------------------------------------------
Year 1 $545 $675 / $175 $275 / $175
- --------------------------------------------------------------------------------
Year 3 $745 $842 / $542 $542 / $542
- --------------------------------------------------------------------------------
Year 5 $962 $1,133/$933 $933 / $933
- --------------------------------------------------------------------------------
Year 10 $1,586 $1,830/$1,830 $2,030/$2,030
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHHBX
CUSIP 41014P839
Newspaper HiYldA
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSHYX
CUSIP 41014P821
Newspaper HiYldB
SEC number 811-3006
Class C
- --------------------------------------------------------------------------------
Ticker N/A
CUSIP 41014P813
Newspaper N/A
SEC number 811-3006
7
<PAGE>
Intermediate Maturity Government Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income consistent with
preservation of capital and maintenance of liquidity. In pursuing this goal, the
fund normally invests at least 80% of assets in U.S. government and agency
securities.
In managing its portfolio, the fund concentrates on sector allocation: deciding
which types of bonds to emphasize at a given time. The fund typically focuses on
mortgage-related securities and U.S. Treasuries.
While the fund may invest in securities of any maturity, it almost always keeps
its overall duration (a common indicator of volatility) between two and ten
years, and generally keeps it between three and four years.
The fund may use certain derivatives, especially in managing its exposure to
interest rate risk, and may invest up to 20% of assets in asset-backed or
corporate debt securities in the highest credit category (rated AAA/Aaa and
their unrated equivalents). However, it does not intend to use derivatives or
asset-backed securities extensively.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 20% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1995
Joined adviser in 1986
Began career in 1986
Seth Robbins, CFA
- ---------------------------------------
Second Vice President of adviser
Joined team in 1998
Joined adviser in 1994
Began career in 1985
Dawn Baillie
- ---------------------------------------
Joined team in 1998
Joined adviser in 1985
Began career in 1985
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns (%) -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
6.56% 3.95% 1.07% 10.27% 3.32% 8.79%
Best quarter: up 3.25% fourth quarter 1995
Worst quarter: down 1.35% first quarter 1996
- --------------------------------------------------------------------------------
Average annual total returns-- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index 1 Index 2
- --------------------------------------------------------------------------------
1 year 5.52% 4.97% 8.52% 7.72%
- --------------------------------------------------------------------------------
5 years 4.78% 4.72% 6.22% 6.39%
- --------------------------------------------------------------------------------
10 years -- -- N/A 8.13%
- --------------------------------------------------------------------------------
Index 1: Lipper Intermediate U.S. Government Index, an equally weighted
unmanaged index that measures the performance of funds with at least 65% of
their assets in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, with dollar-weighted average maturities of five
to ten years.
Index 2: Lehman Brothers Government Bond Index, an unmanaged index that measures
the performance of the U.S. Treasury bonds and U.S. government agency bonds.
8
<PAGE>
MAIN RISKS
[Clip Art] As with most bond funds, the major factor in this fund's performance
is interest rates. When interest rates rise, bond prices typically fall. The
longer the fund's duration, the more sensitive it may be to interest rate
movements. A fall in the worldwide demand for U.S. government securities could
also lower the prices of these securities.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's mortgage-backed and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 3.00% none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 3.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.40% 0.40%
- --------------------------------------------------------------------------------
Distribution fee 0.25% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.51% 0.51%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.16% 1.91%
- --------------------------------------------------------------------------------
Expense reimbursement (may be changed or dropped) -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.16% 1.91%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B
- --------------------------------------------------------------------------------
Year 1 $415 $494 / $194
- --------------------------------------------------------------------------------
Year 3 $657 $800 / $600
- --------------------------------------------------------------------------------
Year 5 $919 $1,032 / $1,032
- --------------------------------------------------------------------------------
Year 10 $1,667 $1,775 / $1,775
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker TAUSX
CUSIP 41014P102
Newspaper IntGva
SEC number 811-3006
Class B
- --------------------------------------------------------------------------------
Ticker TSUSX
CUSIP 41014P201
Newspaper N/A
SEC number 811-3006
9
<PAGE>
Sovereign Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks to generate a high level of current income consistent
with prudent investment risk. In pursuing this goal, the fund normally invests
in a diversified portfolio of marketable debt securities. These securities
include corporate bonds, U.S. government and agency securities and preferred
securities. Most of these securities are investment-grade, although the fund may
invest up to 25% of assets in junk bonds.
In managing its portfolio, the fund concentrates on sector allocation, industry
allocation and securities selection: deciding which types of bonds and
industries to emphasize at a given time, and which individual bonds to buy. When
making its sector and industry allocations, the fund tries to anticipate shifts
in the business cycle, using top-down analysis to determine which sectors and
industries may benefit over the next 12 months.
In choosing individual securities, the fund uses bottom-up research to find
securities that appear comparatively undervalued. The fund looks at bonds of all
different quality levels and maturities from many different issuers, potentially
including foreign governments and corporations.
The fund generally keeps its overall duration (a common indicator of volatility)
similar to that of the bond market as a whole. The fund may use certain
derivatives, especially in managing its exposure to interest rate risk, although
it does not intend to use them extensively.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 20% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- ---------------------------------------
Executive Vice President of adviser
Joined team in 1988
Joined adviser in 1985
Began career in 1977
Anthony A. Goodchild
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1988
Joined adviser in 1994
Began career in 1968
Benjamin Matthews
- ---------------------------------------
Vice President of adviser
Joined team in 1995
Joined adviser in 1995
Began career in 1970
Seth Robbins, CFA
- ---------------------------------------
Second Vice President of adviser
Joined team in 1994
Joined adviser in 1994
Began career in 1985
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
9.85% 12.13% 6.68% 16.59% 8.19% 11.69% -2.74% 19.46% 4.05% 9.64%
</TABLE>
Best quarter: up 6.57% second quarter 1995
Worst quarter: down 2.71% first quarter 1994
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index
- --------------------------------------------------------------------------------
1 year 4.70% 3.90% 3.36%
- --------------------------------------------------------------------------------
5 years 7.17% -- 7.72%
- --------------------------------------------------------------------------------
10 years 8.89% -- 9.16%
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers Corporate Bond Index, an unmanaged index that mirrors
the investment objectives and characteristics of the fund.
10
<PAGE>
MAIN RISKS
[Clip Art] As with most bond funds, the major factor in this fund's performance
is interest rates. When interest rates rise, bond prices typically fall. The
longer the fund's duration, the more sensitive it may be to interest rate
movements.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain sectors or investments don't perform as the fund expects, it could
underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Junk bonds and foreign securities may make the fund more sensitive to market
or economic shifts in the U.S. and abroad.
o If interest rate movements cause the fund's mortgage-backed and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution fee 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.28% 0.28%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.08% 1.78%
- --------------------------------------------------------------------------------
Expense reimbursement (may be changed or dropped) -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.08% 1.78%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B
- --------------------------------------------------------------------------------
Year 1 $555 $681 / $181
- --------------------------------------------------------------------------------
Year 3 $778 $860 / $560
- --------------------------------------------------------------------------------
Year 5 $1,019 $1,164 / $964
- --------------------------------------------------------------------------------
Year 10 $1,708 $1,908 / $1,908
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHNBX
CUSIP 410223101
Newspaper SvBndA
SEC number 811-2402
Class B
- --------------------------------------------------------------------------------
Ticker JHBBX
CUSIP 410223309
Newspaper SvBndB
SEC number 811-2402
11
<PAGE>
Sovereign U.S. Government Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks as high a level of income as is consistent with
long-term total return. In pursuing this goal, the fund normally invests at
least 65% of assets in U.S. government and agency securities. It may also invest
up to 35% of assets in investment-grade short-term securities.
In managing its portfolio, the fund concentrates on sector allocation: deciding
which types of bonds to emphasize at a given time. The fund typically focuses on
mortgage-related securities and U.S. Treasuries.
While the fund may invest in securities of any maturity, it generally keeps its
overall duration (a common indicator of volatility) similar to that of the bond
market as a whole. In seeking to manage its exposure to interest rate risk, the
fund may use several strategies, including actively managing the weightings of
long- and short-term securities in its portfolio. It may also use certain
derivatives, for this same purpose or other purposes, although it does not
intend to use them extensively.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 35% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Barry H. Evans, CFA
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1995
Joined adviser in 1986
Began career in 1986
Seth Robbins
- ---------------------------------------
Second Vice President of adviser
Joined team in 1995
Joined adviser in 1994
Began career in 1985
Dawn Baillie
- ---------------------------------------
Joined team in 1998
Joined adviser in 1985
Began career in 1985
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class B year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
7.52% 14.92% 8.10% 14.44% 5.15% 9.31% -4.56% 17.79% 0.82% 8.56%
</TABLE>
Best quarter: up 8.15% second quarter 1989
Worst quarter: down 3.03% first quarter 1996
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Index
- --------------------------------------------------------------------------------
1 year 4.38% 3.56% 7.72%
- --------------------------------------------------------------------------------
5 years 5.66% 5.81% 6.39%
- --------------------------------------------------------------------------------
10 years -- 8.02% 8.13%
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers Government Bond Index, an umanaged index that measures
the performance of U.S. Treasury bonds and U.S. government agency bonds.
12
<PAGE>
MAIN RISKS
[Clip Art] As with most bond funds, the major factor in this fund's performance
is interest rates. When interest rates rise, bond prices typically fall. The
longer the fund's duration, the more sensitive it may be to interest rate
movements. A fall in the worldwide demand for U.S. government securities could
also lower the prices of these securities.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. If certain sectors or investments don't perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's mortgage-backed and callable
securities to be paid off substantially earlier or later than expected, the
fund's share price or yield could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B
- --------------------------------------------------------------------------------
Management fee 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution fee 0.30% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.34% 0.34%
- --------------------------------------------------------------------------------
Total fund operating expenses 1.14% 1.84%
- --------------------------------------------------------------------------------
Expense reimbursement (may be changed or dropped) -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.14% 1.14%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B
- --------------------------------------------------------------------------------
Year 1 $561 $687 / $187
- --------------------------------------------------------------------------------
Year 3 $796 $879 / $579
- --------------------------------------------------------------------------------
Year 5 $1,049 $1,196 / $996
- --------------------------------------------------------------------------------
Year 10 $1,774 $1,973 / $1,973
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHSGX
CUSIP 410227805
Newspaper SvUSGA
SEC number 811-4651
Class B
- --------------------------------------------------------------------------------
Ticker FGOPX
CUSIP 410227706
Newspaper SvUSGB
SEC number 811-4651
13
<PAGE>
Strategic Income Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high level of current income without assuming undue
risk. Competitive long-term total return is a secondary goal. In pursuing these
goals, the fund invests in the following types of securities:
o foreign government and corporate debt securities
o U.S. government and agency securities
o high-yield, or junk, bonds rated as low as CC/Ca and their unrated equivalents
(although it generally intends to keep its average credit quality in the
investment grade range)
In managing its portfolio, the fund uses top-down analysis to allocate assets
among the three major sectors mentioned above. Although it could invest all
assets in one sector, it generally expects to remain diversified among all
three.
In the foreign sector, the fund seeks high-quality investments (bonds rated no
lower than AA/Aa and their unrated equivalents) in developed and emerging
markets. In the U.S. government sector, the fund selects investments primarily
for current yield. In the junk bond sector, the fund uses bottom-up research to
select individual securities from a wide range of industries.
The fund may use certain higher risk investments, including derivatives,
restricted or illiquid securities and U.S. or foreign stocks.
In abnormal market conditions, the fund may temporarily depart from its stated
investment strategy by investing more than 35% of assets in investment-grade
short-term securities.
================================================================================
PORTFOLIO MANAGERS
Frederick L. Cavanaugh, Jr.
- ---------------------------------------
Senior Vice President of adviser
Joined team in 1986
Joined adviser in 1986
Began career in 1973
Arthur N. Calavritinos, CFA
- ---------------------------------------
Second Vice President of adviser
Joined team in 1995
Joined adviser in 1988
Began career in 1986
Roger C. Hamilton
- ---------------------------------------
Joined team in 1998
Joined adviser in 1994
Began career in 1980
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows the fund's performance over time (along with a
broad-based market index for reference). The year-by-year figures do not include
the effect of sales charges; the average annual figures do. All figures assume
that all distributions were reinvested. Keep in mind that past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
[The following information was represented by a bar graph in the printed
materials.]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1/1/98 -
6/30/98
13.74% -0.41% -9.83% 33.58% 7.68% 13.93% -3.02% 18.73% 11.63% 12.67%
</TABLE>
Best quarter: up 15.09% first quarter 1991
Worst quarter: down 6.68% third quarter 1990
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/97
- --------------------------------------------------------------------------------
Class A Class B Class C(1) Index 1
- --------------------------------------------------------------------------------
1 year 7.60% 6.89% -- 7.87%
- --------------------------------------------------------------------------------
5 years 9.52% -- -- 6.67%
- --------------------------------------------------------------------------------
10 years 8.75% -- -- 8.34%
- --------------------------------------------------------------------------------
Index 1: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
that measures the performance of the U.S. goverment bonds, U.S. corporate bonds,
and Yankee bonds.
(1) Class C shares commenced operations on May 1, 1998.
14
<PAGE>
MAIN RISKS
[Clip Art] The fund's risk profile depends on its sector allocation. In general,
investors should expect fluctuations in share price, yield and total return that
are above average for bond funds.
When interest rates rise, bond prices typically fall. The longer the fund's
duration (a common indicator of volatility), the more sensitive it may be to
interest rate movements. A fall in the worldwide demand for U.S. government
securities could also lower the prices of these securities. Junk bond prices can
fall on bad news about the economy, an industry or a company.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, lower-rated bonds have higher credit risks. If
certain allocation strategies or certain industries or investments don't perform
as the fund expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o If interest rate movements cause the fund's callable securities to be paid off
substantially earlier or later than expected, the fund's share price or yield
could fall.
o In a down market, certain securities could become harder to value or to sell
at a fair price.
o Certain derivatives could produce disproportionate gains or losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to shares of the fund itself.
================================================================================
YOUR EXPENSES
[Clip Art] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly.
- --------------------------------------------------------------------------------
Shareholder transaction expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum sales charge (load) on purchases 4.50% none none
- --------------------------------------------------------------------------------
as a % of the offering price
- --------------------------------------------------------------------------------
as a % of your investment
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) none 5.00% 1.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.40% 0.40% 0.40%
- --------------------------------------------------------------------------------
Distribution fee 0.30% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.22% 0.22% 0.22%
- --------------------------------------------------------------------------------
Total fund operating expenses 0.92% 1.62% 1.62%
- --------------------------------------------------------------------------------
Expense reimbursement
(may be changed or dropped) -- -- --
- --------------------------------------------------------------------------------
Actual operating expenses 1.92% 1.62% 1.62%
- --------------------------------------------------------------------------------
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses (with / without redemption) Class A Class B Class C
- --------------------------------------------------------------------------------
Year 1 $540 $665 / $165 $265 / $165
- --------------------------------------------------------------------------------
Year 3 $730 $811 / $511 $511 / $511
- --------------------------------------------------------------------------------
Year 5 $936 $1,081 / $811 $881 / $881
- --------------------------------------------------------------------------------
Year 10 $1,530 $1,733 / $1,733 $1,922/ $1,922
- --------------------------------------------------------------------------------
FUND I.D. CODES
Class A
- --------------------------------------------------------------------------------
Ticker JHFIX
CUSIP 410227102
Newspaper StrIncA
SEC number 811-4651
Class B
- --------------------------------------------------------------------------------
Ticker STIBX
CUSIP 410227300
Newspaper StrIncB
SEC number 811-4651
Class C
- --------------------------------------------------------------------------------
Ticker N/A
CUSIP 410227888
Newspaper N/A
SEC number 811-4651
15
<PAGE>
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure, allowing you to choose the one that
best meets your requirements. Your financial representative can help you decide.
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
o Front-end sales charges, as described at right. For ways to reduce these
charges, see the account application.
o Distribution (12b-1) fee of 0.25%.
- --------------------------------------------------------------------------------
Class B
o No front-end sales charge; all your money goes to work for you right away.
o Distribution (12b-1) fee of 1.00%.
o A deferred sales charge, as described on following page.
o Automatic conversion to Class A shares after either five years
(Intermediate Maturity Government) or eight years (all other funds), thus
reducing future annual expenses.
- --------------------------------------------------------------------------------
Class C
Currently available only on High Yield Bond and Strategic Income.
o No front-end sales charge; all your money goes to work for you right away.
o Distribution (12b-1) fee of 1.00%.
o A 1% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
For actual past expenses of each share class, see the fund-by-fund information
earlier in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, Class B and Class C
shareholders could end up paying more expenses over the long term than if they
had paid a sales charge.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A Sales charges are as follows:
- --------------------------------------------------------------------------------
Sales charges - Intermediate Maturity Government
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 3.00% 3.09%
$100,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Sales charges - all other funds
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $99,999 4.50% 4.71%
$100,000 - $249,999 3.75% 3.90%
$250,000 - $499,999 2.75% 2.83%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
Investments of $1 million or more Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments - all funds
- --------------------------------------------------------------------------------
Your investment CDSC on shares
being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the last day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
16 YOUR ACCOUNT
<PAGE>
Class B and Class C Shares are offered at their net asset value per share,
without any initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) on shares you sell within a certain time after you
bought them, as described in the tables below. There is no CDSC on shares
acquired through reinvestment of dividends. The CDSC is based on the original
purchase cost or the current market value of the shares being sold, whichever is
less. The CDSCs are as follows:
- --------------------------------------------------------------------------------
Class B deferred charges - all funds
- --------------------------------------------------------------------------------
Years after CDSC on Intermediate CDSC on all
purchase Maturity Government other fund shares
shares being sold being sold
1st year 3.00% 5.00%
2nd year 2.00% 4.00%
3rd year 2.00% 3.00%
4th year 1.00% 3.00%
5th year None 2.00%
6th year None 1.00%
After 6 years None None
- --------------------------------------------------------------------------------
Class C deferred charges - all applicable funds
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
For purposes of these CDSCs, all purchases made during a calendar month are
counted as having been made on the first day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
o fee-based clients of selling brokers who placed at least $2 billion in
John Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges
later.
5 Make your initial investment using the table on the next page. You and your
financial representative can initiate any purchase, exchange or sale of
shares.
YOUR ACCOUNT 17
<PAGE>
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable
"John Hancock Signature to "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no
mail them to Signature Services slip is available, include
(address below). a note specifying the fund
name, your share class,
your account number and
the name(s) in which the
account is registered.
o Deliver the check and your
investment slip or note to
your financial
representative, or mail
them to Signature Services
(address below).
By exchange
[Clip art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
By wire
[Clip art] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your
representative, or mail investment to:
it to Signature Services. First Signature Bank & Trust
Account # 900000260
o Obtain your account number Routing # 211475000
by calling your financial Specify the fund name, your
representative or share class, your account
Signature Services. number and the name(s)
in which the account is
o Instruct your bank to wire registered. Your bank may
the amount of your investment charge a fee to wire funds.
to:
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your
choice of share class, the new
account number and the name(s)
in which the account is
registered. Your bank may charge
a fee to wire funds.
By phone
[Clip art] See "By wire" and "By exchange." o Verify that your bank or
credit union is a member of
the Automated Clearing
House (ACH) system.
o Complete the "Invest-By-
Phone" and "Bank
Information" sections on
your account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Tell the Signature Services
representative the fund name,
your share class, your
account number, the name(s)
in which the account is
registered and the amount
of your investment.
----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative
for instructions and assistance.
----------------------------------------
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
18 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip art] o Accounts of any type. o Write a letter of instruction
or complete a stock power
o Sales of any amount. indicating the fund name, your
share class, your account
number, the name(s) in which
the account is registered and
the dollar value or number of
shares you wish to sell.
o Include all signatures and any
additional documents that may
be required (see next page).
o Mail the materials to Signature
Services.
o A check will be mailed to the
name(s) and address in which
the account is registered, or
otherwise according to your
letter of instruction.
By phone
[Clip art] o Most accounts. o For automated service 24 hours
a day using your touch-tone
o Sales of up to $100,000. phone, call the EASI-Line at
1-800-338-8080.
o To place your order with a
representative at John Hancock
Funds, call Signature Services
between 8 A.M. and 4 P.M.
Eastern Time on most business
days.
By wire or electronic funds transfer (EFT)
[Clip art] o Requests by letter to o Fill out the "Telephone
sell any amount (accounts Redemption" section of your
of any type). new account application.
o Requests by phone to sell o To verify that the telephone
up to $100,000 (accounts redemption privilege is in
with telephone redemption place on an account, or to
privileges). request the forms to add it
to an existing account, call
Signature Services.
o Amounts of $1,000 or more will
be wired on the next business
day. A $4 fee will be deducted
from your account.
o Amounts of less than $1,000
may be sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day.
Your bank may charge a fee
for this service.
By exchange
[Clip art] o Accounts of any type. o Obtain a current prospectus for
the fund into which you are
o Sales of any amount. exchanging by calling your
financial representative or
Signature Services.
o Call your financial
representative or Signature
Services to request an exchange.
By check
[Clip art] o Government Income, Intermediate o Request checkwriting on your
Maturity Government, Sovereign account application.
U.S. Government and Strategic
Income Funds only. o Verify that the shares to be
sold were purchased more
o Any account with than 10 days earlier or were
checkwriting privileges. purchased by wire.
o Sales of over $100. o Write a check for any amount
over $100.
To sell shares through a systematic withdrawal plan, see "Additional investor
services."
YOUR ACCOUNT 19
<PAGE>
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below. You may also need to include a
signature guarantee, which protects you against fraudulent orders. You will need
a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You will need to obtain your signature guarantee from a member of the Signature
Guarantee Medallion Program. Most brokers and securities dealers are members of
this program. A Notary Public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
[Clip art]
- --------------------------------------------------------------------------------
Owners of individual, joint, o Letter of instruction.
sole proprietorship, UGMA/UTMA o On the letter, the signatures and
(custodial accounts for minors) titles of all persons authorized to
or general partner accounts. sign for the account, exactly as
the account is registered.
o Signature guarantee if applicable
(see above).
Owners of corporate or o Letter of instruction.
association accounts. o Corporate resolution, certified
within the past twelve months.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Signature guarantee if applicable
(see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of
the trustee(s).
o Provide a copy of the trust document
certified within the past twelve
months.
o Signature guarantee if applicable
(see above).
Joint tenancy shareholders whose o Letter of instruction signed by
co-tenants are deceased. surviving tenant.
o Copy of death certificate.
o Signature guarantee if applicable
(see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor,
certified within the past twelve
months.
o Signature guarantee if applicable
(see above).
Administrators, conservators, o Call 1-800-225-5291 for
guardians and other sellers or instructions.
account types not listed above.
20 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value per share (NAV) for each fund and class
is determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time). The funds use market prices in
valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Signature Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. Also for your protection, telephone
transactions are not permitted on accounts whose names or addresses have changed
within the past 30 days. Proceeds from telephone transactions can only be mailed
to the address of record.
Exchanges You may exchange shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B shares
will continue to age from the original date and will retain the same CDSC rate
as they had before the exchange, except that the rate will change to the new
fund's rate if that rate is higher. A CDSC rate that has increased will drop
again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may also refuse any exchange order.
A fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
Certificated shares Most shares are electronically recorded. If you wish to have
certificates for your shares, please write to Signature Services. Certificated
shares can only be sold by returning the certificates to Signature Services,
along with a letter of instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The funds generally declare dividends daily and pay them monthly.
Capital gains, if any, are distributed annually, typically after the end of a
fund's fiscal year. Your dividends begin accruing the day after payment is
received by the fund and continue through the day your shares are actually sold.
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
YOUR ACCOUNT 21
<PAGE>
Taxability of dividends Dividends you receive from a fund, whether reinvested or
taken as cash, are generally considered taxable. Dividends from a fund's medium
and long-term capital gains are taxable as capital gains; dividends from other
sources are generally taxable as ordinary income. Some dividends paid in January
may be taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
- --------------------------------------------------------------------------------
YEAR 2000 COMPLIANCE
The adviser and the fund's service providers are taking steps to address any
year 2000-related computer problems. However, there is some risk that these
problems could disrupt the fund's operations or financial markets generally.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your accou nt application.
o If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Signature
Services, Inc." Deliver your check and application to your financial
representative or Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they are
all on the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Signature Services.
Retirement plans John Hancock Funds offers a range of retirement plans,
including traditional and Roth IRAs, SIMPLE plans, SEPs, 401(k) plans and other
pension and profit-sharing plans. Using these plans, you can invest in any John
Hancock fund (except tax-free income funds) with a low minimum investment of
$250 or, for some group plans, no minimum investment at all. To find out more,
call Signature Services at 1-800-225-5291.
22 YOUR ACCOUNT
<PAGE>
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the funds described
in this prospectus. Each fund's board of trustees has ultimate responsibility
for fund business activities, and retains the services of the various firms that
carry out the fund's operations.
Each fund's main business activity -- the management of its investment portfolio
- -- is carried out by the fund's investment adviser. As compensation, the adviser
receives the management fee.
- --------------------------------------------------------------------------------
MANAGEMENT FEES
The management fees paid by the John Hancock income funds last year are as
follows:
- --------------------------------------------------------------------------------
Fund Management Fee
- --------------------------------------------------------------------------------
Government Income 0.63%
- --------------------------------------------------------------------------------
High Yield Bond 0.54%
- --------------------------------------------------------------------------------
Intermediate Maturity Government 0.40%
- --------------------------------------------------------------------------------
Sovereign Bond 0.50%
- --------------------------------------------------------------------------------
Intermediate Maturity Government 0.40%
- --------------------------------------------------------------------------------
Sovereign U.S. Government Income 0.50%
- --------------------------------------------------------------------------------
Strategic Income 0.43%
- --------------------------------------------------------------------------------
[The following information was represented by a flow chart in the printed
materials.]
---------------------
Shareholders
---------------------
- --------------------------------------------------------------------------------
DISTRIBUTION AND SHAREHOLDER SERVICES
Financial services firms and
their representatives
Provide financial advice to
investors.
Principal distributor
Markets the funds through
financial representatives.
Transfer agent
Handles most investor services
and transaction requests.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET MANAGEMENT
Investment adviser
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Manages the funds' business
and investment activities, and
receives the funds' management
fees as compensation.
Custodian
Holds assets, settles portfolio
trades and collects valuation data.
- --------------------------------------------------------------------------------
Trustees
Supervise the funds' activities.
Auditors/Accountants
Review funds' financial figures.
FUND DETAILS 23
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
These tables detail the performance of each fund's share classes, including
total return information showing how much an investment in the fund has
increased or decreased each year.
Government Income Fund
Figures audited by
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/94(1) 10/95(2) 10/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.85 $8.75 $9.32
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.06 0.72 0.65(4)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.10) 0.57 (0.25)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.04) 1.29 0.40
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.06) (0.72) (0.65)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.75 $9.32 $9.07
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) (0.45)(6) 15.32(7) 4.49
- -------------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) (0.46)(6) 15.28 --
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 223 470,569 396,323
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(7) (%) 0.12(6) 1.19 1.17
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets(7) (%) 0.71(6) 7.38 7.10
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 92 102(9) 106
- -------------------------------------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(10) ($) -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding during the period (000s omitted)(10) ($) 349 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Average monthly shares outstanding during the period (000s omitted) 28,696 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding per share during the period(10) ($) 0.01 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Class A - period ended: 5/97(3) 5/98
- ---------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.07
- ---------------------------------------------------------------------------------------------------
Net investment income (loss) 0.37(4)
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.14)
- ---------------------------------------------------------------------------------------------------
Total from investment operations 0.23
- ---------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------
Dividends from net investment income (0.37)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $8.93
- ---------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) 2.57(6)
- ---------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) --
- ---------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 359,758
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets(7) (%) 1.13(8)
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets(7) (%) 7.06(8)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 129
- ---------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(10) ($) --
- ---------------------------------------------------------------------------------------------------
Average daily debt outstanding during the period (000s omitted)(10) ($) N/A
- ---------------------------------------------------------------------------------------------------
Average monthly shares outstanding during the period (000s omitted) N/A
- ---------------------------------------------------------------------------------------------------
Average daily debt outstanding per share during the period(10) ($) N/A
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2)
- ----------------------------------------------------------------------------------------------------------------------------
Per share operating performance
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.83 $10.05 $8.75
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.70 0.65 0.65
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.24 (1.28) 0.57
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.94 (0.63) 1.22
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.72) (0.65) (0.65)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- (0.02) --
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.72) (0.67) (0.65)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.05 $8.75 $9.32
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) 9.86(7) (6.42)(7) 14.49(7)
- ----------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) 9.85 (6.43) 14.47
- ----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 293,413 241,061 226,954
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 2.00(7) 1.93(7) 1.89(7)
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.06(7) 6.98(7) 7.26(7)
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 138 92 102(9)
- ----------------------------------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(10) ($) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding during the period (000s omitted)(10) ($) 503 349 N/A
- ----------------------------------------------------------------------------------------------------------------------------
Average monthly shares outstanding during the period (000s omitted) 26,378 28,696 N/A
- ----------------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding per share during the period(10) ($) 0.02 0.01 N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/96 5/97(3) 5/98
- ---------------------------------------------------------------------------------------------------------------------
Per share operating performance
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $9.32 $9.08
- ---------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.58(4) 0.33(4)
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.24) (0.15)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.34 0.18
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.58) (0.33)
- ---------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (0.58) (0.33)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.08 $8.93
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(5) (%) 3.84 2.02(6)
- ---------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(5) (%) -- --
- ---------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 178,124 153,390
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.90 1.87(8)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.37 6.32(8)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 106 129
- ---------------------------------------------------------------------------------------------------------------------
Debt outstanding at end of period (000s omitted)(10) ($) -- --
- ---------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding during the period (000s omitted)(10) ($) N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Average monthly shares outstanding during the period (000s omitted) N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Average daily debt outstanding per share during the period(10) ($) N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class A shares commenced operations on September 30, 1994.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year end changed from October 31 to May
31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Excludes interest expense, which equalled 0.04% for Class A for the year
ended October 31, 1995 and 0.15%, 0.01%, 0.01% and 0.02% for Class B for
the years ended October 31, 1992, 1993, 1994 and 1995, respectively.
(8) Annualized.
(9) Portfolio turnover rate excludes merger activity.
(10) Debt outstanding consists of reverse repurchase agreements entered into
during the year.
24 GOVERNMENT INCOME FUND
<PAGE>
High Yield Bond Fund
Figures audited by
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/93(1) 10/94 10/95(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $8.10 $8.23 $7.33
Net investment income (loss) 0.33 0.80(4) 0.72
Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12)
Total from investment operations 0.42 (0.03) 0.60
Less distributions:
Dividends from net investment income (0.29) (0.82) (0.73)
Distributions from net realized gain on investments sold -- (0.05) --
Total distributions (0.29) (0.87) (0.73)
Net asset value, end of period $8.23 $7.33 $7.20
Total investment return at net asset value(5) (%) 4.96(6) (0.59) 8.83
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452
Ratio of expenses to average net assets (%) 0.91(7) 1.16 1.16
Ratio of net investment income (loss) to average net assets (%) 12.89(7) 10.14 10.23
Portfolio turnover rate (%) 204 153 98
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/96 5/97(3) 5/98
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.20 $7.55
Net investment income (loss) 0.76(4) 0.45
Net realized and unrealized gain (loss) on investments 0.35 0.32
Total from investment operations 1.11 0.77
Less distributions:
Dividends from net investment income (0.76) (0.45)
Distributions from net realized gain on investments sold -- --
Total distributions (0.76) (0.45)
Net asset value, end of period $7.55 $7.87
Total investment return at net asset value(5) (%) 16.06 10.54(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 52,792 97,925
Ratio of expenses to average net assets (%) 1.10 1.05(7)
Ratio of net investment income (loss) to average net assets (%) 10.31 10.19(7)
Portfolio turnover rate (%) 113 78
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.43 $8.23 $7.33
Net investment income (loss) 0.80 0.74(4) 0.67
Net realized and unrealized gain (loss) on investments 0.75 (0.83) (0.13)
Total from investment operations 1.55 (0.09) 0.54
Less distributions:
Dividends from net investment income (0.75) (0.76) (0.67)
Distributions from net realized gain on investments sold -- (0.05) --
Total distributions (0.75) (0.81) (0.67)
Net asset value, end of period $8.23 $7.33 $7.20
Total investment return at net asset value(5) (%) 21.76 (1.33) 7.97
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 154,214 160,739 180,586
Ratio of expenses to average net assets (%) 2.08 1.91 1.89
Ratio of net investment income (loss) to average net assets (%) 10.07 9.39 9.42
Ratio of adjusted net investment income (loss) to average net assets(10) (%) -- -- --
Portfolio turnover rate (%) 204 153 98
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/96 5/97(3) 5/98
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $7.20 $7.55
Net investment income (loss) 0.70(4) 0.42
Net realized and unrealized gain (loss) on investments 0.35 0.32
Total from investment operations 1.05 0.74
Less distributions:
Dividends from net investment income (0.70) (0.42)
Distributions from net realized gain on investments sold -- --
Total distributions (0.70) (0.42)
Net asset value, end of period $7.55 $7.87
Total investment return at net asset value(5) (%) 15.24 10.06(6)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 242,944 379,024
Ratio of expenses to average net assets (%) 1.82 1.80(7)
Ratio of net investment income (loss) to average net assets (%) 9.49 9.45(7)
Ratio of adjusted net investment income (loss) to average net assets(10) (%) -- --
Portfolio turnover rate (%) 113 78
</TABLE>
HIGH YIELD BOND FUND FUND 25
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Class C - period ended: 5/98
- -------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)
Net realized and unrealized gain (loss) on investments
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gain on investments sold
Total distributions
Net asset value, end of period
Total investment return at net asset value(5) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%) Ratio of net investment income
(loss) to average net assets (%)
Ratio of adjusted net investment income (loss) to average net assets(10) (%)
Portfolio turnover rate (%)
Average brokerage commission rate(8)($)
</TABLE>
(1) Class A shares commenced operations on June 30, 1993.
(2) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(3) Effective May 31, 1997, the fiscal year changed from October 31 to May 31.
(4) Based on the average of the shares outstanding at the end of each month.
(5) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(6) Not annualized.
(7) Annualized.
26 HIGH YIELD BOND FUND
<PAGE>
Intermediate Maturity Government Fund
Figures audited by
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/94 3/95(1) 3/96
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.05 $9.89 $9.79
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.41 0.49 0.62
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.08)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.25 0.38 0.54
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.41) (0.48) (0.64)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.41) (0.48) (0.64)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.89 $9.79 $9.69
- -----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(4) (%) 2.51 3.98 5.60
- -----------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) 2.27 3.43 4.83
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 24,310 12,950 29,024
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.75(7) 0.80(7) 0.75(7)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(9) (%) 0.99(7) 1.35(7) 1.45(7)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 4.09 4.91 6.49
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average assets(9) (%) 3.85 4.36 5.79
- -----------------------------------------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.02 0.05 0.07
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 244 341 423(10)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class A - period ended: 3/97 5/97(2) 5/98
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.69 $9.37
- -------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.67(3) 0.11(3)
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.25) 0.09
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.42 0.20
- -------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.66) (0.11)
- -------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.08) --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.74) (0.11)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.37 $9.46
- -------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(4) (%) 4.56 2.13(6)
- -------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) 4.19 1.93(6)
- -------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 22,043 22,755
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 0.75 0.75(8)
- -------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(9) (%) 1.12 1.92(8)
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.99 7.07(8)
- -------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average assets(9) (%) 6.62 5.90(8)
- -------------------------------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.04 0.02
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 427 77
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/94 3/95(1) 3/96
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.05 $9.89 $9.79
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.34 0.43 0.57
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.10)
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.18 0.32 0.47
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.34) (0.42) (0.57)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.34) (0.42) (0.57)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.89 $9.79 $9.69
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(4) (%) 1.85 3.33 4.92
- --------------------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) 1.61 2.78 4.15
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 11,626 9,506 8,532
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.40(7) 1.45(7) 1.40(7)
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(9) (%) 1.64(7) 2.00(7) 2.10(7)
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 3.44 4.26 5.80
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 3.20 3.71 5.10
- --------------------------------------------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.02 0.05 0.07
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 244 341 423(10)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Class B - period ended: 3/97 5/97(2) 5/98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.69 $9.37
- --------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.60(3) 0.10(3)
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.24) 0.09
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.36 0.19
- --------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.60) (0.10)
- --------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.08) --
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.68) (0.10)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.37 $9.46
- --------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(4) (%) 3.84 2.01(6)
- --------------------------------------------------------------------------------------------------------------------
Total adjusted investment return at net asset value(4,5) (%) 3.47 1.81(6)
- --------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 6,779 6,451
- --------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.43 1.50(8)
- --------------------------------------------------------------------------------------------------------------------
Ratio of adjusted expenses to average net assets(9) (%) 1.80 2.67(8)
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.30 6.04(8)
- --------------------------------------------------------------------------------------------------------------------
Ratio of adjusted net investment income (loss) to average net assets(9) (%) 5.93 4.87(8)
- --------------------------------------------------------------------------------------------------------------------
Fee reduction per share(3) ($) 0.04 0.02
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 427 77
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(2) Effective May 31, 1997, the fiscal year end changed from March 31 to May
31.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Not annualized.
(7) Beginning on December 31, 1991 (commencement of operations) through March
31, 1995, the expenses used in the ratios represented the expenses of the
fund plus expenses incurred indirectly from the Adjustable U.S. Government
fund (the "Portfolio"), the mutual fund in which the fund invested all of
its assets. The expenses used in the ratios for the fiscal year ended March
31, 1996 include the expenses of the Portfolio through September 22, 1995.
(8) Annualized.
(9) Unreimbursed, without fee reduction.
(10) Portfolio turnover rate excludes merger activity.
INTERMEDIATE MATURITY GOVERNMENT FUND 27
<PAGE>
Sovereign Bond Fund
Figures audited by
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/93 12/94 12/95
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.29 $15.53 $13.90
- ---------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 1.14 1.12 1.12
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and financial futures contracts 0.62 (1.55) 1.50
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.76 (0.43) 2.62
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (1.14) (1.12) (1.12)
- ---------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments
sold and financial futures contracts (0.38) (0.08) --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (1.52) (1.20) (1.12)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.53 $13.90 $15.40
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 11.80 (2.75) 19.40
- ---------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 1,505,754 1,326,058 1,535,204
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.41 1.26 1.13
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.18 7.74 7.58
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 107 85 103(5)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Class A - period ended: 12/96 5/97(1) 5/98
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.40 $14.90
- -------------------------------------------------------------------------------------------------------------
Net investment income (loss) 1.09 0.44
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and financial futures contracts (0.50) (0.12)
- -------------------------------------------------------------------------------------------------------------
Total from investment operations 0.59 0.32
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
Dividends from net investment income (1.09) (0.44)
- -------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments
sold and financial futures contracts -- --
- -------------------------------------------------------------------------------------------------------------
Total distributions (1.09) (0.44)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.90 $14.78
- -------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 4.11 2.22(3)
- -------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 1,416,116 1,361,924
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.14 1.11(4)
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.32 7.38(4)
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 123 58
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 12/93(6) 12/94 12/95 12/96
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.90 $15.52 $13.90 $15.40
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.11 1.04 1.02 0.98
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts -- (1.54) 1.50 (0.50)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.11 (0.50) 2.52 0.48
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.11) (1.04) (1.02) (0.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on
investments sold and financial futures contracts (0.38) (0.08) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.49) (1.12) (1.02) (0.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $15.52 $13.90 $15.40 $14.90
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 0.90(3) (3.13) 18.66 3.38
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739 134,112
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.63(4) 1.78 1.75 1.84
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 0.57(4) 7.30 6.87 6.62
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 107 85 103(5) 123
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Class B - period ended: 5/97(1) 5/98
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------
Net asset value, beginning of period $14.90
- ------------------------------------------------------------------------------------------
Net investment income (loss) 0.40
- ------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts (0.12)
- ------------------------------------------------------------------------------------------
Total from investment operations 0.28
- ------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------
Dividends from net investment income (0.40)
- ------------------------------------------------------------------------------------------
Distributions from net realized gain on
investments sold and financial futures contracts --
- ------------------------------------------------------------------------------------------
Total distributions (0.40)
- ------------------------------------------------------------------------------------------
Net asset value, end of period $14.78
- ------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 1.93(3)
- ------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 132,885
- ------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.81(4)
- ------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.68(4)
- ------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 58
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 31, 1997, the fiscal year end changed from December 31 to May
31.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Not annualized.
(4) Annualized.
(5) Portfolio turnover excludes merger activity.
(6) Class B shares commenced operations on November 23, 1993.
28 SOVEREIGN BOND FUND
<PAGE>
Sovereign U.S. Government Income Fund
Figures audited by
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 10/93 10/94 10/95 10/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.29 $10.89 $9.24 $10.01
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.68(2) 0.65 0.65 0.64(2)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and financial futures contracts 0.61 (1.34) 0.77 (0.26)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.29 (0.69) 1.42 0.38
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.68) (0.65) (0.65) (0.64)
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.01) (0.31) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.69) (0.96) (0.65) (0.64)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.89 $9.24 $10.01 $9.75
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 12.89 (6.66) 15.90 4.02
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 375,416 315,372 370,966 330,162
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.30 1.23 1.17 1.15
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.47 6.62 6.76 6.58
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 273 127 94 143
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Class A - period ended: 5/97(1) 5/98
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.75
- ----------------------------------------------------------------------------------------------
Net investment income (loss) 0.37(2)
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and financial futures contracts (0.19)
- ----------------------------------------------------------------------------------------------
Total from investment operations 0.18
- ----------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------
Dividends from net investment income (0.36)
- ----------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold --
- ----------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.01)
- ----------------------------------------------------------------------------------------------
Total distributions (0.37)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period $9.56
- ----------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 1.92(4)
- ----------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 302,589
- ----------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.17(5)
- ----------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.69(5)
- ----------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 88
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Class B - period ended: 10/93 10/94 10/95 10/96
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.28 $10.88 $9.23 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.66(2) 0.61 0.60 0.58(2)
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts 0.61 (1.34) 0.77 (0.26)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.27 (0.73) 1.37 0.32
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.66) (0.61) (0.60) (0.58)
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold (0.01) (0.31) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.67) (0.92) (0.60) (0.58)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.88 $9.23 $10.00 $9.74
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 12.66 (7.05) 15.27 3.33
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 244,133 196,899 130,824 112,228
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.51 1.64 1.72 1.82
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 6.23 6.19 6.24 5.91
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 273 127 94 143
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Class B - period ended: 5/97(1) 5/98
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
- -------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.74
- -------------------------------------------------------------------------------------------
Net investment income (loss) 0.33(2)
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and financial futures contracts (0.18)
- -------------------------------------------------------------------------------------------
Total from investment operations 0.15
- -------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------
Dividends from net investment income (0.32)
- -------------------------------------------------------------------------------------------
Distributions from net realized gain on investments sold --
- -------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.01)
- -------------------------------------------------------------------------------------------
Total distributions (0.33)
- -------------------------------------------------------------------------------------------
Net asset value, end of period $9.56
- -------------------------------------------------------------------------------------------
Total investment return at net asset value(3) (%) 1.61(4)
- -------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 96,349
- -------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.86(5)
- -------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 5.99(5)
- -------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 88
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 31, 1997, the fiscal year end changed from October 31 to May
31.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
SOVEREIGN U.S. GOVERNMENT INCOME FUND 29
<PAGE>
Strategic Income Fund
Figures audited by
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A - period ended: 5/94 5/95 5/96 5/97 5/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.55 $7.17 $7.15 $7.27
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.68 0.64 0.66(1) 0.64(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.33) (0.02) 0.12 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.35 0.62 0.78 0.91
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.58) (0.55) (0.66) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.05) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.10) (0.09) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.73) (0.64) (0.66) (0.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.17 $7.15 $7.27 $7.54
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 4.54 9.33 11.37 12.99
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 335,261 327,876 369,127 416,916
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.32 1.09 1.03 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 8.71 9.24 9.13 8.61
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 55 78 132
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Class B - period ended: 5/94(3) 5/95 5/96
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.58 $7.17 $7.15
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 0.40 0.60(1) 0.61(1)
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts (0.41) (0.02) 0.12
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.01) 0.58 0.73
- -----------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.32) (0.52) (0.61)
- -----------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.03) -- --
- -----------------------------------------------------------------------------------------------------------------------
Distributions from capital paid-in (0.05) (0.08) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (0.40) (0.60) (0.61)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.17 $7.15 $7.27
- -----------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) (0.22)(4) 8.58 10.61
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 77,691 134,527 206,751
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.91(5) 1.76 1.73
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 8.12(5) 8.55 8.42
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 91 55 78
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Class B - period ended: 5/97 5/98
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $7.27
- ---------------------------------------------------------------------------------------
Net investment income (loss) 0.59
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and financial futures contracts 0.27
- ---------------------------------------------------------------------------------------
Total from investment operations 0.86
- ---------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------
Dividends from net investment income (0.59)
- ---------------------------------------------------------------------------------------
Distributions in excess of net investment income --
- ---------------------------------------------------------------------------------------
Distributions from capital paid-in --
- ---------------------------------------------------------------------------------------
Total distributions (0.59)
- ---------------------------------------------------------------------------------------
Net asset value, end of period $7.54
- ---------------------------------------------------------------------------------------
Total investment return at net asset value(2) (%) 12.21
- ---------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) ($) 328,487
- ---------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.70
- ---------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average net assets (%) 7.90
- ---------------------------------------------------------------------------------------
Portfolio turnover rate (%) 132
- ---------------------------------------------------------------------------------------
</TABLE>
30 STRATEGIC INCOME FUND
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Class C - period ended: 5/98
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period
Net investment income (loss)
Net realized and unrealized gain (loss) on investments, foreign currency
transactions and financial futures contracts
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions in excess of net investment income
Distributions from capital paid-in
Total distributions
Net asset value, end of period
Total investment return at net asset value(3) (%)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($)
Ratio of expenses to average net assets (%)
Ratio of net investment income (loss) to average net assets (%)
Portfolio turnover rate (%)
</TABLE>
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(3) Class B shares commenced operations on October 4, 1993.
(4) Not annualized.
(5) Annualized.
STRATEGIC INCOME FUND 31
<PAGE>
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
income funds:
ANNUAL/SEMIANNUAL
REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance information, portfolio
holdings, a statement from portfolio management and the auditor's report.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA02217-1000
By phone: 1-800-225-5291
By EASI-Line: 1-800-338-8080
By TDD: 1-800-544-6713
On the Internet:
www.jhancock.com/funds
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public
Reference Room in Washington, DC
By phone: 1-800-SEC-0330
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-6009
(duplicating fee required)
On the Internet: www.sec.gov
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue,
Boston, Massachusetts
02199-7603
John Hancock(R) (C) 1998 John Hancock Funds, Inc.
INCPN 10/98
<PAGE>
JOHN HANCOCK SOVEREIGN U.S. GOVERNMENT INCOME FUND
Class A and Class B Shares
Statement of Additional Information
October 1, 1998
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 Income Funds' Prospectus dated
October 1, 1998 (the "Prospectus"). The Fund is a diversified 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 Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
Table of Contents
Page
Organization of the Fund ................................................ 2
Investment Objective and Policies ....................................... 2
Investment Restrictions ................................................. 14
Those Responsible for Management ........................................ 16
Investment Advisory and Other Services .................................. 25
Distribution Contracts .................................................. 26
Sales Compensation ...................................................... 28
Net Asset Value ......................................................... 29
Initial Sales Charge on Class A Shares .................................. 30
Deferred Sales Charge on Class B Shares ................................. 32
Special Redemptions ..................................................... 35
Additional Services and Programs ........................................ 36
Description of the Fund's Shares ........................................ 38
Tax Status .............................................................. 39
Calculation of Performance .............................................. 43
Brokerage Allocation .................................................... 44
Transfer Agent Services ................................................. 46
Custody of Portfolio .................................................... 46
Independent Auditors .................................................... 46
Appendix A-Description of Investment Risks .............................. A-1
Appendix B-Description of Bond Ratings .................................. B-1
Financial Statements .................................................... F-1
1
<PAGE>
ORGANIZATION OF THE FUND
The Fund is a diversified open-end investment management company organized as a
Massachusetts business trust under the laws of The Commonwealth of
Massachusetts. The Fund was organized on April 16, 1986. The Trustees have
authority to issue an unlimited number of shares of beneficial interest of
separate series without par value.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's goals,
strategies and risks discussed in the Prospectus. Appendix A contains further
information describing investment risks. There is no assurance that the Fund
will achieve its investment objective. The investment objective is fundamental
and may only be change with shareholder approval.
The Fund's investment objective is to provide as high a level of income as is
consistent with long-term total return by investing in securities issued,
guaranteed or otherwise backed by the United States government, its agencies or
instrumentalities ("Government Securities"). The Adviser believes that a high
current income consistent with long-term total return may be derived from: (i)
interest income from 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.
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 (maturities of one year or less), Notes (maturities of one to
ten years), Bonds (generally maturities of greater than ten years) 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
United States include but are not limited to obligations of the Tennessee Valley
Authority, the Federal
2
<PAGE>
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.
The Fund may, for purposes of liquidity and flexibility, place up to 35% of its
assets in investment-grade (equivalent to the top four bond rating categories of
a nationally recognized securities rating organization such as Standard & Poor's
Rating Group ("Standard & Poor's") or Moody's Investor's Service, Inc.
("Moody's")) short-term securities, including debt securities of corporations,
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. In abnormal market conditions, it may invest
more assets in these securities as a defensive tactic. See Appendix B 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.
GNMA Certificates. Certificates of the GNMA ("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
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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 FHLMC 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
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 FNMA 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
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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.
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.
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.
Repurchase Agreements. In a repurchase agreement the Fund buys a security for a
relatively short period (usually not more than 7 days) subject to the obligation
to sell it back to the issuer at a fixed time and price plus accrued interest.
The Fund will enter into repurchase agreements only with member banks of the
Federal Reserve System and with "primary dealers" in U.S.
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Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, decline in
value of the underlying securities or lack of access to income during this
period and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. To minimize
various risks associated with reverse repurchase agreements, the Fund will
establish and maintain with the Fund's custodian a separate account consisting
of liquid securities, of any type or maturity, in an amount at least equal to
the repurchase prices of the securities (plus any accrued interest thereon)
under such agreements. The Fund will also continue to be subject to the risk of
a decline in the market value of the securities sold under the agreements
because it will reacquire those securities upon effecting their repurchase. The
Fund will not enter into reverse repurchase agreements and other borrowings
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). The Fund will enter into
reverse repurchase agreements only with federally insured banks which are
approved in advance as being creditworthy by the Trustees. Under procedures
established by the Trustees, the Adviser will monitor the creditworthiness of
the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 15% of its net
assets in illiquid investments. If the Trustees determine based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining 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 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.
Options on Securities and Securities Indices. The Fund may purchase and write
(sell) call and put options on any securities in which it may invest or on any
securities index based on securities in which it may invest. These options may
be listed on national domestic securities exchanges or traded in the
over-the-counter market. The Fund may write covered put and call options and
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purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by a Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account with a value at least equal to the Fund's obligation under
the option, (ii) entering into an offsetting forward commitment and/or (iii)
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position. A written call option on securities is typically covered by
maintaining the securities that are subject to the option in a segregated
account. The Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. Put options may
also be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
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The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates or securities prices, the Fund
may purchase and sell various kinds of futures contracts, and purchase and write
call and put options on these futures contracts. The Fund may also enter into
closing purchase and sale transactions with respect to any of these contracts
and options. The futures contracts may be based on various securities (such as
U.S. Government securities), securities indices and any other financial
instruments and indices. All futures contracts entered into by the Fund are
traded on U.S. exchanges or boards of trade that are licensed, regulated or
approved by the Commodity Futures Trading Commission ("CFTC").
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Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire. When
interest rates are rising or securities prices are falling, the Fund can seek to
offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of the Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities, to alter the
investment characteristics of portfolio securities or to gain or increase its
exposure to a particular securities market.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures
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position if prices move in a favorable direction but limits its risk of loss in
the event of an unfavorable price movement to the loss of the premium and
transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve.
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In the event of an imperfect correlation between a futures position and a
portfolio position which is intended to be protected, the desired protection may
not be obtained and the Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When- issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis may also
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of the Fund's borrowing and other senior securities. For financial reporting and
tax purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar roll transactions that are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset-backed securities. Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Fund's ability to
maintain positions in
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these securities will be affected by reductions in the principal amount of such
securities resulting from prepayments, and its ability to reinvest the returns
of principal at comparable yields is subject to generally prevailing interest
rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests may be subject to its 15% limitation on investments
in illiquid securities.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an
12
<PAGE>
effect similar to buying or writing options. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status."
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.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
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.
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. Such trading may have the effect of increasing
the Fund's portfolio turnover rate. See "Portfolio Turnover".
Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments, or to take advantage of yield disparities between various fixed
income securities in order to realize capital gains or improve income. Short
term trading may have the effect of increasing portfolio turnover rate. A high
rate of portfolio turnover (100% or greater) involves correspondingly greater
brokerage expenses. The Fund's
13
<PAGE>
portfolio turnover rate is set forth in the table under the caption "Financial
Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means the approval by the lesser of (1) the holders of
67% or more of the Fund's shares represented at a meeting if more than 50% of
the Fund's outstanding shares are present in person or by proxy at that meeting
or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
1. 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.
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.
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.
14
<PAGE>
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 objective 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 Trustees without
shareholder approval.
The Fund may not:
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 and this Statement of
Additional Information.
12. Invest more than 15% of its net assets in illiquid securities.
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. 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).
15. Securities of Other Investment Companies. Purchase a security if, as a
result, (i) more than 10% of the Fund's total assets would be invested in the
securities of other investment companies, (ii) the Fund would hold more than 3%
of the total outstanding voting securities of any one investment company, or
(iii) more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not apply to (a)
the investment of cash collateral, received by the Fund in connection with
lending the Fund's portfolio securities, in the securities of open-end
investment companies or (b) the purchase of shares of any investment company in
connection with a merger, consolidation, reorganization or purchase of
substantially all of the assets of another investment company. Subject to the
above percentage limitations, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or amounts of net assets will
15
<PAGE>
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).
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers and directors of the Adviser or officers and Directors of the
Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
16
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Edward J. Boudreau, Jr. * Trustee, Chairman and Chairman, Director and
101 Huntington Avenue Chief Executive Officer Chief Executive Officer,
Boston, MA 02199 (1, 2) the Adviser; Chairman,
October 1944 Director and Chief
Executive Officer, The
Berkeley Financial Group,
Inc. ("The Berkeley
Group"); Chairman and
Director, NM Capital
Management, Inc. ("NM
Capital"), John Hancock
Advisers International
Limited ("Advisers
International") and
Sovereign Asset Management
Corporation ("SAMCorp");
Chairman, Chief Executive
Officer and President,
John Hancock Funds, Inc.
("John Hancock Funds");
Chairman, First Signature
Bank and Trust Company;
Director, John Hancock
Insurance Agency, Inc.
("Insurance Agency,
Inc."), John Hancock
Advisers International
(Ireland) Limited
("International Ireland"),
John Hancock Capital
Corporation and New
England/Canada Business
Council; Member,
Investment Company
Institute Board of
Governors; Director, Asia
Strategic Growth Fund,
Inc.; Trustee, Museum of
Science; Director, John
Hancock Freedom Securities
Corporation (until
September 1996); Director,
John Hancock Signature
Services, Inc. ("Signature
Services") (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
17
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dennis S. Aronowitz Trustee Professor of Law,
1216 Falls Boulevard Emeritus, Boston
Fort Lauderdale, FL 33327 University School of Law
June 1931 (as of 1997); Trustee,
Brookline Savings Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline
160 Washington Street Savings Bank; Director,
Brookline, MA 02147 Federal Home Loan Bank
February 1935 of Boston (lending);
Director, Lumber
Insurance Companies
(fire and casualty
insurance); Trustee,
Northeastern University
(education); Director,
Depositors Insurance
Fund, Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior
20 Buttonwood Place Banker and Senior Credit
Saddle River, NJ 07458 Officer, Citibank, N.A.
January 1933 (retired September
1991); Executive Vice
President, Citadel Group
Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until
October 1993); Trustee,
the Hudson City Savings
Bank (since 1995).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
18
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Douglas M. Costle Trustee (1) Director, Chairman of
RR2 Box 480 the Board and
Woodstock, VT 05091 Distinguished Senior
July 1939 Fellow, Institute for
Sustainable Communities,
Montpelier, Vermont (since
1991); Dean Vermont Law
School (until 1991);
Director, Air and Water
Technologies Corporation
(environmental services
and equipment), Niagara
Mohawk Power Company
(electric services) and
Mitretek Systems
(governmental consulting
services).
Leland O. Erdahl Trustee Vice President, Chief
8046 Mackenzie Court Financial Officer and
Las Vegas, NV 89129 Director of Amax Gold,
December 1928 Inc.; Director, Santa Fe
Ingredients Company of
California, Inc. and
Santa Fe Ingredients
Company, Inc. (private
food processing
companies), Uranium
Resources Corporation;
Freeport-McMoRan Copper
& Gold Company, Inc.,
Hecla Mining Company,
Canyon Resources
Corporation and Original
Sixteen to One Mines,
Inc. (1984-1987 and
1991-1995) (management
consultant).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
19
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard A. Farrell Trustee President of Farrell,
Venture Capital Partners Healer & Co., (venture
160 Federal Street capital management firm)
23rd Floor (since 1980); Prior to
Boston, MA 02110 1980, headed the venture
November 1932 capital group at Bank of
Boston Corporation.
Gail D. Fosler Trustee Vice President and Chief
3054 So. Abingdon Street Economist, The
Arlington, VA 22206 Conference Board
December 1947 (non-profit economic and
business research);
Director, Unisys Corp.;
and H.B. Fuller Company.
William F. Glavin Trustee President Emeritus,
120 Paget Court - Babson College (as of
John's Island 1997); Vice Chairman,
Vero Beach, FL 32963 Xerox Corporation (until
March 1932 June 1989); Director,
Caldor Inc., Reebok,
Inc. (since 1994) and
Inco Ltd.
Anne C. Hodsdon * Trustee and President President, Chief
101 Huntington Avenue (1,2) Operating Officer and
Boston, MA 02199 Director, the Adviser;
April 1953 President, COO and
Director, The Berkeley
Group; Director, John
Hancock Funds, Advisers
International, Insurance
Agency, Inc. and
International Ireland;
President and Director,
SAMCorp. and NM Capital;
Executive Vice
President, the Adviser
(until December 1994);
Director, Signature
Services (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
20
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Dr. John A. Moore Trustee President and Chief
Institute for Evaluating Executive Officer,
Health Risks Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since
Washington, DC 20006-1602 September 1989).
February 1939
Patti McGill Peterson Trustee Executive Director,
Council for International Council for
Exchange of Scholars International Exchange
3007 Tilden Street, N.W., of Scholars (since
Suite 5L January 1998), Vice
Washington, DC 20008-3009 President, Institute of
May 1943 International Education
(since January 1998);
Cornell Institute of
Public Affairs, Cornell
University (until December
1997); President Emeritus
of Wells College and St.
Lawrence University;
Director, Niagara Mohawk
Power Corporation
(electric utility) and
Security Mutual Life
(insurance).
John W. Pratt Trustee Professor of Business
2 Gray Gardens East Administration at
Cambridge, MA 02138 Harvard University
September 1931 Graduate School of
Business Administration
(since 1961).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
21
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard S. Scipione * Trustee (1) General Counsel, John
John Hancock Place Hancock Life Company;
P.O. Box 111 Director, the Adviser,
Boston, MA 02117 Advisers International,
August 1937 John Hancock Funds, John
Hancock Distributors,
Inc., Insurance Agency,
Inc., John Hancock
Subsidiaries, Inc.,
SAMCorp. and NM Capital;
Director, The Berkeley
Group; Director, JH
Networking Insurance
Agency, Inc.; Director,
Signature Services
(until January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat
259C Commercial Bld. Marwick LLP (retired
Ft. Lauderdale, FL 33308 June 1990).
November 1932
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief
101 Huntington Avenue Investment Officer (2) Investment Officer, the
Boston, MA 02199 Adviser; Director, the
July 1938 Adviser, Advisers
International, John
Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank
Fund and NM Capital;
Director and Senior Vice
President, The Berkeley
Group; President, the
Adviser (until December
1994); Director, Signature
Services (until January
1997).
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
22
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James B. Little Senior Vice President and Senior Vice President,
101 Huntington Avenue Chief Financial Officer the Adviser, The
Boston, MA 02199 Berkeley Group, John
February 1935 Hancock Funds.
John A. Morin Vice President Vice President and
101 Huntington Avenue Secretary, the Adviser,
Boston, MA 02199 The Berkeley Group,
July 1950 Signature Services and
John Hancock Funds;
Secretary, NM Capital and
SAMCorp.; Clerk, Insurance
Agency, Inc.; Counsel,
John Hancock Mutual Life
Insurance Company (until
February 1996), and Vice
President of John Hancock
Distributors, Inc. (until
April 1994).
Susan S. Newton Vice President and Vice President, the
101 Huntington Avenue Secretary Adviser; John Hancock
Boston, MA 02199 Funds, Signature
March 1950 Services and The
Berkeley Group, NM
Capital; Vice President,
John Hancock
Distributors, Inc.
(until April 1994).
James J. Stokowski Vice President and Vice President, the
101 Huntington Avenue Treasurer Adviser.
Boston, MA 02199
November 1946
- ----------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
23
<PAGE>
The following table provides information regarding the compensation paid by the
Fund and other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. The Trustees not listed were not
Trustees of the Trust as of the end of the Fund's last completed fiscal year.
The three non-independent Trustees, Messrs. Boudreau and Scipione and Ms.
Hodsdon and each of the officers of the Fund are interested persons of the
Adviser, are compensated by the Adviser and receive no compensation from the
Fund for their services.
<TABLE>
<CAPTION>
Total Compensation From the
Aggregate Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
- -------------------- ---------------- ----------------------
<S> <C> <C>
Dennis S. Aronowitz $ 72,000
Richard P. Chapman, Jr. f 75,000
William J. Cosgrove f 72,000
Douglas M. Costle 75,000
Leland O. Erdahl 72,000
Richard A. Farrell 75,000
Gail D. Fosler 72,000
William F. Glavin f 72,000
Dr. John A. Moore f 72,000
Patti McGill Peterson 72,000
John W. Pratt 72,000
Edward J. Spellman 75,000
---------
Total $ 876,000
</TABLE>
(1) Compensation is for the fiscal year ended May 31, 1998
(2) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1997.
As of this date, there were sixty-seven funds in the John Hancock Fund
Complex, with each of these Independent Trustees serving on thirty-two
funds.
f On December 31, 1997, the value of the aggregate deferred compensation
from all funds in the John Hancock Fund Complex for Mr. Chapman was
$69,148, for Mr. Cosgrove was $167,829 and for Mr. Glavin was $193,540 and
for Dr. Moore was $84,315 under the John Hancock Deferred Compensation
Plan for Independent Trustees.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of June 12, 1998, the officers and Trustees of the Trust as a group
beneficially owned less than 1% of the Fund's outstanding shares. As of that
date, no person owned of record or beneficially as much as 5% of the outstanding
shares of the Fund.
24
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Fund and other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over 1,400,000 shareholders. The Adviser is an affiliate of
the Life Company, one of the most recognized and respected financial
institutions in the nation. With total assets under management of more than $100
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries high ratings from Standard & Poor's and A.M.
Best's. Founded in 1862, the Life Company has been serving clients for over 130
years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund); the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association memberships; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based 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.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
For the fiscal year ended October 31, 1996 and for the period from November
1,1996 to May 31, 1997, the Fund paid the Adviser fees in the amount of
$2,346,755, and $1,218,973, respectively. For the fiscal year ended May 31,
1998, the Fund paid the Adviser fees in the amount of $ .
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates provide investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders
25
<PAGE>
investment advice arise for consideration at or about the same time,
transactions in such securities will be made insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreement, the Adviser is not liable to the Fund or its
shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of the obligations and duties under
the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and Distribution Agreement (discussed
below) was approved by all of the Trustees. The Advisory Agreement, and the
Distribution Agreement, will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both agreements may be terminated on 60 days
written notice by any party or by a vote of a majority of the outstanding voting
securities of the Fund and will terminate automatically if assigned.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year ended October 31, 1996, the Fund paid
the Adviser $28,344 under this agreement. For the period from November 1, 1996
to May 31, 1997, the Fund paid the Adviser $45,712. For the fiscal year ended
May 31, 1997, the Fund paid the Adviser $ .
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use their 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 the John Hancock Funds. John Hancock Funds accepts orders
for the purchase of the shares of the Fund that are continually offered at net
asset
26
<PAGE>
value next determined, plus an applicable sales charge, if any. In connection
with the sale of Class A or Class B shares, John Hancock Funds and Selling
Brokers receive compensation from a sales charge imposed, in the case of Class A
shares at the time of sale. In the case of Class B shares the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis. John Hancock Funds may pay extra compensation to financial services firms
selling large amounts of fund shares. This compensation would be calculated as a
percentage of fund shares sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended October 31, 1996 was $379,649, for the period from November
1, 1996 to May 31, 1997 was $162,187 and for the fiscal year ended May 31, 1998
was $ . Of such amounts, $41,439, $18,811 and $ , respectively,
were retained by John Hancock Funds in 1996 and for the period from November 1,
1996 to May 31, 1997, $ for 1998. The remainder of the underwriting
commissions were reallowed to selling brokers.
The Fund's Trustees adopted Distribution Plans with respect to Class A and Class
B shares (the "Plans"), pursuant to Rule 12b-1 under the Investment Company Act
of 1940. Under the Plans the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% and 1.00%, respectively, of the Fund's
average daily net assets attributable to shares of that class. However, the
service fee will not exceed 0.25% of the Fund's average daily net assets
attributable to each class of shares. The distribution fees will be used to
reimburse the John Hancock Funds for their distribution expenses, including but
not limited to: (i) initial and ongoing sales compensation to Selling Brokers
and others (including affiliates of the John Hancock Funds) engaged in the sale
of Fund shares; (ii) marketing, promotional and overhead expenses incurred in
connection with the distribution of Fund shares; and (iii) with respect to Class
B shares only, interest expenses on unreimbursed distribution expenses. The
service fees will be used to compensate Selling Brokers and others for providing
personal and account maintenance services to shareholders. In the event the John
Hancock Funds is not fully reimbursed for payments or expenses they incur under
the Class A Plan, these expenses will not be carried beyond twelve months from
the date they were incurred. Unreimbursed expenses under the Class B Plan will
be carried forward together with interest on the balance of these unreimbursed
expenses. The Fund does not treat unreimbursed expenses under the Class B Plan
as a liability of the Fund, because the Trustees may terminate the Class B Plan
at any time. For the fiscal year ended May 31, 1998 an aggregate of $ of
distribution expenses or % of the average net assets of the Class B shares of
the Fund, was not reimbursed or recovered by the John Hancock Funds through the
receipt of deferred sales charges or 12b-1 fees in prior periods.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by the Trustees, including a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (the "Independent
Trustees"), by votes cast in person at meetings called for the purpose of voting
on these Plans.
Pursuant to the Plans, at least quarterly, the John Hancock Funds provides the
Fund with a written report of the amounts expended under the Plans and the
purpose for which these expenditures were made. The Trustees review these
reports on a quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty, (a) by a vote of a majority of the Independent Trustees, (b) by a vote
of a majority of the Fund's outstanding shares of the applicable class in each
case upon 60 days' written notice to the John Hancock Funds, and (c)
automatically in the event of assignment. The Plans further provide that they
may not be
27
<PAGE>
amended to increase the maximum amount of the fees for the services described
therein without the approval of a majority of the outstanding shares of the
class of the Fund which has voting rights with respect to the Plan. Each Plan
provides that no material amendment to the Plans will be effective unless it is
approved by a majority vote of the Trustees and the Independent Trustees of the
Fund. The holders of Class A and Class B shares have exclusive voting rights
with respect to the Plan applicable to their respective class of shares. In
adopting the Plans, the Trustees concluded that, in their judgment, there is a
reasonable likelihood that the Plans will benefit the holders of the applicable
class of shares of the Fund.
Amounts paid to the John Hancock Funds by any class of shares of the Fund will
not be used to pay the expenses incurred with respect to any other class of
shares of the Fund; provided, however, that expenses attributable to the Fund as
a whole will be allocated, to the extent permitted by law, according to a
formula based upon gross sales dollars and/or average daily net assets of each
such class, as may be approved from time to time by vote of a majority of the
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
During the fiscal year ended May 31, 1998, the Fund paid John Hancock Funds the
following amounts of expenses in connection with their services for the Fund:
Expense Items
-------------
Printing and Interest
Mailing of Expense of Carrying
Prospectus to Compensation John or Other
New to Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
Class A Shares $ $ $ $ ----
Class B Shares $ $ $ $ $
SALES COMPENSATION
As part of their business strategies, each of the John Hancock funds, along with
John Hancock Funds, pay compensation to financial services firms that sell the
funds' shares. These firms typically pass along a portion of this compensation
to your financial representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation that authorizes annual fees of this type). The 12b-1 fee
rates vary by share class, according to Rule 12b-1 plans adopted by each class.
The sales charges and 12b-1 fees paid by investors are detailed in the
prospectus. The portions of these expenses that are reallowed to financial
services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B and Class C
shares, interest expenses.
Whenever you make an investment in the fund, the financial services firm
receives either a reallowance from the initial sales charge or a commission, as
described below. The firm also receives the first year's service fee at this
time. Beginning with the second year after an
28
<PAGE>
investment is made, the financial services firm receives an annual service fee
of 0.25% of its total eligible net assets. This fee is paid quarterly in
arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
<TABLE>
<CAPTION>
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation (1)
Class A investments (% of offering price) (% of offering price) (% of net investment) (% of offering price)
- ------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 4.00%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of $1
million or more
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1M - $5M above that -- 0.25% 0.25% 0.50%
Next $1 or more above that -- 0.00% 0.25% 0.25%
Maximum
reallowance First year Maximum
or commission service fee total compensation (1)
Class B investments (% of offering price) (% of net investment) (% of offering price)
- ------------------- --------------------- --------------------- ---------------------
All amounts 3.75% 0.25% 4.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
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
29
<PAGE>
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 NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net asset by the number of its shares outstanding.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive a Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining reduced sales charges referred
to generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A shares of the Fund, the
investor is entitled to accumulate current purchases with the greater of the
current value (at offering price) of the Class A shares of the Fund, owned by
the investor, or if John Hancock Signature Services, Inc. ("Signature Services")
is notified by the investor's dealer or the investor at the time of the
purchase, the cost of the Class A shares owned.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandchildren, grandparents, mother, father, sister,
brother, mother-in-law, father-in-law, daughter-in-law, son-in-law, niece,
nephew and same-sex domestic partner) of any of the foregoing; or any
fund, pension, profit sharing or other benefit plan for the individuals
described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into a signed agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock
funds, when he or she withdraws from his or her plan and transfers any or
all of his or her plan distributions directly to the Fund.
30
<PAGE>
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if
the Plan has more than $3 million in assets or 500 eligible employees at
the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement. See your Merrill Lynch financial consultant for further
information.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed
retirement plans with at least 100 eligible employees at the inception of
the Fund account. Each of these investors may purchase Class A shares with
no initial sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the purchase was made,
a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
- --------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount being invested but also
the investor's purchase price or current value of the Class A shares of all John
Hancock funds which carry a sales charge already held by such person. Class A
shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
b shares if class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
31
<PAGE>
Letter of Intention. Reduced sales charges are also applicable to investments
pursuant to a Letter of Intention (the "LOI"), which should be read carefully
prior to its execution by an investor. The Fund offers two options regarding the
specified period for making investments under the LOI. All investors have the
option of making their investments over a specified period of thirteen (13)
months. Investors who are using the Fund as a funding medium for a retirement
plan, however, may opt to make the necessary investments called for by the LOI
over a forty-eight (48) month period. These retirement plans include
Traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (including
TSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing and
Section 457 plans. Non-qualified and retirement plans investments cannot be
combined to satisfy an LOI of 48 months. Such an investment (including
accumulations and combinations but not including reinvested dividends) must
aggregate $50,000 or more invested during the specified period from the date of
the LOI or from a date within ninety (90) days prior thereto, upon written
request to Signature Services. The sales charge applicable to all amounts
invested under the LOI is computed as if the aggregate amount intended to be
invested had been invested immediately. If such aggregate amount is not actually
invested, the difference in the sales charge actually paid and the sales charge
payable had the LOI not been in effect is due from the investor. However, for
the purchases actually made within the specified period (either 13 or 48 months)
the sales charge applicable will not be higher than that which would have been
applied (including accumulations and combinations) had the LOI been for the
amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charges as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Prospectus as a percentage of the dollar amount
subject to the CDSC. The charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the Class B
shares being redeemed. No CDSC will be imposed on increases in account value
above the initial purchase prices, including all shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service retirement plans administered
by Signature Services or the Life Company that had more than 100 eligible
employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number all
payments during a month will be aggregated and deemed to have been made on the
first day of the month.
32
<PAGE>
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six year CDSC redemption period or those you acquired through
dividend and capital gain reinvestment, and next from the shares you have held
the longest during the six year period. For this purpose, the amount of any
increase in a share's value above its initial purchase price is not regarded as
a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price.
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:
<TABLE>
<S> <C>
o Proceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00)
-------
o Amount subject to CDSC $ 280.00
</TABLE>
* The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
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.
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 circumstance defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to trust accounts
unless trust is being dissolved.)
* Redemptions where the proceeds are used to purchase a John Hancock
Declaration Variable Annuity.
33
<PAGE>
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan or
redemptions for fees charged by planners or advisors for advisory
services, as long as your annual redemptions do not exceed 12% of your
account value, including reinvested dividends, at the time you established
your periodic withdrawal plan and 12% of the value of subsequent
investments (less redemptions) in that account at the time you notify
Signature Services. (Please note, this waiver does not apply to periodic
withdrawal plan redemptions of Class A shares that are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has less than $3 million in assets or 500 eligible
employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement. See your Merrill Lynch financial
consultant for further information.
* Redemptions of Class A shares by retirement plans that invested through
the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement under section 401(a) of the Code (such
as 401(k), Money Purchase Pension Plan and Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
Please see matrix for reference.
34
<PAGE>
CDSC Waiver Matrix for Class B
- --------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-
Distribution (401(k), Rollover Retirement
MPP, PSP)
- --------------------------------------------------------------------------------
Death or Waived Waived Waived Waived Waived
Disability
- --------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments.
- --------------------------------------------------------------------------------
Between 59 Waived Waived Waived Waived for 12% of
1/2 and Life account
70 1/2 Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments.
- --------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
annuity annuity annuity annuity account
payments payments payments payments value
(72t) or 12% (72t) or 12% (72t) or 12% (72t) or 12% annually in
of account of account of account of account periodic
value value value value payments
annually in annually in annually in annually in
periodic periodic periodic periodic
payments. payments payments payments
- --------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- --------------------------------------------------------------------------------
Termination Not Waived Not Waived Not Waived Not Waived N/A
of Plan
- --------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- --------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- --------------------------------------------------------------------------------
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however,
35
<PAGE>
elected to be governed by Rule 18f-1 under the Investment Company Act. Under
that rule, the Fund must redeem its shares for cash except to the extent that
the redemption payments to any shareholder during any 90- day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of the
Fund for shares of the same class in any other John Hancock fund offering that
class.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may changed or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional Class A or
Class B shares of the Fund could be disadvantageous to a shareholder because of
the initial sales charge payable on such purchases of Class A shares and the
CDSC imposed on redemptions of Class B shares and because redemptions are
taxable events. Therefore, a shareholder should not purchase Class A and Class B
shares at the same time a Systematic Withdrawal Plan is in effect. The Fund
reserves the right to modify or discontinue the Systematic Withdrawal Plan of
any shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). 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.
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The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the processing date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS".
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years. or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
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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 creation of two series. The
Trustees have also authorized the issuance of two classes of shares of the Fund,
designated as Class A and Class B.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that classes of the Fund. Holders of
Class A and Class B shares have certain exclusive voting rights on matters
relating to their respective distribution plans. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to the Class A and Class B shares will be
borne exclusively by that class (ii) Class B shares will pay higher distribution
and service fees than Class A shares and (iii) each of Class A and Class B
shares will bear any other class expenses properly allocable to that class of
shares, subject to the conditions the Internal Revenue Service imposes with
respect to the multiple-class structures. Similarly, the net asset value per
share may vary depending on whether Class A or Class B shares are purchased. No
interest will be paid on uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act of 1940 or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund shareholders may remove a Trustee by the affirmative vote of
at least two-thirds of the Trust's outstanding shares, and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with a requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Furthermore, no fund included in this Fund's prospectus shall
be liable for the liabilities of any other John Hancock Fund. Liability is
therefore limited to circumstances in which the Fund itself would be unable to
meet its obligations, and the possibility of this occurrence is remote. For
telephone transactions the transfer agent will take measures to verify the
identity of the caller, such as asking for name, account number, Social Security
or other taxpayer ID number and other relevant information. If
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appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid. Information
provided on the account application may be used by the Fund to verify the
accuracy of the information or for background or financial history purposes. A
joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. The transfer agent will take measures to verify the identity of
the caller, such as asking for name, account number, Social Security or other
taxpayer ID number and other relevant information. If appropriate measures are
taken, the transfer agent is not responsible for any losses that may occur to
any account due to an unauthorized telephone call. Also for your protection
telephone transactions are not permitted on accounts whose names or addresses
have changed within the past 30 days. Proceeds from telephone transactions can
only be mailed to the address of record.
TAX STATUS
Each series of the Trust including the Fund, is treated as a separate entity for
tax purposes. The Fund has qualified as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to continue to so qualify for each taxable year. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on its taxable income
(including net realized capital gains) which is distributed to shareholders in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% nondeductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as capital gain. (Net capital
gain is the excess (if any) of net long-term capital gain over net short-term
capital loss, and investment company taxable income is all taxable income and
capital gains, other than those gains and losses included in computing net
capital gain, after reduction by deductible expenses.) As a result of federal
tax legislation enacted on August 5, 1997, gain recognized after May 6, 1997
from the sale of a capital asset is taxable to individual (noncorporate)
investors at different maximum federal income tax rates, depending generally
upon the tax holding period for the asset, the federal income tax bracket of the
taxpayer, and the dates the asset was acquired and/or sold. The Treasury
Department has issued guidance under the Act that enables the Fund to pass
through to its shareholders the benefits of the capital gains rates enacted in
the Act. Shareholders should consult their own tax advisers on the correct
application of these new rules. Some distributions may be paid in January but
may be taxable to shareholders as if they had been received on December 31 of
the previous year. The tax treatment described above will apply
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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.
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 or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. A sales charge paid in purchasing Class A
shares of the Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent 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. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department guidance issued to
implement the Act may contain additional rules for determining the tax treatment
of sales of Fund shares held for various periods, including the treatment of
losses on sales of shares held for six months or less that are recharacterized
as long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such
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excess was retained and not exhausted by the carryforward of prior years'
capital losses, it would be subject to Federal income tax in the hands of the
Fund. Upon proper designation of this amount by the Fund, each shareholder would
be treated for Federal income tax purposes as if the Fund had distributed to him
on the last day of its taxable year his pro rata share of such excess, and he
had paid his pro rata share of the taxes paid by the Fund and reinvested the
remainder in the Fund. Accordingly, each shareholder would (a) include his pro
rata share of such excess as capital gain in his return for his taxable year in
which the last day of the Fund's taxable year falls, (b) be entitled either to a
tax credit on his return for, or 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:
$48,876,888 of capital loss carryforwards which will expire May 31, 1998 --
$282,637, May 31, 2002-- $16,549,431, May 31, 2003 -- $26,193,155, May 31, 2004
- --$3,597,046 and May 31, 2005 --$2,254,619.
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 minims 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
borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions
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and proceeds, whether taken in cash or reinvested in shares, will be reduced by
the amounts required to be withheld. Any amounts withheld may be credited
against a shareholder's U.S. federal income tax liability. Investors should
consult their tax advisers about the applicability of the backup withholding
provisions.
The Fund may be required to account for its transactions in forward rolls or
swaps, caps, floors and collars in a manner that, under certain circumstances,
may limit the extent of its participation in such transactions. Additionally,
the Fund may be required to recognize gain, but not loss, if a swap or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. The Fund may have to sell portfolio securities
under disadvantageous circumstances to generate cash, or borrow cash, to satisfy
these distribution requirements.
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.
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.
Additionally, the Fund may be required to recognize gain, but not loss, if an
option or other transaction is treated as a constructive sale of an appreciated
financial position in the Fund's portfolio. Also, certain of the Fund's losses
on its transactions involving options, futures or forward contracts and/or
offsetting or successor portfolio positions may be deferred rather than being
taken into account currently in calculating the Fund's taxable income or gains.
Certain of these transactions may also cause the Fund to dispose of investments
sooner than would otherwise have occurred. These transactions may therefore
affect the amount, timing and character of the Fund's distributions to
shareholders. The Fund will take into account the special tax rules (including
consideration of available elections) applicable to options, futures and forward
contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
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The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30 day period ending May 31, 1998, the yield on Class A and Class B
shares of the Fund was % and %, respectively. The average total return of
Class A shares of the Fund for the 1 year, 5 years and period from January 3,
1992 (inception of the Fund) to May 31, 1998 were %, % and %,
respectively.
The average total return of Class B shares of the 1 year, 5 year and 10 year
periods ended May 31, 1998 were %, % and %, respectively and reflects the
applicable CDSC.
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/cd ) + 1 ] ^6 - 1)
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of shares of the Fund 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
(NAVE where applicable).
The Fund's total return is computed by finding the average annual compounded
rate of return over the 1-year, 5-year, and 10-year periods that would equate
the initial amount invested to the ending redeemable value according to the
following formula:
T = ((ERV/P)^(1/n)) - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
designated periods or fraction thereof.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of Class A or Class B shares, this
calculation assumes the maximum sales charge is included in the initial
investment or the CDSC applied at the end of the period, respectively. This
calculation assumes that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the period. The "distribution rate"
is determined by annualizing the result of dividing the declared dividends of
the Fund during the
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period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B shares into account. Excluding the Fund's sales charge on
Class A shares and the CDSC on Class B shares from a total return calculation
produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield and
total return and/or yield 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 fixed income mutual funds in the United
States. Ibbotson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well a the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, may also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on these transactions.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. Ion other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
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The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and other policies that the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitments to allocate portfolio transactions upon any
prescribed basis. While the Fund's officers will be primarily responsible for
the allocation of the Fund's brokerage business, their policies and practices in
this regard must be consistent with the foregoing and will at all times be
subject to review by the Trustees. For the period ended October 31, 1996, for
the period from November 1, 1996 to May 31, 1997 and for the fiscal year ended
May 31, 1998, the Fund paid negotiated brokerage commissions of $107,825,
$97,937 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 the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. For the fiscal year ended May 31, 1998, the Fund
did not pay commissions as compensation to any brokers for research services
such as industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors, Inc. a broker-dealer ("Distributors"
or Affiliated Broker"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. For the
period ended October 31, 1996, for the period from November 1, 1996 to May 1,
1997 and for the fiscal year ended May 31, 1998, the Fund did not execute any
portfolio transactions with the Affiliated Broker.
Distributors may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as a clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority
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of the Trustees who are not interested persons (as defined in the Investment
Company Act) of the Fund, the Adviser or the Affiliated Brokers. Because the
Adviser, which is affiliated with the Affiliated Brokers, has, as an investment
adviser to the Fund, the obligation to provide investment management services,
which includes elements of research and related investment skills, such research
and related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate securities to be
sold or purchased for the Fund with those to be sold or purchased for other
clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way , Suite 1000, Boston,
MA 02217-1000 a wholly- owned indirect subsidiary of the Life Company is the
transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee of $20.00 for each Class A shareholder account and $22.50
for each Class B shareholder account, 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 value.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Trust and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &
Trust Company performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts, 02110. Price Waterhouse LLP audits and renders an
opinion on the Fund's annual financial statements and reviews the Fund's annual
Federal income tax return.
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APPENDIX-A
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of the fund's
risk profile in the prospectus.
A fund is permitted to utilize -- within limits established by the trustees --
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them, with examples of related securities and
investment practices included in brackets. See the "Investment Objectives and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the fund will earn income or
show a positive total return over any period of time -- days, months or years.
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks. (e.g., currency contracts, futures and related options,
options on securities and indices, swaps, caps, floors and collars).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. (e.g., non- investment-grade debt securities, borrowing; reverse
repurchase agreements, covered mortgage dollar roll transactions, repurchase
agreements, securities lending, brady bonds, foreign debt securities, in-kind,
delayed and zero coupon debt securities, asset-backed securities,
mortgage-backed securities, participation interest, options on securities,
structured securities and swaps, caps floors and collars).
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.(e.g., foreign debt
securities, currency contracts, swaps, caps, floors and
collars).
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.(e.g. mortgage-backed securities and
structured securities).
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values. (e.g.,
non-investment-grade debt securities, covered mortgage dollar roll transactions,
brady bonds, foreign debt securities, in-kind, delayed and zero coupon debt
securities, asset-backed securities, mortgage-backed securities, participation
interest, swaps, caps, floors and collars).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements, covered mortgage dollar roll
transactions, when-issued securities and forward commitments, currency
contracts,
A-1
<PAGE>
financial futures and options; securities and index options, structured
securities, swaps, caps, floors and collars).
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that
the fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance. (e.g. non-investment-grade debt securities, restricted and illiquid
securities, mortgage-backed securities, participation interest, currency
contracts, futures and related options; securities and index options, structured
securities, swaps, caps, floors and collars).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them. (e.g. covered
mortgage dollar roll transactions, short-term trading, when-issued securities
and forward commitments, brady bonds, foreign debt securities, in-kind, delayed
and zero coupon debt securities, restricted and illiquid securities, rights and
warrants, financial futures and options; and securities and index options,
structured securities).
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.(e.g. covered mortgage dollar roll transactions, when-issued
securities and forward commitments, currency contracts, financial futures and
options; securities and securities and index options).
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
(e.g., brady bonds and foreign debt securities).
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, reducing the value of mortgage-backed securities.
(e.g., mortgage backed securities).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for. (e.g., non-investment-grade debt
securities, participation interest, structured securities, swaps, caps, floors
and collars).
A-2
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APPENDIX B
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 unlikely 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
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.
B-1
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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.
B-2
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper Ratings
Moody's ratings for commercial paper are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's two highest commercial paper rating categories
are as follows:
"P-1 -- "Prime-1" indicates the highest quality repayment capacity of the rated
issues.
"P-2 -- "Prime-2" indicates that the issuer has a strong capacity for repayment
of short-term promissory obligations. Earnings trends and coverage ratios, while
sound, will be more subjective to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained."
Standard & Poor's Commercial Paper Ratings
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
"A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1."
B-3
<PAGE>
JOHN HANCOCK STRATEGIC INCOME FUND
Class A, Class B and Class C Shares
Statement of Additional Information
October 1, 1998
This Statement of Additional Information provides information about John Hancock
Strategic Income Fund (the "Fund") in addition to the information that is
contained in the combined Income Funds' Prospectus dated October 1, 1998 (the
"Prospectus"). The Fund is a diversified 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 Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
Table of Contents
Page
Organization of the Fund 2
Investment Objective and Policies 2
Investment Restrictions 17
Those Responsible for Management 19
Investment Advisory and Other Services 27
Distribution Contracts 29
Sales Compensation 31
Net Asset Value 32
Initial Sales Charge on Class A Shares 33
Deferred Sales Charge on Class B and Class C Shares 35
Special Redemptions 38
Additional Services and Programs 38
Description of the Fund's Shares 40
Tax Status 42
Calculation of Performance 46
Brokerage Allocation 48
Transfer Agent Services 50
Custody of Portfolio 50
Independent Auditors 50
Appendix A-Description of Investment Risk A-1
Appendix B-Description of Bond Ratings B-1
Financial Statements F-1
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ORGANIZATION OF THE FUND
The Fund is series of the Trust, an open-end investment management company
organized as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. The Fund was organized in April 1986.
John Hancock Advisers, Inc. (the "Adviser") is the Fund's investment adviser.
The Adviser is an indirect wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), a Massachusetts life insurance company
chartered in 1862, with national headquarters at John Hancock Place, Boston,
Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. Appendix B contains further
information describing investment risks. There is no assurance that the Fund
will achieve its investment objective. The investment objective is fundamential
and may only be change with shareholder approval.
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.
The Fund may invest in all types of debt securities. The debt securities in
which the Fund may invest include bonds, debentures, notes (including variable
and floating rate instruments), preferred and preference stock, zero coupon
bonds, payment-in-kind securities, increasing rate note securities,
participation interest, multiple class pass through securities, collateralized
mortgage obligations, stripped debt securities, other mortgage-backed
securities, asset-backed securities and other derivative debt securities. Under
normal circumstances, the Fund's assets will be invested in each of the
foregoing three sectors. However, from time to time the Fund may invest up to
100% of its total assets in any one sector.
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 below
Baa by Moody's Investors Service, Inc. ("Moody's") or below BBB 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 Appendix B
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.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Funds as initial criteria for the selection of portfolio securities.
Among the factors which will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends. Appendix A
contains further information
2
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concerning the rating of Moody's and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund.
Debt securities that are rated in the lower rating categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income. In addition, lower ratings reflect a greater possibility of an adverse
change in financial condition affecting the ability of the issuer to make
payments of interest and principal. The market price and liquidity of lower
rated fixed income securities generally respond to short-term corporate and
market developments to a greater extent than the price and liquidity of higher
rated securities, because these developments are perceived to have a more direct
relationship to the ability of an issuer of lower rated securities to meet its
ongoing debt obligations. Although the Adviser seeks to minimize these risks
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions, there can be no
assurance that the Adviser will be successful in limiting the Fund's exposure to
the risks associated with lower rated securities. Because the 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
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.
3
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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 Fund may enter into forward foreign currency
contracts involving currencies of the different countries in which it will
invest as a hedge against possible variations in the foreign exchange rate
between these currencies as well as to enhance return or as a substitute for the
purchase or sale of currency. 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. 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.
Transaction hedging is the purchase or sale of forward foreign currency
contracts with respect to specific receivables for payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities denominated
in foreign currencies. Portfolio hedging is the use of forward foreign currency
contracts to offset portfolio security positions denominated or quoted in such
foreign currencies. The Fund will not attempt to hedge all of its foreign
portfolio positions and will enter into such transactions only to the extent, if
any, deemed appropriate by the Adviser.
If the Fund enters into a forward contract requiring it to purchase foreign
currency, its custodian bank will segregate cash or liquid securities in a
separate account of the Fund in an amount equal to the value of the Fund's total
assets committed to the consummation of such forward contract. Those assets will
be valued at market daily and if the value of the assets in the separate account
declines, additional cash or securities 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
4
<PAGE>
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
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.
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
5
<PAGE>
or in public offerings with respect to which a registration statement is in
effect under the 1933 Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair market value as determined in good
faith by the Fund's Trustees.
Repurchase Agreements. In a repurchase agreement the Fund would buy a security
for a relatively short period (usually not more than 7 days) subject to the
obligation to sell it back to the issuer at a fixed time and price plus accrued
interest. The Fund will enter into repurchase agreements only with member banks
of the Federal Reserve System and with "primary dealers" in U.S. Government
securities. The Adviser will continuously monitor the creditworthiness of the
parties with whom the Fund enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income decline in
value of the underlying securities or lack of access to income during this
period and the expense of enforcing its rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. The Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting their repurchase. The Fund will not enter into reverse repurchase
agreements and other borrowings exceeding in the aggregate 33% of the market
value of its total assets. The Fund will enter into reverse repurchase
agreements only with federally insured banks or savings and loan associations
which are approved in advance as being creditworthy by the Board of Trustees.
Under procedures established by the Board of Trustees, the Adviser will monitor
the creditworthiness of the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 act.
However, the Fund will not invest more than 15% of its net assets in illiquid
investments. If the Trustees determines, based upon a continuing review of the
trading markets for specific Section 4(2) paper or Rule 144A securities, that
they are liquid, they will not be subject to the 15% limit in illiquid
investments. The Trustees may adopt guidelines and delegate to the Adviser the
daily function of determining and monitoring the liquidity of restricted
securities. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Trustees will carefully
monitor the Fund's 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.
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Options on Securities, Securities Indices and Currency. The Fund may purchase
and write (sell) call and put options on any securities in which it may invest,
on any securities index based on securities in which it may invest or on any
currency in which Fund investments may be denominated. These options may be
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. The Fund may write covered put and
call options and purchase put and call options to enhance total return, as a
substitute for the purchase or sale of securities or currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency written by the
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by the Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive the Fund of the opportunity to profit from an increase in the market
price of the securities or foreign currency assets in its portfolio. Writing
covered put options may deprive the Fund of the opportunity to profit from a
decrease in the market price of the securities or foreign currency assets to be
acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account with a value at least equal to the Fund's obligation under the option,
(ii) entering into an offsetting forward commitment and/or (iii) purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position. A
written call option on securities is typically covered by maintaining the
securities that are subject to the option in a segregated account. The Fund may
cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. The Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of
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protective puts is designed to offset or hedge against a decline in the market
value of the Fund's portfolio securities or the currencies in which they are
denominated. Put options may also be purchased by the Fund for the purpose of
affirmatively benefiting from a decline in the price of securities or currencies
which it does not own. The Fund would ordinarily realize a gain if, during the
option period, the value of the underlying securities or currency decreased
below the exercise price sufficiently to cover the premium and transaction
costs; otherwise the Fund would realize either no gain or a loss on the purchase
of the put option. Gains and losses on the purchase of put options may be offset
by countervailing changes in the value of the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
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Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange rates, the Fund may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on these futures
contracts. The Fund may also enter into closing purchase and sale transactions
with respect to any of these contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), securities
indices, foreign currencies and any other financial instruments and indices. All
futures contracts entered into by the Fund are traded on U.S. or foreign
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire or the
exchange rate of currencies in which portfolio securities are quoted or
denominated. When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, the Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. The Fund may
seek to offset anticipated changes in the value of a currency in which its
portfolio securities, or securities that it intends to purchase, are quoted or
denominated by purchasing and selling futures contracts on such currencies.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated rise in
interest rates or a decline in market prices or foreign currency rates that
would adversely affect the dollar value of the Fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the Fund or securities with characteristics similar to those of the
Fund's portfolio securities. Similarly, the Fund may sell futures contracts on
any currencies in which its portfolio securities are quoted or denominated or in
one currency to hedge against fluctuations in the value of securities
denominated in a different currency if there is an established historical
pattern of correlation between the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of
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futures contracts or by attempting to achieve only a partial hedge against price
changes affecting the Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available. The Fund
may also purchase futures contracts as a substitute for transactions in
securities or foreign currency, to alter the investment characteristics of or
currency exposure associated with portfolio securities or to gain or increase
its exposure to a particular securities market or currency.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
they are quoted or denominated) that the Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the currency in which they are quoted or denominated) it intends to purchase.
The Fund will determine that the price fluctuations in the futures contracts and
options on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of its hedging intent, the Fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities (or assets denominated in the related currency) in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it
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is economically advantageous for the Fund to do so, a long futures position may
be terminated or an option may expire without the corresponding purchase of
securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities or currencies, require the Fund to
establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Fund than if
it had not entered into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and a portfolio position which is intended to be protected,
the desired protection may not be obtained and the Fund may be exposed to risk
of loss. In addition, it is not possible to hedge fully or protect against
currency fluctuations affecting the value of securities denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
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.
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On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal in value to the Fund's commitment. These
assets will be valued daily at market, and additional cash or securities will be
segregated in a separate account to the extent that the total value of the
assets in the account declines below the amount of the when-issued commitments.
Alternatively, the Fund may enter into offsetting contracts for the forward sale
of other securities that it owns.
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.
Short Sales. The Fund may engage in short sales in order to profit from an
anticipated decline in the value of a security. The Fund may also engage in
short sales to attempt to limit its exposure to a possible market decline in the
value of its portfolio securities through short sales of securities which the
Adviser believes possess volatility characteristics similar to those being
hedged. To effect such a transaction, the Fund must borrow the security sold
short to make delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. Until the security is replaced, the Fund is required to pay to the
lender any accrued interest or dividends and may be required to pay a premium.
The Fund may only make short sales "against the box," meaning that the Fund, by
virtue of its ownership of other securities, has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions.
The Fund will realize a gain if the security declines in price between the date
of the short sale and the date on which the Fund replaces the borrowed security.
On the other hand, the Fund will incur a loss as a result of the short sale if
the price of the security increases between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of any
premium or interest or dividends the Fund may be required to pay in connection
with a short sale. The successful use of short selling as a hedging device may
be adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
Under applicable guidelines of the staff of the SEC, if the Fund engages in
short sales, it must put in a segregated account (not with the broker) an amount
of cash or U.S. Government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. Government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until the Fund replaces the borrowed
security, it must daily maintain the segregated account at such a level that the
amount deposited in it plus the amount deposited with the broker as collateral
will equal the current market value of the securities sold short.
Short selling may produce higher than normal portfolio turnover which may result
in increased transaction costs to the Fund and may result in gains from the sale
of securities deemed to have been held for less than three months, which gains
must be less than 30% of the Fund's gross income for a taxable year in order for
the Fund to qualify as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code") for that year.
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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
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.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter
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into covered rolls. A "covered roll" is a specific type of dollar roll for which
there is an offsetting cash position or a cash equivalent security position
which matures on or before the forward settlement date of the dollar roll
transaction. Covered rolls are not treated as a borrowing or other senior
security and will be excluded from the calculation of the Fund's borrowing and
other senior securities. For financial reporting and tax purposes, the Fund
treats mortgage dollar rolls as two separate transactions; one involving the
purchase of a security and a separate transaction involving a sale. The Fund
does not currently intend to enter into mortgage dollar roll transactions that
are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset-backed securities. Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Fund's ability to
maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests may be subject to its 15% limitation on investments
in illiquid securities.
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to
14
<PAGE>
exchange the notional principal amount as well. Swaps may also depend on other
prices or rates, such as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a grater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status."
Brady Bonds. The Fund may invest in so-called "Brady Bonds" and other sovereign
debt securities of countries that have restructured or are in the process of
restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt
securities described as part of a restructuring plan created by U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally, commercial bank
debt). In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund (the
"IMF"). The Brady Plan facilitate the exchange of commercial bank debt for newly
issued (known as Brady Bonds). The World Bank and IMF provide funds pursuant to
loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount. Under these arrangements IMF debtor nations are required to implement
of certain domestic monetary and
15
<PAGE>
fiscal reforms. These reforms have included the liberalization of trade and
foreign investment, the privatization of state-owned enterprises and the setting
of targets for public spending and borrowing. These policies and programs
promote the debtor country's ability to service its external obligations and
promote its economic growth and development. The Brady Plan only sets forth
general guiding principles for economic reform and debt reduction, emphasizing
that solutions must be negotiated on a case-by-case basis between debtor nations
and their creditors. The Adviser believes that economic reforms undertaken by
countries in connection with the issuance of Brady Bonds make the debt of
countries which have issued or have announced plans to issue Brady Bonds an
attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of January, 1, 1997, the Fund is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have a long
payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
16
<PAGE>
Time Deposits. The Securities and Exchange Commission ("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 net assets.
Short Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments or to take advantage of yield disparities between fixed income
securities in order to realize capital gains or improve income. Short-term
trading may have the effect of increasing portfolio turnover rate. A high rate
of portfolio turnover (100% or greater) involves correspondingly greater
brokerage expenses. The Fund's portfolio rate is set forth in the table under
the caption "Financial Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means the approval of the lesser of (1) the holders of
67% or more of the shares represented at a meeting if by more than 50% of the
Fund's outstanding shares are present in person or by proxy at that meeting or
(2) more than 50% of the Fund's outstanding shares.
The Fund observes the 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 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% 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
17
<PAGE>
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,
(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 Trustees without
shareholder approval.
The Fund may not:
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser to save commissions or to average prices
among them is not deemed to result in a 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 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
18
<PAGE>
investment company in connection with a merger, consolidation,
reorganization or purchase of substantially all of the assets of
another investment company. Subject to the above percentage
limitations, the Fund may, in connection with the John Hancock Group of
Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John
Hancock Group of Funds.
(d) Invest for the purpose of exercising control over or management of any
company.
(e) Invest more than 15% of its net assets in illiquid securities.
In addition, the Fund complies with the following nonfundamental limitation on
its investments:
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.
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").
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief
101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;
Boston, MA 02199 Chairman, Director and Chief
October 1944 Executive Officer, The Berkeley
Financial Group, Inc. ("The
Berkeley Group"); Chairman and
Director, NM Capital Management,
Inc. ("NM Capital"), John Hancock
Advisers International Limited
("Advisers International") and
Sovereign Asset Management
Corporation ("SAMCorp");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds");
Chairman, First Signature Bank and
Trust Company; Director, John
Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Advisers International
(Ireland) Limited ("International
Ireland"), John Hancock Capital
Corporation and New
England/Canada Business Council;
Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Director, John Hancock
Freedom Securities Corporation
(until September 1996); Director,
John Hancock Signature Services,
Inc. ("Signature Services") (until
January 1997).
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
20
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
1216 Falls Boulevard University School of Law (as of
Fort Lauderdale, FL 33327 1997); Trustee, Brookline Savings
June 1931 Bank.
Richard P. Chapman, Jr. Trustee (1) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, MA 02147 Boston (lending); Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University (education);
Director, Depositors Insurance Fund,
Inc. (insurance).
William J. Cosgrove Trustee Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, NJ 07458 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
21
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Douglas M. Costle Trustee (1) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, VT 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean Vermont Law
School (until 1991); Director, Air
and Water Technologies
Corporation (environmental services
and equipment), Niagara Mohawk
Power Company (electric services)
and Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee Vice President, Chief Financial
8046 Mackenzie Court Officer and Director of Amax Gold,
Las Vegas, NV 89129 Inc.; Director, Santa Fe Ingredients
December 1928 Company of California, Inc. and
Santa Fe Ingredients Company, Inc.
(private food processing companies),
Uranium Resources Corporation;
Freeport-McMoRan Copper & Gold
Company, Inc., Hecla Mining
Company, Canyon Resources
Corporation and Original Sixteen to
One Mines, Inc. (1984-1987 and
1991-1995) (management
consultant).
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
22
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
Venture Capital Partners (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank of
Boston, MA 02110 Boston Corporation.
November 1932
Gail D. Fosler Trustee Vice President and Chief Economist,
3054 So. Abingdon Street The Conference Board (non-profit
Arlington, VA 22206 economic and business research);
December 1947 Director, Unisys Corp.; and H.B.
Fuller Company.
William F. Glavin Trustee President Emeritus, Babson College
120 Paget Court - John's Island (as of 1997); Vice Chairman, Xerox
Vero Beach, FL 32963 Corporation (until June 1989);
March 1932 Director, Caldor Inc., Reebok, Inc.
(since 1994) and Inco Ltd.
Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer
101 Huntington Avenue and Director, the Adviser; President,
Boston, MA 02199 COO and Director, The Berkeley
April 1953 Group; Director, John Hancock
Funds, Advisers International,
Insurance Agency, Inc. and
International Ireland; President and
Director, SAMCorp. and NM
Capital; Executive Vice President,
the Adviser (until December 1994);
Director, Signature Services (until
January 1997).
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
23
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Dr. John A. Moore Trustee President and Chief Executive
Institute for Evaluating Health Risks Officer, Institute for Evaluating
1629 K Street NW Health Risks, (nonprofit
Suite 402 institution) (since September 1989).
Washington, DC 20006-1602
February 1939
Patti McGill Peterson Trustee Executive Director, Council for
Council for International Exchange International Exchange of Scholars
of Scholars (since January 1998), Vice
3007 Tilden Street, N.W., Suite 5L President, Institute of International
Washington, DC 20008-3009 Education (since January 1998);
May 1943 Cornell Institute of Public Affairs,
Cornell University (until December
1997); President Emeritus of Wells
College and St. Lawrence
University; Director, Niagara
Mohawk Power Corporation
(electric utility) and Security Mutual
Life (insurance).
John W. Pratt Trustee Professor of Business
2 Gray Gardens East Administration at Harvard
Cambridge, MA 02138 University Graduate School of
September 1931 Business Administration (since
1961).
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
24
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John
Boston, MA 02117 Hancock Funds, John Hancock
August 1937 Distributors, Inc., Insurance Agency,
Inc., John Hancock Subsidiaries,
Inc., SAMCorp. and NM Capital;
Director, The Berkeley Group;
Director, JH Networking Insurance
Agency, Inc.; Director, Signature
Services (until January 1997).
Edward J. Spellman, CPA Trustee Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retired June 1990).
Ft. Lauderdale, FL 33308
November 1932
Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief
101 Huntington Avenue Investment Officer (2) Investment Officer, the Adviser;
Boston, MA 02199 Director, the Adviser, Advisers
July 1938 International, John Hancock Funds,
SAMCorp., Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund
and NM Capital; Director and
Senior Vice President, The Berkeley
Group; President, the Adviser (until
December 1994); Director,
Signature Services (until January
1997).
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
25
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John
July 1950 Hancock Funds; Secretary, NM
Capital and SAMCorp.; Clerk,
Insurance Agency, Inc.; Counsel,
John Hancock Mutual Life
Insurance Company (until February
1996), and Vice President of John
Hancock Distributors, Inc. (until
April 1994).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group, NM
March 1950 Capital; Vice President, John
Hancock Distributors, Inc. (until
April 1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
</TABLE>
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
26
<PAGE>
The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Boudreau and Scipione and Ms.
Hodsdon, each a non-Independent Trustee, and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and/or its
affiliates and receive no compensation from the Fund for their services.
<TABLE>
<CAPTION>
Total Compensation From All Funds in
Aggregate Compensation Funds in John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
- -------------------- ---------------- ----------------------
<S> <C> <C>
Dennis S. Aronowitz $72,000
Richard P. Chapman, Jr.* 75,000
William J. Cosgrove* 72,000
Douglas M. Costle 75,000
Leland O. Erdahl 72,000
Richard A. Farrell 75,000
Gail D. Fosler 72,000
William F. Glavin* 72,000
John A. Moore* 72,000
Patti McGill Peterson 72,000
John W. Pratt 72,000
Edward J. Spellman 75,000
------
Total $876,000
</TABLE>
(1) Compensation is for the fiscal year ended May 31, 1998.
(2) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31,
1997. As of that, date there were sixty-one funds in the John Hancock
Fund Complex, with each of these Independent Trustees serving on
sixteen funds.
*As of May 31, 1998 the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Fund Complex for
Mr. Chapman was $69,148 and for Mr. Cosgrove was $167,829 and Mr.
Glavin was $193,514 and for Dr. Moore was $84,315 under the John
Hancock Deferred Compensation Plan for Independent Trustees.
All of the officers listed are officers or employees of the Adviser or
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of June 12, 1998, the officers and Trustees of the Fund as a group owned less
than 1% of the outstanding shares of the Fund. As of that date, no persons owned
of record or beneficially 5% or more of the Fund's outstanding Class A shares
and the following person is the only person owning of record 5% or more of the
Fund's outstanding Class B shares: Merrill Lynch Pierce Fenner & Smith, Inc.,
Attention: Mutual Fund Operations, 4800 Deer Lake Drive East, Jacksonville,
Florida (12.24%).
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Fund and the other mutual funds and
publicly traded investment
27
<PAGE>
companies in the John Hancock group of funds having a combined total of over
1,400,000 shareholders. The Adviser is an affiliate of the Life Company, one of
the most recognized and respected financial institutions in the nation. With
total assets under management of $100 billion, the Life Company is one of the
ten largest life insurance companies in the United States, and carries high
ratings from Standard & Poor's and A.M. Best. Founded in 1862, the Life Company
has been serving clients for over 130 years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser, which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies, expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses of redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund); the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders'
meetings; trade association membership; insurance premiums; and any
extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee, based on a stated percentage of the average of the daily
net assets the Fund as follows:
Net Asset Value Annual Rate 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.
For the years ended May 31, 1996, 1997 and 1998 the Adviser received a fee of
$2,313,339, $2,830,885 and $ , respectively.
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
28
<PAGE>
investment advice arise for consideration at or about the same time,
transactions in such securities will be made insofar as feasible for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Pursuant to its Advisory Agreement, the Adviser is not liable to the Fund or its
shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of its obligations and duties under
the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the non-exclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and Distribution Agreement (discussed
below) was approved by all of the Trustees. The Advisory Agreement and the
Distribution Agreement will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both Agreements may be terminated on 60 days
written notice by either party or by vote of a majority of the outstanding
voting securities of the Fund and will terminate automatically if assigned.
Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year ended May 31, 1996, 1997 and 1998,
respectively, the Fund paid the Adviser $ , $132,910 and $ for
services under this Agreement.
In order to avoid conflicts with portfolio trades for the Fund, the Adviser and
the Fund have adopted extensive restrictions on personal securities trading by
personnel of the Adviser and its affiliates. Some of these restrictions are:
pre-clearance for all personal trades and a ban on the purchase of initial
public offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
DISTRIBUTION CONTRACT
The Fund has a Distribution Agreement with John Hancock Funds. Under the
agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each class on behalf of the Fund. Shares of the Fund are also sold by
selected broker-dealers (the "Selling Brokers") which have entered into selling
agency agreements with John Hancock Funds. John Hancock Funds accepts orders for
the purchase of the shares of the Fund which are continually offered at net
asset value next determined, plus any applicable sales charge, if any. In
connection with the sale of Fund shares, John Hancock Funds and Selling Brokers
receive compensation from a sales
29
<PAGE>
charge imposed, in the case of Class A shares at the time of sale. In the case
of Class B or Class C shares, the broker receives compensation immediately but
John Hancock Funds is compensated on a deferred basis. John Hancock Funds may
pay extra compensation to financial services firms selling large amounts of fund
shares. This compensation would be calculated as a percentage of fund shares
sold by the firm.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended May 31, 1996, 1997 and 1998 were $2,095,227, $2,275,918 and
$ , respectively. Of such amounts, $232,623, $266,508 and $ ,
respectively, were retained by John Hancock Funds in 1996, 1997 and 1998. The
remainder of the underwriting commissions were reallowed to selling brokers.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans"), pursuant to Rule 12b-1 under the Investment Company Act of
1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.30% for Class A shares and 1.00% for Class B
and Class C shares of the Fund's average daily net assets attributable to shares
of that class. However, the service fee will not exceed 0.25% of the Fund's
average daily net assets attributable to each class of shares. The distribution
fees will be used to reimburse John Hancock Funds for its distribution expenses,
including but not limited to: (i) initial and ongoing sales compensation to
Selling Brokers and others engaged in the sale of Fund shares, (ii) marketing,
promotional and overhead expenses incurred in connection with the distribution
of Fund shares, and (iii) with respect to Class B and Class C shares only,
interest expenses on unreimbursed distribution expenses. The service fees will
be used to compensate Selling Brokers and others for providing personal and
account maintenance services to shareholders. In the event that John Hancock
Funds is not fully reimbursed for payments it makes or expenses it incurs under
the Class A Plan, these expenses will not be carried beyond one year from the
date they were incurred. Unreimbursed expenses under the Class B and Class C
Plans will be carried forward together with interest on the balance of these
unreimbursed expenses. The Fund does not treat unreimbursed expenses under Class
B and Class C Plans as a liability of the Fund, because the Trustees may
terminate the Class B and/or Class C Plans at any time. For the period ended May
31, 1998 an aggregate of $ of distribution expenses or % of the
average net assets of the Class B shares of the Fund was not reimbursed or
recovered by John Hancock Funds through the receipt of deferred sales charges or
12b-1 fees in prior periods. Class C shares did not commence operations until
May 1, 1998; therefore, there are no unreimbursed expenses to report.
The Plans were approved by a majority of the voting securities of the Fund. The
Plans and all amendments were approved by 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 each these Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty (a) by a vote of a majority of the Independent Trustees, or (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class in
each case upon 60 days' written notice to John Hancock Funds and (c)
automatically in the event of assignment. The Plans further provide that they
may not be amended to increase the maximum amount of the fees for the services
described therein without
30
<PAGE>
the approval of a majority of the outstanding shares of the class of the Fund
which has voting rights with respect to the Plan. Each Plan provides that no
material amendment to the Plans will be effective unless it is approved by a
majority vote of the Trustees and the Independent Trustees of the Fund. The
holders of Class A, Class B and Class C shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans, the Trustees concluded that, in their judgment, there is a reasonable
likelihood that the Plans will benefit the holders of the applicable class of
shares of the Fund.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of the
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
During the fiscal year ended May 31, 1998, the Fund paid John Hancock Funds the
following amounts of expenses in connection with their services for the Fund.
Class C shares did not commence operations until May 1, 1998; therefore, there
are no expenses to report.
Expense Items
-------------
<TABLE>
<CAPTION>
Printing and Interest
Mailing of Expense of Carrying
Prospectus to Compensation John or Other
New to Selling Hancock Finance
Advertising Shareholders Brokers Funds Charges
----------- ------------ ------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A Shares $ $ $ $ ----
Class B Shares $ $ $ $ $
</TABLE>
SALES COMPENSATION
As part of their business strategies, each of the John Hancock funds, along with
John Hancock Funds, pay compensation to financial services firms that sell the
funds' shares. These firms typically pass along a portion of this compensation
to your financial representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the funds' assets ("12b-1" refers to the federal
securities regulation that authorizes annual fees of this type). The 12b-1 fee
rates vary by share class, according to Rule 12b-1 plans adopted by each class.
The sales charges and 12b-1 fees paid by investors are detailed in the
prospectus. The portions of these expenses that are reallowed to financial
services firms are shown on the next page.
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B and Class C
shares, interest expenses.
Whenever you make an investment in the fund, the financial services firm
receives either a reallowance from the initial sales charge or a commission, as
described below. The firm also receives the first year's service fee at this
time. Beginning with the second year after an
31
<PAGE>
investment is made, the financial services firm receives an annual service fee
of 0.25% of its total eligible net assets. This fee is paid quarterly in
arrears.
Financial services firms selling large amounts of fund shares may receive extra
compensation. This compensation, which John Hancock Funds pays out of its own
resources, may include asset retention fees as well as reimbursement for
marketing expenses.
<TABLE>
<CAPTION>
Maximum
Sales charge reallowance First year Maximum
paid by investors or commission service fee total compensation (1)
Class A investments (% of offering price) (% of offering price) (% of net investment) (% of offering price)
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 4.00%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Regular investments of $1
million or more
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1M - $5M above that -- 0.25% 0.25% 0.50%
Next $1 or more above that -- 0.00% 0.25% 0.25%
Maximum
reallowance First year Maximum
or commission service fee total compensation (1)
Class B investments (% of offering price) (% of net investment) (% of offering price)
--------------------- --------------------- ---------------------
All amounts 3.75% 0.25% 4.00%
Maximum
reallowance First year Maximum
or commission service fee total compensation (1)
Class C investments (% of offering price) (% of net investment) (% of offering price)
--------------------- --------------------- ---------------------
All amounts 0.75% 0.25% 1.00%
</TABLE>
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition.
CDSC revenues collected by John Hancock Funds may be used to pay commissions
when there is no initial sales charge.
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
32
<PAGE>
to determine valuations for normal institutional size trading units of debt
securities without exclusive reliance upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m. London time (12:00 noon,
New York time) on the date of any determination of a Fund's NAV. If quotations
are not readily available, or the value has been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Trustees believe accurately reflects fair value.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net assets by the number of its shares outstanding.
On any day an international market is closed and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). Share certificates
will not be issued unless requested by the shareholder in writing, and then they
will only be issued for full shares. The Trustees reserve the right to change or
waive a Fund's minimum investment requirements and to reject any order to
purchase shares (including purchase by exchange) when in the judgment of the
Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A shares of the Fund are
described in the Prospectus. Methods of obtaining 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 accumulate current purchases with the
greater of the current value (at offering price) of the Class A shares of the
Fund owned by the investor, or, if John Hancock Signature Services, Inc.
("Signature Services") is notified by the investor's dealer or the investor at
the time of the purchase, the cost of the Class A shares owned.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
33
<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, grandchildren, mother, father, grandparents, sister,
brother, mother-in-law, father-in-law, daughter-in-law, son-in-law,
niece, nephew, grandparents and same-sex domestic partner) of any of
the foregoing; or any fund, pension, profit sharing or other benefit
plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered
investment advisor that has entered into a signed agreement with John
Hancock Funds providing specifically for the use of Fund shares in
fee-based investment products or services made available to their
clients.
o A former participant in an employee benefit plan with John
Hancock funds, when he or she withdraws from his or her plan and
transfers any or all of his or her plan distributions directly to the
Fund.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing
programs, if the Plan has more than $3 million in assets or 500
eligible employees at the date the Plan Sponsor signs the Merrill Lynch
Recordkeeping Service Agreement.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
o Existing full service clients of the Life Company who were group
annuity contract holders as of September 1, 1994, and participant
directed retirement plans with at least 100 eligible employees at the
inception of the Fund account. Each of these investors may purchase
Class A shares with no initial sales charge. However, if the shares are
redeemed within 12 months after the end of the calendar year in which
the purchase was made, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class A shares of the Fund may also be purchased without an initial sales charge
in connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account and (c) groups which qualify for the Group Investment Program (see
below). Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Signature Services
or a Selling Broker's representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into
34
<PAGE>
account not only the amount being invested but also the investor's purchase
price or current value of the Class A shares of all John Hancock funds which
carry a sales charge already held by such person. Class A shares of John Hancock
money market funds will only be eligible for the accumulation privilege if the
investor has previously paid a sales charge on the amount of those shares.
Retirement plan investors may include the value of Class B shares if Class B
shares held are greater than $1 million. Retirement plans must notify Signature
Services to utilize.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. 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 retirement plan, however, may opt to
make the necessary investments called for by the LOI over a forty-eight (48)
month period. These retirement plans include Traditional, Roth and Education
IRAs, SEP, SARSEP, 401(k), 403(b) (including TSAs), SIMPLE IRA, SIMPLE 401(k),
Money Purchase Pension, Profit Sharing and Section 457 plans. Non-qualified and
retirement plans investments cannot be combined to satisfy an LOI of 48 months.
Such an investment (including accumulations and combinations but not including
renvested dividends) must aggregate $100,000 or more invested during the
specified period from the date of the LOI or from a date within ninety (90) days
prior thereto, upon written request to Signature Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
amount intended to be invested had been invested immediately. If such aggregate
amount is not actually invested, the difference in the sales charge actually
paid and the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period
(either 13 or 48 months) the sales charge applicable will not be higher than
that which would have applied (including accumulations and combinations) had the
LOI been for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow Class A shares will be released. If the total investment specified in
the LOI is not completed, the shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charge as may be due. By signing the
LOI, the investor authorizes Signature Services to act as his attorney-in-fact
to redeem any escrowed Class A shares and adjust the sales charge, if necessary.
A LOI does not constitute a binding commitment by an investor to purchase, or by
the Fund to sell, any additional Class A shares and may be terminated at any
time.
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B and Class C shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
35
<PAGE>
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B or Class C shares being redeemed. No
CDSC will be imposed on increases in account value above the initial purchase
prices, including all shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service retirement plans administered
by Signature Services or the Life Company that had more than 100 eligible
employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for the purpose of determining the number of
years from the time of any payment for the purchase of both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C or those you acquired through dividend and capital
gain reinvestment, and next from the shares you have held the longest during the
six-year period for Class B shares. For this purpose, the amount of any increase
in a share's value above its initial purchase price is not regarded as a share
exempt from CDSC. Thus, when a share that has appreciated in value is redeemed
during the CDSC period, a CDSC is assessed only on its initial purchase price.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
<TABLE>
<S> <C>
o Proceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00)
-------
o Amount subject to CDSC $ 280.00
</TABLE>
* The appreciation is based on all 100 shares in the lot not just the
shares being redeemed.
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to selected
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
36
<PAGE>
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and Class C shares and of Class A shares that are
subject to CDSC, unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions where the proceeds are used to purchase a John Hancock
Declaration Variable Annuity.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan, or redemptions for fees charged by planners or
advisors for advisory services, as long as your annual redemptions do
not exceed 12% of your account value, including reinvested dividends,
at the time you established your periodic withdrawal plan and 12% of
the value of subsequent investments (less redemptions) in that account
at the time you notify Investor Services. (Please note, this waiver
does not apply to periodic withdrawal plan redemptions of Class A or
Class C shares that are subject to a CDSC.)
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See you Merrill Lynch financial
consultant for further information.
* Redemptions by Class A or Class C shares by retirement plans that
invested through the PruArray Program sponsored by Prudential
Securities.
For Retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLE
IRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement under section 401(a)
of the Code (such as 401(k), Money Purchase Pension Plan and
Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for reference.
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<PAGE>
CDSC Waiver Matrix for Class B and Class C
- --------------------------------------------------------------------------------
Type of 401(a) Plan 403(b) 457 IRA, IRA Non-
Distribution (401(k), Rollover Retirement
MPP, PSP)
- --------------------------------------------------------------------------------
Death or Waived Waived Waived Waived Waived
Disability
- --------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of
mandatory account
distributions value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments.
- --------------------------------------------------------------------------------
Between 59 Waived Waived Waived Waived for 12% of
1/2 and Life account
70 1/2 Expectancy value
or 12% of annually in
account periodic
value payments
annually in
periodic
payments.
- --------------------------------------------------------------------------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of
(Class B only)annuity annuity annuity annuity account
payments payments payments payments value
(72t) or 12% (72t) or 12% (72t) or 12% (72t) or 12% annually in
of account of account of account of account periodic
value value value value payments
annually in annually in annually in annually in
periodic periodic periodic periodic
payments. payments payments payments
- --------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- --------------------------------------------------------------------------------
Termination Not Waived Not Waived Not Waived Not Waived N/A
of Plan
- --------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- --------------------------------------------------------------------------------
Return of Waived Waived Waived Waived N/A
Excess
- --------------------------------------------------------------------------------
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in readily marketable
portfolio securities as prescribed by the Trustees. When the shareholder sells
portfolio securities received in this fashion, the shareholder will incur a
brokerage charge. Any such securities would be valued for the purposes of making
such payment at the same value as used in determining net asset value. The Fund
has, however, elected to be governed by Rule 18f-1 under the Investment Company
Act. Under that rule, the Fund must redeem its shares for cash except to the
extent that the redemption payments to any shareholder during any 90-day period
would exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
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Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transactions charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock Short-Term Strategic Income Fund
and John Hancock Intermediate Maturity Government Fund will retain the exchanged
fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994
(except John Hancock Short-Term Strategic Income Fund) for Class B shares of any
other John Hancock fund, the acquired shares will continue to be subject to the
CDSC schedule that was in effect when the exchanged shares were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares which may result in realization of gain or loss for
purposes of Federal, state and local income taxes. The maintenance of a
Systematic Withdrawal Plan concurrently with purchases of additional shares of
the Fund could be disadvantageous to a shareholder because of the initial sales
charge payable on purchases of Class A shares and the CDSC imposed on
redemptions of Class B and Class C shares and because redemptions are taxable
events. Therefore, a shareholder should not purchase shares at the same time
that a Systematic Withdrawal Plan is in effect. The Fund reserves the right to
modify or discontinue the Systematic Withdrawal Plan of any shareholder on 30
days' prior written notice to such shareholder, or to discontinue the
availability of such plan in the future. The shareholder may terminate the plan
at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program (MAAP). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any 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 checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the processing date of any investment.
39
<PAGE>
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel the reinvestment privilege at any time.
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."
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
For participating retirement plans investing in Class B share, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. As of the date of this Statement of Additional
Information, the Trustees have authorized shares of the Fund and 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 three classes of shares of the Fund,
designated as Class A, Class B and Class C.
The shares of the Fund represent an equal proportionate interest in the
aggregate net assets attributed to that class of the Fund. Holders of each class
of 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.
40
<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 on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class will be borne exclusively
by that class; (ii) Class B and Class C shares will pay higher distribution and
service fees than Class A shares; and (iii) each class of shares will bear any
class expenses properly allocable to that class of shares, subject to the
conditions the Internal Revenue Service imposes with respect to the
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares, and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Liability is therefore limited to circumstances in which the
Fund itself would be unable to meet its obligations, and the possibility of this
occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter or credit card checks. All checks returned
by the post office as undeliverable will be reinvested at net asset value in the
fund or funds from which a redemption was made or dividend paid.Information
provided on the account application may be used by the Fund to verify the
accuracy of the information or for background or financial history purposes. A
joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
41
<PAGE>
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate entity
for tax purposes. The Fund has qualified as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and intends to continue to so qualify for each taxable year. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on its taxable income
(including net realized capital gains) which is distributed to shareholders in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as 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 those gains and losses included in
computing net capital gain, after reduction by deductible expenses.) As a result
of federal tax legislation enacted on August 5, 1997 (the "Act"), gain
recognized after May 6, 1997 from the sale of a capital asset is taxable to
individual (noncorporate) investors at different maximum federal income tax
rates, depending generally upon the tax holding period for the asset, the
federal income tax bracket of the taxpayer, and the dates the asset was acquired
and/or sold. The Treasury Department has issued guidance under the Act that
enables the Fund to pass through to its shareholders the benefits of the capital
gains rates enacted in the Act. Shareholders should consult their own tax
advisers on the correct application of these new rules in their particular
circumstances. Some distributions may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency options, foreign currency forward contracts, foreign
currencies, or payables or receivables denominated in a foreign currency are
subject to Section 988 of the Code, which generally causes such gains and losses
to be treated as ordinary income and losses and may affect the amount, timing
and character of distributions to shareholders. Transactions in foreign
currencies that are not directly related to the Fund's investment in stock or
securities, including speculative currency positions could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed the Fund's investment company taxable income computed without
regard to such loss, the
42
<PAGE>
resulting overall ordinary loss for such year would not be deductible by the
Fund or its shareholders in future years.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits or deductions
with respect to foreign income taxes or certain other foreign taxes ("qualified
foreign taxes"), paid by the Fund, subject to certain holding period
requirements and limitations contained in the Code, if the Fund so elects. If
more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Fund
may file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to (i) include in ordinary gross
income (in addition to taxable dividends and distributions actually received)
their pro rata shares of qualified foreign taxes paid by the Fund even though
not actually received by them, and (ii) treat such respective pro rata portions
as 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 the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities and/or engage in options, futures or forward transactions
that will generate capital gains 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 or undistributed taxable income of the Fund.
Consequently, subsequent distributions on those shares from such appreciation or
income may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. A sales charge paid in purchasing Class A
shares of the Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent 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
43
<PAGE>
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department guidance issued to
implement the Act may contain additional rules for determining the tax treatment
of sales of Fund shares held for various periods, including the treatment of
losses on sales of shares held for six months or less that are recharacterized
as long-term capital losses, as described above.
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as capital gain
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled
to increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
realized 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 $29,587,682 of capital loss carry-forwards, which
expire as follows: May 31, 1999-$8,553,157, May 31, 2002-$454,810, May 31,
2003-$20,312,807 and May 31, 2004-$266,908 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.
Investment in debt obligations that are at risk of or in default presents
special tax issues for any fund that holds these obligations. 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 if it acquires such obligations
in order to reduce the risk of distributing insufficient
44
<PAGE>
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 or constructive sale rules applicable to certain options, futures,
forwards, short sales or other transactions may also require the Fund to
recognize income or gain without a concurrent receipt of cash. Additionally,
some countries restrict repatriation which may make it difficult or impossible
for the Fund to obtain cash corresponding to its earnings or assets in those
countries. However, the Fund must distribute to shareholders for each taxable
year substantially all of its net income and net capital gains, including such
income or gain, to qualify as a regulated investment company and avoid liability
for any federal income or excise tax. Therefore, the Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash,
or borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
The Fund may be required to account for its transactions in forward rolls or
swaps, caps, floors and collars in a manner that, under certain circumstances,
may limit the extent of its participation in such transactions. Additionally,
the Fund may be required to recognize gain, but not loss, if a swap or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. The Fund may have to sell portfolio securities
under disadvantageous circumstances to generate cash, or borrow cash, to satisfy
these distribution requirements.
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<PAGE>
Limitations imposed by the Code on regulated investment companies like the Fund
may restrict the Fund's ability to enter into options, future, foreign currency
positions, and foreign currency forward contracts.
Certain options, futures and forward foreign currency contracts undertaken by
the Fund may cause the Fund to recognize gains or losses from marking to market
even though its positions have not been sold or terminated and affect the
character as long-term or short- term (or, in the case of foreign currency
contracts, as ordinary income or loss) and timing of some gains and losses
realized by the Fund. Additionally, the Fund may be required to recognize gain,
but not loss, if an option, short sale or other transaction is treated as a
constructive sale of an appreciated financial position in the Fund's portfolio.
Also, certain of the Fund's losses on its transactions involving options,
futures or forward contracts and/or offsetting or successor portfolio positions
may be deferred rather than being taken into account currently in calculating
the Fund's taxable income or gains. Certain of such transactions may also cause
the Fund to dispose of investments sooner than would otherwise have occurred.
These transactions may therefore affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options, futures and forward contracts in order to seek to minimize any
potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended May 31, 1998, the Fund's annualized yields for Class
A and Class B shares of the Fund were % and %, respectively. Class C shares
of the Fund commenced operations on May 1, 1998; therefore, there is no yield to
report. The average annual total returns on Class A shares of the Fund for the 1
year, 5 year and 10 year period ended November 30, 1997 were %, % and %,
respectively.
The total returns for the 1-year and since inception on October 4, 1993 periods
for Class B shares were % and %, respectively. Class C shares of the Fund
commenced operations on May 1, 1998; therefore, there is no average annual total
return to report.
46
<PAGE>
The Fund advertises yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per share (which includes the full sales charge) on the
last day of the period 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. The Fund's yield is computed according to the following standard
formula:
Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1)
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of Fund shares outstanding during the period
that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(NAV where applicable).
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:
T = ((ERV/P)^(1/n)) - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1-year and life-of-fund periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC applied at the end of the period, respectively. This calculation assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B or Class C shares into account. Excluding the Fund's
sales charge on Class A shares and the CDSC on Class B or Class C shares from a
total return calculation produces a higher total return figure.
47
<PAGE>
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 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.
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.
In the U.S. and in some other countries, debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and 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
48
<PAGE>
information and to a lesser extent statistical assistance furnished to the
Adviser of the Fund, and their value and expected contribution to the
performance of the Fund. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Adviser. The receipt of
research information is not expected to reduce significantly the expenses of the
Adviser. The research information and statistical assistance furnished by
brokers and dealers may benefit the Life Company or other advisory clients of
the Adviser, and, conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser may result in research information and
statistical assistance beneficial to the Fund. The Fund will make no commitment
to allocate portfolio transactions upon any prescribed basis. While the 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, 1995, 1996 and 1997, the Fund paid
negotiated brokerage commissions in the amount of $2,751, $11,500 and $4,000,
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, 1998,
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
("Distributors" or Affiliated Broker"). Pursuant to procedures determined by the
Trustees and consistent with the above policy of obtaining best net results, the
Fund may execute portfolio transactions with or through Affiliated Brokers.
During the year ending May 31, 1998, 1997 and 1996, the Fund did not execute any
portfolio transactions with Affiliated Brokers.
Distributors may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another 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.
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
49
<PAGE>
permitted by law, the Adviser may aggregate securities to be sold or purchased
for the Fund with those to be sold or purchased for other clients managed by it
in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Signature
Services an annual fee of $20.00 for each Class A shareholder account, $22.50
for each Class B shareholder account and $20.50 for each Class C shareholder
account. The Fund pays certain out-of-pocket expenses and these expenses are
aggregated and charged to the Fund and allocated to each class on the basis of
their relative net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and Investors Bank & Trust Company, 200 Clarendon Street,
Boston, MA 02116. Under the custodian agreement, Investors Bank & Trust Company
performs custody, portfolio and fund accounting services.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Price Waterhouse LLP, 160 Federal
Street, Boston, Massachusetts 02110. Price Waterhouse audits and renders an
opinion on the Fund's annual financial statements, and reviews the Fund's annual
Federal income tax return.
50
<PAGE>
APPENDIX-A
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of the fund's
risk profile in the prospectus.
A fund is permitted to utilize -- within limits established by the trustees --
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them, with examples of related securities and
investment practices included in brackets. See the "Investment Objectives and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the fund will earn income or
show a positive total return over any period of time -- days, months or years.
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks. (e.g., currency contracts, futures and related options,
options on securities and indices, swaps, caps, floors and collars).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. (e.g., non- investment-grade debt securities, borrowing; reverse
repurchase agreements, covered mortgage dollar roll transactions, repurchase
agreements, securities lending, brady bonds, foreign debt securities, in-kind,
delayed and zero coupon debt securities, asset-backed securities,
mortgage-backed securities, participation interest, options on securities,
structured securities and swaps, caps floors and collars).
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.(e.g., foreign debt
securities, currency contracts, swaps, caps, floors and collars).
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.(e.g. mortgage-backed securities and
structured securities).
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values. (e.g.,
non-investment-grade debt securities, covered mortgage dollar roll transactions,
brady bonds, foreign debt securities, in-kind, delayed and zero coupon debt
securities, asset-backed securities, mortgage-backed securities, participation
interest, swaps, caps, floors and collars).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements,
A-1
<PAGE>
covered mortgage dollar roll transactions, when-issued securities and forward
commitments, currency contracts, financial futures and options; securities and
index options, structured securities, swaps, caps, floors and collars).
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that
the fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance. (e.g. non-investment-grade debt securities, restricted and illiquid
securities, mortgage-backed securities, participation interest, currency
contracts, futures and related options; securities and index options, structured
securities, swaps, caps, floors and collars).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them. (e.g. covered
mortgage dollar roll transactions, short-term trading, when-issued securities
and forward commitments, brady bonds, foreign debt securities, in-kind, delayed
and zero coupon debt securities, restricted and illiquid securities, rights and
warrants, financial futures and options; and securities and index options,
structured securities).
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.(e.g. covered mortgage dollar roll transactions, when-issued
securities and forward commitments, currency contracts, financial futures and
options; securities and securities and index options).
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
(e.g., brady bonds and foreign debt securities).
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, reducing the value of mortgage-backed securities.
(e.g., mortgage backed securities).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for. (e.g., non-investment-grade debt
securities, participation interest, structured securities, swaps, caps, floors
and collars).
A-2
<PAGE>
APPENDIX-B
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.
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
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
B-1
<PAGE>
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.
B-2
<PAGE>
JOHN HANCOCK STRATEGIC SERIES
PART C.
OTHER INFORMATION
Item. 23. Exhibits:
The exhibits to this Registration Statement are listed in the Exhibit Index
hereto and are incorporated herein by reference.
Item 24. Persons Controlled by or under Common Control with Registrant.
No person is directly or indirectly controlled by or under common control with
Registrant.
Item. 25. Indemnification.
Indemnification provisions relating to the Registrant's Trustees, officers,
employees and agents is set forth in Article VII of the Registrant's By Laws
included as Exhibit 2 herein.
Under Section 12 of the Distribution Agreement, John Hancock Funds, Inc. ("John
Hancock Funds") has agreed to indemnify the Registrant and its Trustees,
officers and controlling persons against claims arising out of certain acts and
statements of John Hancock Funds.
Section 9(a) of the By-Laws of John Hancock Mutual Life Insurance Company ("the
Insurance Company") provides, in effect, that the Insurance Company will,
subject to limitations of law, indemnify each present and former director,
officer and employee of the Insurance Company who serves as a Trustee or officer
of the Registrant at the direction or request of the Insurance Company against
litigation expenses and liabilities incurred while acting as such, except that
such indemnification does not cover any expense or liability incurred or imposed
in connection with any matter as to which such person shall be finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interests of the Insurance Company. In addition, no such
person will be indemnified by the Insurance Company in respect of any final
adjudication unless such settlement shall have been approved as in the best
interests of the Insurance Company either by vote of the Board of Directors at a
meeting composed of directors who have no interest in the outcome of such vote,
or by vote of the policyholders. The Insurance Company may pay expenses incurred
in defending an action or claim in advance of its final disposition, but only
upon receipt of an undertaking by the person indemnified to repay such payment
if he should be determined not to be entitled to indemnification.
<PAGE>
Article IX of the respective By-Laws of John Hancock Funds and John Hancock
Advisers, Inc. ("the Adviser") provide as follows:
"Section 9.01. Indemnity. Any person made or threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was at any time since the
inception of the Corporation a director, officer, employee or agent of the
Corporation or is or was at any time since the inception of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and the liability was not incurred by reason of gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and expenses in connection therewith may be advanced by the Corporation,
all to the full extent authorized by the law."
"Section 9.02. Not Exclusive; Survival of Rights: The indemnification provided
by Section 9.01 shall not be deemed exclusive of any other right to which those
indemnified may be entitled, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
Insofar as indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the Registrant's Declaration of Trust and By-Laws of John
Hancock Funds, the Adviser, or the Insurance Company or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
Item 26. Business and Other Connections of Investment Advisers.
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of the Adviser,
reference is made to Form ADV (801-8124) filed under the Investment Advisers Act
of 1940, which is incorporated herein by reference.
<PAGE>
Item 27. Principal Underwriters.
(a) John Hancock Funds acts as principal underwriter for the Registrant and also
serves as principal underwriter or distributor of shares for John Hancock Cash
Reserve, Inc., John Hancock Bond Trust, John Hancock Current Interest, John
Hancock Series Trust, John Hancock Tax-Free Bond Trust, John Hancock California
Tax-Free Income Fund, John Hancock Capital Series, John Hancock Special Equities
Fund, John Hancock Sovereign Bond Fund, John Hancock Tax-Exempt Series, John
Hancock Strategic Series, John Hancock World Fund, John Hancock Investment
Trust, John Hancock Institutional Series Trust, John Hancock Investment Trust II
and John Hancock Investment Trust III.
(b) The following table lists, for each director and officer of John Hancock
Funds, the information indicated.
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Edward J. Boudreau, Jr. Director, Chairman, Trustee, Chairman, and
101 Huntington Avenue President and Chief Chief Executive Officer
Boston, Massachusetts Executive Officer
Anne C. Hodsdon Director, Executive Vice President
101 Huntington Avenue President
Boston, Massachusetts
Robert H. Watts Director, Executive Vice None
John Hancock Place President and Chief
P.O. Box 111 Compliance Officer
Boston, Massachusetts
Robert G. Freedman Director Vice Chairman and Chief
101 Huntington Avenue Investment Officer
Boston, Massachusetts
Osbert M. Hood Senior Vice President and None
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
David A. King Director None
380 Stuart Street
Boston, Massachusetts
James B. Little Senior Vice President Senior Vice President and
101 Huntington Avenue Chief Financial Officer
Boston, Massachusetts
Richard O. Hansen Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
John A. Morin Vice President and Vice President
101 Huntington Avenue Secretary
Boston, Massachusetts
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address With Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Susan S. Newton Vice President Vice President and
101 Huntington Avenue Secretary
Boston, Massachusetts
Christopher M. Meyer Vice President and None
101 Huntington Avenue Treasurer
Boston, Massachusetts
Stephen L. Brown Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Thomas E. Moloney Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Jeanne M. Livermore Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Richard S. Scipione Director Trustee
John Hancock Place
P.O. Box 111
Boston, Massachusetts
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
------------------ --------------------- ---------------------
Business Address With Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
John M. DeCiccio Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
Foster L. Aborn Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
David F. D'Alessandro Director None
John Hancock Place
P.O. Box 111
Boston, Massachusetts
William C. Fletcher Director None
53 State Street
Boston, Massachusetts
James V. Bowhers Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Anthony P. Petrucci Executive Vice President None
101 Huntington Avenue
Boston, Massachusetts
Charles H. Womack Senior Vice President None
6501 Americas Parkway
Suite 950
Albuquerque, New Mexico
Keith F. Hartstein Senior Vice President None
101 Huntington Avenue
Boston, Massachusetts
J. William Bennintende Vice President None
101 Huntington Avenue
Boston, Massachusetts
<PAGE>
Karen F. Walsh Vice President None
101 Huntington Avenue
Boston, Massachusetts
Griselda Lyman Vice President None
101 Huntington Avenue
Boston, Massachusetts
Gary Cronin Vice President None
101 Huntington Avenue
Boston, Massachusetts
Kristine Pancare Vice President None
101 Huntington Avenue
Boston, Massachusetts
</TABLE>
(c) None.
Item 28. Location of Accounts and Records.
The Registrant maintains the records required to be maintained by it
under Rules 31a-1 (a), 31a-a(b), and 31a-2(a) under the Investment
Company Act of 1940 at its principal executive offices at 101
Huntington Avenue, Boston Massachusetts 02199-7603. Certain records,
including records relating to Registrant's shareholders and the
physical possession of its securities, may be maintained pursuant to
Rule 31a-3 at the main office of Registrant's Transfer Agent and
Custodian.
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston, and The Commonwealth of Massachusetts on the 6th day of July,
1998.
JOHN HANCOCK STRATEGIC SERIES
By: *
----------------------------------
Edward J. Boudreau, Jr.
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman and Chief Executive July 6, 1998
_______________________ Officer (Principal Executive Officer)
Edward J. Boudreau, Jr.
/s/James B. Little Senior Vice President and Chief Financial
______________________ Officer (Principal Financial and Accounting
James B. Little Officer)
_________*____________ Trustee
Dennis S. Aronowitz
_________*____________ Trustee
Richard P. Chapman, Jr.
_________*____________ Trustee
William J. Cosgrove
_________*____________ Trustee
Douglas M. Costle
_________*____________ Trustee
Leland O. Erdahl
<PAGE>
_______*_________ Trustee
Richard A. Farrell
_______*______________ Trustee
Gail D. Fosler
_______*______________ Trustee
William F. Glavin
_______*______________ Trustee
Anne C. Hodsdon
_______*______________ Trustee
John A. Moore
_______*______________ Trustee
Patti McGill Peterson
_______*______________ Trustee
John W. Pratt
_______*______________ Trustee
Richard S. Scipione
_______*______________ Trustee
Edward J. Spellman
</TABLE>
By: /s/Susan S. Newton July 6, 1998
------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney dated
May 21, 1996 and June 27, 1996.
<PAGE>
John Hancock Strategic Series
(File no. 33-5186)
INDEX TO EXHIBITS
99.(a) Articles of Incorporation. Amended and Restated Declaration of Trust
dated September 21, 1993.*
99.(a).1 Instrument Establishing and Designating John Hancock Sovereign U.S.
Government Income Fund as an additional series of the Registrant and
Establishing and Designating Class A and Class B shares of such Series
dated August 27, 1996.****
99.(a).2 Amendment to Declaration of Trust dated December 7, 1993.*
99.(a).3 Amendment to Declaration of Trust dated March 5, 1996.***
99.(a).4 Amendment to Declaration of Trust- Abolition of John Hancock
Independence Equity Fund and John Hancock Utilities Fund dated August
27, 1996.****
99.(a).5 Amendment of Section 5.11 and Established and Designation of Class C
Shares of Beneficial Interest of John Hancock Strategic Income Fund.+
99.(b) By-Laws. Amended and Restated By-Laws dated December 3, 1996.****
99.(c) Instruments Defining Rights of Securities Holders. See exhibits 99.(a)
and 99.(b).
99.(d) Investment Advisory Contracts. Investment Advisory Agreement between
John Hancock Strategic Income Fund and John Hancock Advisers, Inc.
dated January 1, 1994.*
99.(d).1 Investment Advisory Contracts. Investment Advisory Agreement between
John Hancock Sovereign U.S. Government Income Fund and John Hancock
Advisers, Inc. dated August 30, 1996.****
99.(e) Underwriting Contracts. Distribution Agreement between John Hancock
Funds, Inc. (formerly named John Hancock Broker Distribution Services,
Inc. and the Registrant dated August 1, 1991.*
99.(e).1 Form of Soliciting Dealer Agreement between John Hancock Broker
Distribution Services ,Inc. and Selected Dealers.**
99.(e).2 Form of Financial Institution Sales and Service Agreement between John
Hancock Funds, Inc. and the John Hancock funds.*
99.(e).3 Amendment to Distribution Agreement between Registrant and John Hancock
Funds, Inc. dated August 30, 1996.****
99.(f) Bonus or Profit Sharing Contracts. Not Applicable.
99.(g) Custodian Agreements. Master Custodian Agreement between John Hancock
Mutual Funds and Investors Bank and Trust Company dated December 15,
1992.*
99.(h) Other Material Contracts. Amended and Restated Master Transfer Agency
and Service Agreement between John Hancock Funds and John Hancock
Signature Services, Inc. dated June 1, 1998.+
99.(h).1 Accounting and Legal Services Agreement between John Hancock Advisers,
Inc. and Registrant as of January 1 1996.****
99.(i) Legal Opinion. Not Applicable.
<PAGE>
99.(j) Other Opinions. Not Applicable.
99.(k) Omitted Financial Statements. Not Applicable.
99.(l) Initial Capital Agreements. Not Applicable.
99.(m) Rule 12b-1 Plans. Class A Distribution Plan between John Hancock
Strategic Income Fund and John Hancock Funds, Inc. dated January 1,
1994.*
99.(m).1 Class B Distribution Plan between John Hancock Strategic Income Fund
and John Hancock Funds, Inc. dated October 1, 1993.*
99.(m).2 Classes A and B Distribution Plans between John Hancock U.S. Government
Income Fund and John Hancock Funds, Inc. dated August 30, 1996****
99.(m).3 Class C Distribution Plan between John Hancock Strategic Income Fund
and John Hancock Funds, Inc. dated May 1, 1998.+
Financial Data Schedule. Not Applicable
99.(o) Rule 18f-3 Plan. John Hancock Funds Class A and Class B amended and
restated Multiple Class Plan pursuant to Rule 18f-3 for John Hancock
Sovereign U.S. Government Income Fund dated May 1, 1998.+
99.(o).1 John Hancock Funds Class A, Class B and Class C amended and restated
Multiple Class Plan pursuant to Rule 18f-3 for John Hancock Strategic
Income Fund dated May 1, 1998.+
* Previously filed electronically with Registration Statement and/or post
-effective amendment no. 21 file nos. 811-6451 and 33-5186 on June 29,
1995, accession number 0000950146-95-000353.
** Previously filed electronically with Registration Statement and/or
post-effective amendment no. 22 file nos. 811-6451 and 33-5186 on
February 9, 1996, accession number 0000950146-95-000519.
*** Previously filed electronically with Registration Statement and/or
post-effective amendment no. 24 file nos. 811-6451 and 33-5186 on
August 29, 1996, accession number 0001010521-96-000150.
**** Previously filed electronically with Registration Statement and/or
post-effective amendment no. 25 file nos. 811-6451 and 33-5186 on
February 27, 1997, accession number 0001010521-97-00230.
+ Filed herewith.
JOHN HANCOCK STRATEGIC SERIES
John Hancock Strategic Income Fund
Amendment of Section 5.11 and
Establishment and Designation of Class C Shares
of Beneficial Interest of
John Hancock Strategic Income Fund,
a Series of John Hancock Strategic Series
Amendment of Section 5.11
The undersigned, being a majority of the Trustees of John Hancock
Strategic Series, a Massachusetts business trust (the "Trust"), acting pursuant
to Section 8.3 of the Amended and Restated Declaration of Trust dated September
21, 1993, as amended from time to time (the "Declaration of Trust"), do hereby
amend Section 5.11 as follows:
1. Section 5.11 (a) shall be deleted and replaced with the
following:
Without limiting the authority of the Trustees set forth in
Section 5.1 to establish and designate any further Series or
Classes, the Trustees hereby establish the following Series, each
of which consists of Class A Shares and Class B Shares: John
Hancock Sovereign U.S. Government Income Fund and John Hancock
Strategic Income Fund (the "Existing Series").
Establishment and Designation of Class C Shares
The undersigned, being a majority of the Trustees of John Hancock
Strategic Series, a Massachusetts business trust (the "Trust"), acting pursuant
to Sections 5.1 and 5.11 of the Amended and Restated Declaration of Trust dated
September 21, 1993, as amended from time to time (the "Declaration of Trust"),
do hereby establish and designate an additional class of shares of John Hancock
High Yield Bond Fund (the "Fund") as follows:
1. The additional class of Shares of the Fund established and designated
hereby is "Class C Shares".
2. Class C Shares shall be entitled to all of the rights and preferences
accorded to Shares under the Declaration of Trust.
3. The purchase price of Class C Shares, the method of determining the net
asset value of Class C Shares, and the relative dividend rights of
holders of Class C Shares shall be established by the Trustees of the
Trust in accordance with the provisions of the Declaration of Trust and
shall be as set forth in the Prospectus and Statement of Additional
Information of the Fund included in the Trust's Registration Statement,
<PAGE>
as amended from time to time, under the Securities Act of 1933, as
amended and/or the Investment Company Act of 1940, as amended.
The Declaration of Trust is hereby amended to the extent necessary to
reflect the amendment of Section 5.11 and the establishment of an additional
class of Shares, effective May 1, 1998.
Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Declaration of Trust.
IN WITNESS WHEREOF, the undersigned have executed this instrument on
the 10th day of March 1998.
/s/Dennis S. Aronowitz /s/William F. Glavin
Dennis S. Aronowitz William F. Glavin
/s/Edward J. Boudreau, Jr. /s/Anne C. Hodsdon
Edward J. Boudreau, Jr. Anne C. Hodsdon
/s/Richard P. Chapman, Jr. /s/John A. Moore
Richard P. Chapman, Jr. John A. Moore
/s/William J. Cosgrove /s/Patti McGill Peterson
William J. Cosgrove Patti McGill Peterson
/s/Douglas M. Costle /s/John W. Pratt
Douglas M. Costle John W. Pratt
/s/Leland O. Erdahl ________________________
Leland O. Erdahl Richard S. Scipione
/s/Richard A. Farrell /s/Edward J. Spellman
Richard A. Farrell Edward J. Spellman
/s/Gail D. Fosler
Gail D. Fosler
The Declaration of Trust, a copy of which, together with all amendments
thereto, is on file in the office of the Secretary of State of The Commonwealth
of Massachusetts, provides that no Trustee, officer, employee or agent of the
Trust or any Series thereof shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its shareholders, in
connection with Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard of his/her duties with respect to such Person; and all such Persons
shall look solely to the Trust Property, or to the Trust Property of one or more
specific Series of the Trust if the claim arises from the conduct of such
Trustee, officer, employee or agent with respect to only such Series, for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust.
<PAGE>
STATE OF FLORIDA )
)ss
COUNTY OF PASCO )
Then personally appeared the above-named Dennis S. Aronowitz, Edward J.
Boudreau, Jr., Richard P. Chapman, Jr., William J. Cosgrove, Douglas M. Costle,
Leland O. Erdahl, Richard A. Farrell, Gail D. Fosler, William F. Glavin, Anne C.
Hodsdon, John A. Moore, Patti McGill Peterson, John W. Pratt, and Edward J.
Spellman, who acknowledged the foregoing instrument to be his or her free act
and deed, before me, this 10th day of March, 1998.
/s/ Michele Jones
Notary Public
My Commission Expires:8/25/00
AMENDED AND RESTATED MASTER TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN
JOHN HANCOCK FUNDS AND JOHN HANCOCK SIGNATURE SERVICES, INC.
Amended and Restated Master Transfer Agency and Service Agreement made as of the
1st day of June, 1998 by and between each investment company advised by John
Hancock Advisers, Inc., having its principal office and place of business at 101
Huntington Avenue, Boston, Massachusetts, 02199, and John Hancock Signature
Services, Inc., a Delaware corporation having its principal office and place of
business at 101 Huntington Avenue, Boston, Massachusetts 02199 ("JHSS").
WITNESSETH:
WHEREAS, each investment company desires to appoint JHSS as its transfer agent,
dividend disbursing agent and agent in connection with certain other activities;
and
WHEREAS, JHSS desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Definitions
Whenever used in this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
(a)"Fund" shall mean the investment company which has adopted this
agreement and is listed on Appendix A hereto. If the Fund is a
Massachusetts business trust or Maryland corporation, it may in the
future establish and designate other separate and distinct series of
shares, each of which may be called a "series" or a "portfolio"; in
such case, the term "Fund" shall also refer to each such separate
series or portfolio.
(b)"Board" shall mean the board of directors/trustees/managing general
partners/director general partners of the Fund, as the case may be.
Article 2 Terms of Appointment; Duties of JHSS
------------------------------------
2.01 Subject to the terms and conditions set forth in this Agreement, the Fund
hereby employs and appoints JHSS to act, and JHSS agrees to act, as transfer
agent and dividend dispersing agent with respect to the authorized and issued
shares of beneficial interest ("Shares") of the Fund subject to this Agreement
and to provide to the shareholders of the Fund ("Shareholders") such services in
connection therewith as may be set out in the prospectus of the Fund from time
to time.
2.02 JHSS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and JHSS, JHSS shall:
(i)Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor
to the Fund's Custodian authorized pursuant to the
1
<PAGE>
Fund's Declaration of Trust or Articles of Incorporation (the
"Custodian");
(ii)Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
(iii)Receive for acceptance, redemption requests and redemption
directions and deliver the appropriate documentation therefor to
the Custodian;
(iv)At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay over
or cause to be paid over in the appropriate manner such monies as
instructed by the redeeming Shareholders;
(v)Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi)Prepare and transmit payments for dividends and distributions
declared by the Fund, processing the reinvestment of
distributions on the Fund at the net asset value per share for
the Fund next computed after the payment (in accordance with the
Fund's then-current prospectus);
(vii)Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(viii)Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) of the rules and regulations of the
Securities Exchange Act of 1934 a record of the total number of
Shares of the Fund which are authorized, based upon data provided
to it by the Fund, and issued and outstanding. JHSS shall also
provide the Fund, on a regular basis, with the total number of
Shares which are authorized and issued and outstanding and shall
have no obligation, when recording the issuance of Shares, to
monitor the issuance of these Shares or to take cognizance of any
laws relating to the issue or sale of these Shares, which
functions shall be the sole responsibility of the Fund.
(b) In calculating the number of Shares to be issued on purchase or
reinvestment, or redeemed or repurchased, or the amount of the purchase
payment or redemption or repurchase payments owed, JHSS shall use the
net asset value per share (as described in the Fund's then-current
prospectus) computed by it or such other person as may be designated by
the Fund's Board. All issuances, redemptions or repurchases of the
Funds' shares shall be effected at net asset values per share next
computed after receipt of the orders therefore and said orders shall
become irrevocable at the time as of which said value is next computed.
(c) In addition to and not in lieu of the services set forth in the
above paragraph (a), JHSS shall: (i) perform all of the customary
services of a transfer agent and dividend disbursing agent including
but not limited to: maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, receiving and tabulating
proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing appropriate forms required with respect
to dividends and distributions by federal authorities for all
Shareholders, preparing and mailing confirmation forms and statements
of account to Shareholders for all purchases and redemptions of Shares
and other confirmable transactions in Shareholder accounts, preparing
and mailing activity statements for Shareholders, and providing
2
<PAGE>
Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of the Fund's Shares sold
in each State.
(d) In addition, the Fund shall (i) identify to JHSS in writing those
transactions and assets to be treated as exempt from the blue sky
reporting for each State and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The
responsibility of JHSS for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions
subject to blue sky compliance by the Fund and the reporting of these
transactions to the Fund as provided above.
(e) Additionally, JHSS shall:
(i) Utilize a system to identify all share transactions which
involve purchase and redemption orders that are processed at a
time other than the time of the computation of net asset value
per share next computed after receipt of such orders, and
shall compute the net effect upon the Fund of the transactions
so identified on a daily and cumulative basis.
(ii) If upon any day the cumulative net effect of such
transactions upon the Fund is negative and exceeds a dollar
amount equivalent to 1/2 of 1 cent per share, JHSS shall
promptly make a payment to the Fund in cash or through the use
of a credit in the manner described in paragraph (iv) below,
in such amount as may be necessary to reduce the negative
cumulative net effect to less than 1/2 of 1 cent per share.
(iii) If on the last business day of any month the cumulative
net effect upon the Fund of such transactions (adjusted by the
amount of all prior payments and credits by JHSS and the Fund)
is negative, the Fund shall be entitled to a reduction in the
fee next payable under the Agreement by an equivalent amount,
except as provided in paragraph (iv) below. If on the last
business day in any month the cumulative net effect upon the
Fund of such transactions (adjusted by the amount of all prior
payments and credits by JHSS and the Fund) is positive, JHSS
shall be entitled to recover certain past payments and
reductions in fees, and to a credit against all future
payments and fee reductions that may be required under the
Agreement as herein described in paragraph (iv) below.
(iv) At the end of each month, any positive cumulative net
effect upon a Fund of such transactions shall be deemed to be
a credit to JHSS which shall first be applied to permit JHSS
to recover any prior cash payments and fee reductions made by
it to the Fund under paragraphs (ii) and (iii) above during
the calendar year, by increasing the amount of the monthly fee
under the Agreement next payable in an amount equal to prior
payments and fee reductions made by JHSS during such calendar
year, but not exceeding the sum of that month's credit and
credits arising in prior months during such calendar year to
the extent such prior credits have not previously been
utilized as contemplated by this paragraph. Any portion of a
credit to JHSS not so used by it shall remain as a credit to
be used as payment against the amount of any future negative
cumulative net effects that would otherwise require a cash
payment or fee reduction to be made to the Fund pursuant to
paragraphs (ii) or (iii) above (regardless of whether or not
the credit or any portion thereof arose in the same calendar
year as that in which the negative cumulative net effects or
any portion thereof arose).
3
<PAGE>
(v) JHSS shall supply to the Fund from time to time, as
mutually agreed upon, reports summarizing the transactions
identified pursuant to paragraph (i) above, and the daily and
cumulative net effects of such transactions, and shall advise
the Fund at the end of each month of the net cumulative effect
at such time. JHSS shall promptly advise the Fund if at any
time the cumulative net effects exceeds a dollar amount
equivalent to 1/2 of 1 cent per share.
(vi) In the event that this Agreement is terminated for
whatever cause, or this provision 2.02 (d) is terminated
pursuant to paragraph (vii) below, the Fund shall promptly pay
to JHSS an amount in cash equal to the amount by which the
cumulative net effect upon the Fund is positive or, if the
cumulative net effect upon the Fund is negative, JHSS shall
promptly pay to the Fund an amount in cash equal to the amount
of such cumulative net effect.
(vii) This provision 2.02 (e) of the Agreement may be
terminated by JHSS at any time without cause, effective as of
the close of business on the date written notice (which may be
by telex) is received by the Fund.
Procedures applicable to certain of these services may be established from time
to time by agreement between the Fund and JHSS.
Article 3 Fees and Expenses
3.01 For performance by JHSS pursuant to this Agreement, the Fund agrees to pay
JHSS a fee as set out in Appendix A attached hereto. Such fees and out-of-pocket
expenses and advances identified under Section 3.02 below may be changed from
time to time subject to mutual written agreement between the Fund and JHSS.
3.02 In addition to the fee paid under Section 3.01 above, the Fund agrees to
reimburse JHSS for out-of-pocket expenses or advances incurred by JHSS for the
items set out in the fee schedule attached hereto. In addition, any other
expenses incurred by JHSS at the request or with the consent of the Fund, will
be reimbursed by the Fund.
3.03 The Fund agrees to pay all fees and reimbursable expenses promptly
following the mailing of the respective billing notice. Postage for mailing of
proxies to all shareholder accounts shall be advanced to JHSS by the Funds at
least seven (7) days prior to the mailing date of such materials.
Article 4 Representations and Warranties of JHSS
--------------------------------------
JHSS represents and warrants to the Fund that:
4.01 It is a corporation duly organized and existing and in good standing under
the laws of the State of Delaware, and is duly qualified and in good standing as
a foreign corporation under the Laws of The Commonwealth of Massachusetts.
4.02 It has corporate power and authority to enter into and perform its
obligations under this Agreement.
4
<PAGE>
4.03 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
4.04 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 5 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to JHSS that:
5.01 It is a business trust duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts or, in the case of John
Hancock Cash Reserve, Inc., a Maryland corporation duly organized and existing
and in good standing under the laws of the State of Maryland.
5.02 It has power and authority to enter into and perform this Agreement.
5.03 All proceedings required by the Fund's Declaration of Trust or Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
5.04 It is an open-end investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act").
5.05 A registration statement under the Securities Act of 1933, as amended, with
respect to the shares of the Fund subject to this Agreement has become
effective, and appropriate state securities law filings have been made and will
continue to be made.
Article 6 Indemnification
6.01 JHSS shall not be responsible for, and the Fund shall indemnify and hold
JHSS harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liabilities arising out of or attributable
to:
(a) All actions of JHSS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken
in good faith and without negligence or willful misfeasance.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's bad faith, gross negligence
or willful misfeasance or which arise out of the reckless disregard of
any representation or warranty of the Fund hereunder.
(c) The reliance on or use by JHSS or its agents or subcontractors of
information, records and documents which (i) are received by JHSS or
its agents or subcontractors and furnished to it by or on behalf of the
Fund, and (ii) have been prepared and/or maintained by the Fund or any
other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by JHSS or its agents or
subcontractors of, any instructions or requests of the Fund.
5
<PAGE>
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or
regulations of any state that Fund Shares be registered in that state
or in violation of any stop order or other determination or ruling by
any federal agency or any state with respect to the offer or sale of
Shares in that state.
(f) It is understood and agreed that the assets of the Fund may be used
to satisfy the indemnity under this Article 6 only to the extent that
the loss, damage, cost, charge, counsel fee, payment, expense and
liability arises out of or is attributable to services hereunder with
respect to the Shares of such Fund.
6.02 JHSS shall indemnify and hold harmless the Fund from and against any and
all losses, damages, costs, charges, counsel fees, payments, expenses and
liabilities arising out of or attributed to any action or failure or omission to
act by JHSS as a result of JHSS's lack of good faith, negligence or willful
misfeasance.
6.03 At any time JHSS may apply to any officer of the Fund for instructions, and
may consult with legal counsel with respect to any matter arising in connection
with the services to be performed by JHSS under this Agreement, and JHSS and its
agents or subcontractors shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such instructions or
upon the opinion of such counsel. JHSS, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction, information, data,
records or documents provided JHSS or its agents or subcontractors by machine
readable input, telex, CRT data entry or other similar means authorized by the
Fund, and shall not be held to have notice of any change of authority of any
person, until receipt of written notice thereof from the Fund. JHSS, its agents
and subcontractors shall also be protected and indemnified in recognizing share
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officer of the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
6.04 In the event either party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
6.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
6.06 In order that the indemnification provisions contained in this Article 6
shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
6
<PAGE>
Article 7 Covenants of the Fund and JHSS
------------------------------
7.01 The Fund shall promptly furnish to JHSS the following:
(a) A certified copy of the resolution(s) of the Trustees of the Trust
or the Directors of the Corporation authorizing the appointment of JHSS
and the execution and delivery of this Agreement.
(b) A copy of the Fund's Declaration of Trust or Articles of
Incorporation and By-Laws and all amendments thereto.
7.02 JHSS hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for safekeeping of share certificates and
facsimile signature imprinting devices, if any; and for the preparation or use,
and for keeping account of, such certificates and devices.
7.03 JHSS shall keep records relating to the services to be performed hereunder,
in the form and manner as it may deem advisable. To the extent required by
Section 31 of the Investment Company Act of 1940 and the rules and regulations
of the Securities and Exchange Commission thereunder, JHSS agrees that all such
records prepared or maintained by JHSS relating to the services to be performed
by JHSS hereunder are the property of the Fund and will be preserved, maintained
and made available in accordance with such Act and rules, and will be
surrendered to the Fund promptly on and in accordance with the Fund's request.
7.04 JHSS and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person without
the consent of the other party to this Agreement, except as may be required by
law.
7.05 JHSS agrees that, from time to time or at any time requested by the Fund,
JHSS will make reports to the Fund, as requested, of JHSS's performance of the
foregoing services.
7.06 JHSS will cooperate generally with the Fund to provide information
necessary for the preparation of registration statements and periodic reports to
be filed with the Securities and Exchange Commission, including registration
statements on Form N-1A, semi-annual reports on Form N-SAR, periodic statements,
shareholder communications and proxy materials furnished to holders of shares of
the Fund, filings with state "blue sky" authorities and with United States and
foreign agencies responsible for tax matters, and other reports and filings of
like nature.
7.07 In case of any requests or demands for the inspection of the Shareholder
records of the Fund, JHSS will endeavor to notify the Fund and to secure
instructions from an authorized officer of the Fund as to such inspection. JHSS
reserves the right, however, to exhibit the Shareholder records to any person
whenever it is advised by its counsel that it may be held liable for the failure
to exhibit the Shareholder records to such person.
7
<PAGE>
Article 8 No Partnership or Joint Venture
-------------------------------
8.01 The Fund and JHSS are not currently partners of or joint venturers with
each other and nothing in this Agreement shall be construed so as to make them
partners or joint venturers or impose any liability as such on them.
Article 9 Termination of Agreement
9.01 This Agreement may be terminated by either party upon one hundred twenty
(120) days' written notice to the other party.
9.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses
associated with the movement of records and material will be borne by the Fund.
Additionally, JHSS reserves the right to charge for any other reasonable
expenses associated with such termination.
Article 10 Assignment
10.01 Except as provided in Section 10.03 below, neither this Agreement nor any
rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
10.03 JHSS may, without further consent on the part of the Fund, subcontract for
the performance hereof with (i) Boston Finanacial Data Services, Inc., a
Massachusetts corporation ("BE") which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934 ("Section
17A(c)(1)") or any other entity registered as a transfer agent under Section
17A(c)(1) JHSS deems appropriate in order to comply with the terms and
conditions of this Agreement; provided, however, that JHSS shall be as fully
responsible to the Fund for the acts and omissions of any subcontractor as it is
for its own acts and omissions.
Article 11 Amendment
11.01 This Agreement may be amended or modified by a written agreement executed
by both parties and authorized or approved by a resolution of the Trustees of
the Trust or Directors of the Corporation.
Article 12 Massachusetts Law to Apply
12.01 This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the internal substantive laws of The Commonwealth
of Massachusetts.
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
8
<PAGE>
Article 14 Limitation on Liability
14.01 If the Fund is a Massachusetts business trust, JHSS expressly acknowledges
the provision in the Fund's Declaration of Trust limiting the personal liability
of the trustees and shareholders of the Fund; and JHSS agrees that it shall have
recourse only to the assets of the Fund for the payment of claims or obligations
as between JHSS and the Fund arising out of this Agreement, and JHSS shall not
seek satisfaction of any such claim or obligation from the trustees or
shareholders of the Fund. In any case, each Fund, and each series or portfolio
of each Fund, shall be liable only for its own obligations to JHSS under this
Agreement and shall not be jointly or severally liable for the obligations of
any other Fund, series or portfolio hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf under their seals by and through their duly
authorized officers, as of the day and year first above written.
JOHN HANCOCK FUNDS Listed on Appendix A
By: /s/Anne C. Hodsdon
------------------
Anne C. Hodsdon
President
JOHN HANCOCK SIGNATURE SERVICES, INC.
By: /s/Charles J. McKenney, Jr.
---------------------------
Charles J. McKenney, Jr.
Vice President
9
<PAGE>
EXHIBIT A
TRANSFER AGENT FEE SCHEDULE, EFFECTIVE JUNE 1, 1998
Effective June 1, 1998, the transfer agent fees payable monthly under
the transfer agent agreement between each fund and John Hancock Signature
Services, Inc. shall be the following rates plus certain out-of-pocket expenses
as described to the Board:
Annual Rate Per Account
Class A Shares Class B Shares Class C Shares*
Equity Fund $19.00 $21.50 $20.50
- -----------
John Hancock Capital Series
- -JH Independence Equity Fund*
- -JH Special Value Fund*
John Hancock Special Equities Fund
John Hancock World Fund
- -JH Pacific Basin Fund
- -JH Global Rx Fund
- -JH European Equity Fund
John Hancock Investment Trust
- -JH Growth and Income Fund*
- -JH Sovereign Balanced Fund
- -JH Sovereign Investors Fund*
John Hancock Investment Trust II
- -JH Financial Industries Fund
- -JH Regional Bank Fund
John Hancock Investment Trust III
- -John Hancock Global Fund
- -John Hancock Growth Fund*
- -John Hancock International Fund*
- -John Hancock Special Opportunities Fund*
John Hancock Series Trust
- -JH Emerging Growth Fund*
- -JH Global Technology Fund
10
<PAGE>
Annual Rate Per Account
Class A Shares Class B Shares Class C Shares*
Money Market Funds $20.00 $22.50 $21.50
- ------------------
John Hancock Current Interest
- -JH Money Market Fund*
- -JH US Government Cash Reserve (Class A
Shares only)
John Hancock Cash Reserve, Inc. (Class A
Shares only)
Annual Rate Per Account
Class A Shares Class B Shares
Tax Free Funds $20.00 $22.50
- --------------
John Hancock Tax-Exempt Series Fund
- -JH Massachusetts Tax-Free Income Fund
- -JH New York Tax-Free Income Fund
John Hancock California Tax-Free Income Fund
John Hancock Tax-Free Bond Trust
- -JH High Yield Tax-Free Fund
- -JH Tax Free Bond Fund
Annual Rate Per Account
Class A Shares Class B Shares Class C Shares*
Income Funds $20.00 $22.50 $21.50
------------
John Hancock Sovereign Bond Fund
John Hancock Strategic Series
- -JH Strategic Income Fund*
- -JH Sovereign US Government Income Fund
John Hancock Investment Trust III
- -JH Short-Term Strategic Income Fund
- -JH World Bond Fund
John Hancock Bond Trust
- -JH Government Income Fund
- -JH High Yield Bond Fund*
11
<PAGE>
- -JH Intermediate Maturity Government Fund
The following funds are at a % of daily net assets of the Fund.
Out-of-pocket expenses are paid by John Hancock Signature Services, Inc.
% of Daily Net Assets of the Class
----------------------------------
Class Y Shares 0.10%
John Hancock Special Equities Fund
John Hancock Sovereign Investors Fund
% of Daily Net Assets of the Fund
---------------------------------
John Hancock Institutional Series Trust 0.05%
- -JH Active Bond Fund
- -JH Dividend Performers Fund
- -JH Small Capitalization Value Fund
- -JH Global Bond Fund
- -JH Independence Balanced Fund
- -JH Independence Diversified Core Equity Fund II
- -JH Independence Growth Fund
- -JH Independence Medium Capitalization Fund
- -JH Independence Value Fund
- -JH International Equity Fund
- -JH Multi-Sector Growth Fund
- -JH Small Capitalization Growth Fund
These fees are agreed to by the undersigned as of June 1, 1998.
/s/Anne C. Hodsdon
---------------
Anne C. Hodsdon
President of Each Fund
/s/Charles McKenney, Jr.
----------------------
Charles McKenney, Jr.
Vice President of John Hancock
Signature Services, Inc.
12
JOHN HANCOCK STRATEGIC SERIES
JOHN HANCOCK STRATEGIC INCOME FUND
Distribution Plan
Class C Shares
May 1, 1998
Article I. This Plan
This Distribution Plan (the "Plan") sets forth the terms and conditions
on which John Hancock Strategic Series (the "Trust") on behalf of John Hancock
Strategic Income Fund (the "Fund"), a series portfolio of the Trust, on behalf
of its Class C shares, will, after the effective date hereof, pay certain
amounts to John Hancock Funds, Inc. ("JH Funds") in connection with the
provision by JH Funds of certain services to the Fund and its Class C
shareholders, as set forth herein. Certain of such payments by the Fund may,
under Rule 12b-1 of the Securities and Exchange Commission, as from time to time
amended (the "Rule"), under the Investment Company Act of 1940, as amended (the
"Act"), be deemed to constitute the financing of distribution by the Fund of its
shares. This Plan describes all material aspects of such financing as
contemplated by the Rule and shall be administered and interpreted, and
implemented and continued, in a manner consistent with the Rule. The Fund and JH
Funds heretofore entered into a Distribution Agreement, dated August 1, 1991
(the "Agreement"), the terms of which, as heretofore and from time to time
continued, are incorporated herein by reference.
Article II. Distribution and Service Expenses
The Fund shall pay to JH Funds a fee in the amount specified in Article
III hereof. Such fee may be spent by JH Funds on any activities or expenses
primarily intended to result in the sale of Class C shares of the Fund,
including, but not limited to the payment of Distribution Expenses (as defined
below) and Service Expenses (as defined below). Distribution Expenses include
but are not limited to, (a) initial and ongoing sales compensation out of such
fee as it is received by JH Funds or other broker-dealers ("Selling Brokers")
that have entered into an agreement with JH Funds for the sale of Class C shares
of the Fund, (b) direct out-of pocket expenses incurred in connection with the
distribution of Class C shares of the Fund, including expenses related to
printing of prospectuses and reports to other than existing Class C shareholders
of the Fund, and preparation, printing and distribution of sales literature and
advertising materials, (c) an allocation of overhead and other branch office
expenses of JH Funds related to the distribution of Class C shares of the Fund,
(d) interest expenses on unreimbursed distribution expenses related to Class C
shares, as described in Article IV and (e) distribution expenses incurred in
connection with the distribution of a corresponding class of any open-end,
registered investment company which sells all or substantially all its assets to
the Fund or which merges or otherwise combines with the Fund.
Service Expenses include payments made to, or on account of account
executives of selected broker-dealers (including affiliates of JH Funds) and
others who furnish personal and shareholder account maintenance services to
Class C shareholders of the Fund.
<PAGE>
Article III. Maximum Expenditures
The expenditures to be made by the Fund pursuant to this Plan, and the
basis upon which such expenditures will be made, shall be determined by the
Fund, and in no event shall such expenditures exceed 1.00% of the average daily
net asset value of the Class C shares of the Fund (determined in accordance with
the Fund's prospectus as from time to time in effect) on an annual basis to
cover Distribution Expenses and Service Expenses, provided that the portion of
such fee used to cover Service Expenses, shall not exceed an annual rate of up
to 0.25% of the average daily net asset value of the Class C shares of the Fund.
Such expenditures shall be calculated and accrued daily and paid monthly or at
such other intervals as the Trustees shall determine.
Article IV. Unreimbursed Distribution Expenses
In the event that JH Funds is not fully reimbursed for payments made or
expenses incurred by it as contemplated hereunder, in any fiscal year, JH Funds
shall be entitled to carry forward such expenses to subsequent fiscal years for
submission to the Class C shares of the Fund for payment, subject always to the
annual maximum expenditures set forth in Article III hereof; provided, however,
that nothing herein shall prohibit or limit the Trustees from terminating this
Plan and all payments hereunder at any time pursuant to Article IX hereof.
Article V. Expenses Borne by the Fund
Notwithstanding any other provision of this Plan, the Trust, the Fund
and its investment adviser, John Hancock Advisers, Inc. (the "Adviser"), shall
bear the respective expenses to be borne by them under the Investment Management
Contract between them, dated January 1, 1994 as from time to time continued and
amended (the "Management Contract"), and under the Fund's current prospectus as
it is from time to time in effect. Except as otherwise contemplated by this
Plan, the Trust and the Fund shall not, directly or indirectly, engage in
financing any activity which is primarily intended to or should reasonably
result in the sale of shares of the Fund.
Article VI. Approval by Trustees, etc.
This Plan shall not take effect until it has been approved, together
with any related agreements, by votes, cast in person at a meeting called for
the purpose of voting on this Plan or such agreements, of a majority (or
whatever greater percentage may, from time to time, be required by Section 12(b)
of the Act or the rules and regulations thereunder) of (a) all of the Trustees
of the Fund and (b) those Trustees of the Fund who are not "interested persons"
of the Fund, as such term may be from time to time defined under the Act, and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it (the "Independent Trustees").
Article VII. Continuance
This Plan and any related agreements shall continue in effect for so
long as such continuance is specifically approved at least annually in advance
in the manner provided for the approval of this Plan in Article VI.
Article VIII. Information
JH Funds shall furnish the Fund and its Trustees quarterly, or at such
other intervals as the Fund shall specify, a written report of amounts expended
or incurred for Distribution Expenses and Services Expenses pursuant to this
Plan and the purposes for which such expenditures were made and such other
information as the Trustees may request.
<PAGE>
Article IX. Termination
This Plan may be terminated (a) at any time by vote of a majority of
the Trustees, a majority of the Independent Trustees, or a majority of the
Fund's outstanding voting Class C shares, or (b) by JH Funds on 60 days' notice
in writing to the Fund.
Article X. Agreements
Each Agreement with any person relating to implementation of this Plan
shall be in writing, and each agreement related to this Plan shall provide:
(a) That, with respect to the Fund, such agreement may be
terminated at any time, without payment of any penalty, by
vote of a majority of the Independent Trustees or by vote of a
majority of the Fund's then outstanding Class C shares.
(b) That such agreement shall terminate automatically in the event
of its assignment.
Article XI. Amendments
This Plan may not be amended to increase the maximum amount of the fees
payable by the Fund hereunder without the approval of a majority of the
outstanding voting Class C shares of the Fund. No material amendment to the Plan
shall, in any event, be effective unless it is approved in the same manner as is
provided for approval of this Plan in Article VII.
Article XII. Limitation of Liability
The names "John Hancock Strategic Series" and "John Hancock Strategic
Income Fund" are the designations of the Trustees under the Amended and Restated
Declaration of Trust, dated September 21, 1993, as amended and restated from
time to time. The Amended and Restated Declaration of Trust has been filed with
the Secretary of State of the Commonwealth of Massachusetts. The obligations of
the Trust and the Fund are not personally binding upon, nor shall resort be had
to the private property of, any of the Trustees, shareholders, officers,
employees or agents of the Fund, but only the Fund's property shall be bound. No
series of the Trust shall be responsible for the obligations of any other series
of the Trust.
IN WITNESS WHEREOF, the Fund has executed this amended and restated
Distribution Plan effective as of the 1st day of May, 1998 in Boston,
Massachusetts.
JOHN HANCOCK STRATEGIC SERIES --
JOHN HANCOCK STRATEGIC INCOME FUND
By: /s/ Anne C Hodsdon
-----------------------
President
JOHN HANCOCK FUNDS, INC.
By: /s/ Edward J. Boudreau, Jr.
---------------------------
Chairman, President & CEO
John Hancock Funds
Class A and Class B
Multiple Class Plan Pursuant to Rule 18f-3
Each class of shares of each of the John Hancock Funds listed in Appendix A
attached hereto (each the "Fund") will have the same relative rights and
privileges and be subject to the same sales charges, fees and expenses, except
as set forth below. The Board of Trustees/Directors, as the case may be, may
determine in the future that other allocations of expenses (whether ordinary or
extraordinary) or other services to be provided to a class of shares are
appropriate and amend this Plan accordingly without the approval of shareholders
of any class. Except as set forth in the Fund's prospectus, shares may be
exchanged only for shares of the same class of another fund in the John Hancock
group of funds.
Class A Shares
Class A Shares are sold at net asset value and subject to the initial sales
charge schedule or contingent deferred sales charge and the minimum purchase
requirements set forth in the Fund's prospectus. Class A Shares are subject to
fees under the Fund's Class A Rule 12b-1 Distribution Plan on the terms set
forth in the Fund's prospectus. The Class A Shareholders have exclusive voting
rights, if any, with respect to the Class A Distribution Plan. Class A Shares
shall be entitled to the shareholder services set forth from time to time in the
Fund's prospectus with respect to Class A Shares.
Class B Shares
Class B Shares are sold at net asset value per share without the imposition of
an initial sales charge. However, Class B shares redeemed within a specified
number of years of purchase will be subject to a contingent deferred sales
charge as set forth in the Fund's prospectus. Class B Shares are sold subject to
the minimum purchase requirements set forth in the Fund's prospectus. Class B
Shares are subject to fees under the Class B Rule 12b-1 Distribution Plan on the
terms set forth in the Fund's prospectus. The Class B Shareholders of the Fund
have exclusive voting rights, if any, with respect to the Fund's Class B
Distribution Plan. Class B Shares shall be entitled to the shareholder services
set forth from time to time in the Fund's prospectus with respect to Class B
Shares.
Class B Shares will automatically convert to Class A Shares of the Fund at the
end of a specified number of years after the initial purchase date of Class B
shares, except as provided in the Fund's prospectus. The initial purchase date
for Class B shares acquired through reinvestment of dividends on Class B Shares
will be deemed to be the date on which the original Class B shares were
purchased. Such conversion will occur at the relative net asset value per share
of each class. Redemption requests placed by shareholders who own both Class A
and Class B Shares of the Fund will be satisfied first by redeeming the
shareholder's Class A Shares, unless the shareholder has made a specific
election to redeem Class B Shares.
The conversion of Class B Shares to Class A Shares may be suspended if it is
determined that the conversion constitutes or is likely to constitute a taxable
event under federal income tax law.
<PAGE>
APPENDIX A
John Hancock Bond Trust
- John Hancock Government Income Fund
- John Hancock Intermediate Maturity Government Fund
John Hancock California Tax-Free Income Fund
John Hancock Current Interest
- John Hancock U.S. Government Cash Reserve
John Hancock Investment Trust
- John Hancock Sovereign Balanced Fund
John Hancock Investment Trust II
- John Hancock Financial Industries Fund
- John Hancock Regional Bank Fund
John Hancock Investment Trust III
- John Hancock Global Fund
- John Hancock Growth Fund
- John Hancock Special Opportunities Fund
- John Hancock International Fund
- John Hancock World Bond Fund
- John Hancock Short-Term Strategic Income Fund
John Hancock Series Trust
- John Hancock Emerging Growth Fund
- John Hancock Global Technology Fund
John Hancock Sovereign Bond Fund
John Hancock Strategic Series
- John Hancock Sovereign U.S. Government Income Fund
John Hancock Tax-Exempt Series Fund
- John Hancock Massachusetts Tax-Free Income Fund
- John Hancock New York Tax-Free Income Fund
John Hancock Tax-Free Bond Trust
- John Hancock High Yield Tax-Free Fund
- John Hancock Tax-Free Bond Fund
John Hancock World Fund
- John Hancock Pacific Basin Equities Fund
- John Hancock Global Rx Fund
Dated: May 1, 1998
John Hancock Funds
Class A, Class B, and Class C
Amended and Restated Multiple Class Plan Pursuant to Rule 18f-3
Each class of shares of each of the John Hancock Funds listed in Appendix A
attached hereto (each the "Fund") will have the same relative rights and
privileges and be subject to the same sales charges, fees and expenses, except
as set forth below. The Board of Trustees/Directors, as the case may be, may
determine in the future that other allocations of expenses (whether ordinary or
extraordinary) or other services to be provided to a class of shares are
appropriate and amend this Plan accordingly without the approval of shareholders
of any class. Except as set forth in the Fund's prospectus, shares may be
exchanged only for shares of the same class of another fund in the John Hancock
group of funds.
Class A Shares
Class A Shares are sold at net asset value and subject to the initial sales
charge schedule or contingent deferred sales charge and the minimum purchase
requirements set forth in the Fund's prospectus. Class A Shares are subject to
fees under the Fund's Class A Rule 12b-1 Distribution Plan on the terms set
forth in the Fund's prospectus. The Class A Shareholders have exclusive voting
rights, if any, with respect to the Class A Distribution Plan. Class A Shares
shall be entitled to the shareholder services set forth from time to time in the
Fund's prospectus with respect to Class A Shares.
Class B Shares
Class B Shares are sold at net asset value per share without the imposition of
an initial sales charge. However, Class B shares redeemed within a specified
number of years of purchase will be subject to a contingent deferred sales
charge as set forth in the Fund's prospectus. Class B Shares are sold subject to
the minimum purchase requirements set forth in the Fund's prospectus. Class B
Shares are subject to fees under the Class B Rule 12b-1 Distribution Plan on the
terms set forth in the Fund's prospectus. The Class B Shareholders of the Fund
have exclusive voting rights, if any, with respect to the Fund's Class B
Distribution Plan. Class B Shares shall be entitled to the shareholder services
set forth from time to time in the Fund's prospectus with respect to Class B
Shares.
Class B Shares will automatically convert to Class A Shares of the Fund at the
end of a specified number of years after the initial purchase date of Class B
shares, except as provided in the Fund's prospectus. The initial purchase date
for Class B shares acquired through reinvestment of dividends on Class B Shares
will be deemed to be the date on which the original Class B shares were
purchased. Such conversion will occur at the relative net asset value per share
of each class. Redemption requests placed by shareholders who own both Class A
and Class B Shares of the Fund will be satisfied first by redeeming the
shareholder's Class A Shares, unless the shareholder has made a specific
election to redeem Class B Shares.
The conversion of Class B Shares to Class A Shares may be suspended if it is
determined that the conversion constitutes or is likely to constitute a taxable
event under federal income tax law.
<PAGE>
Class C Shares
Class C Shares are sold at net asset value per share without the imposition of
an initial sales charge. However, Class C shares redeemed within one year of
purchase will be subject to a contingent deferred sales charge as set forth in
the Fund's prospectus. Class C Shares are sold subject to the minimum purchase
requirements set forth in the Fund's prospectus. Class C Shares are subject to
fees under the Class C Rule 12b-1 Distribution Plan on the terms set forth in
the Fund's prospectus. The Class C Shareholders of the Fund have exclusive
voting rights, if any, with respect to the Fund's Class C Distribution Plan.
Class C Shares shall be entitled to the shareholder services set forth from time
to time in the Fund's prospectus with respect to Class C Shares.
<PAGE>
APPENDIX A
John Hancock Bond Trust
- John Hancock High Yield Bond Fund
John Hancock Capital Series
- John Hancock Independence Equity Fund
- John Hancock Special Value Fund
John Hancock Current Interest
- John Hancock Money Market Fund
John Hancock Investment Trust
- John Hancock Growth and Income Fund
John Hancock Strategic Series
- John Hancock Strategic Income Fund
Dated: May 1, 1998
<PAGE>
APPENDIX A
John Hancock Bond Trust
- John Hancock High Yield Bond Fund
John Hancock Capital Series
- John Hancock Independence Equity Fund
- John Hancock Special Value Fund
John Hancock Current Interest
- John Hancock Money Market Fund
John Hancock Investment Trust
- John Hancock Growth and Income Fund
John Hancock Investment Trust III
- John Hancock Growth Fund
- John Hancock Special Opportunities Fund
- John Hancock International Fund
John Hancock Series Trust
- John Hancock Emerging Growth Fund
John Hancock Strategic Series
- John Hancock Strategic Income Fund
Dated: June 1, 1998
