JOHN HANCOCK
GROWTH AND
INCOME FUNDS
[John Hancock's Graphic Logo. A Circle
Dianond, Triangle and a Cube]
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PROSPECTUS GROWTH AND INCOME FUND
AUGUST 30, 1996
INDEPENDENCE EQUITY FUND
This prospectus gives vital
information about these funds. SOVEREIGN BALANCED FUND
For your own benefit and
protection, please read it before SOVEREIGN INVESTORS FUND
you invest, and keep it on hand
for future reference. SPECIAL VALUE FUND
Please note that these funds: UTILITIES FUND
* are not bank deposits
* are not federally insured
* are not endorsed by any bank
or government agency
* are not guaranteed to achieve
their goal(s)
Like all mutual fund shares, these
securities have not been approved or
disapproved by the Securities and
Exchange Commission or any state
securities commission, nor has the
Securities and Exchange Commission or
any state securities commission passed
upon the accuracy or adequacy of this [LOGO]JOHN HANCOCK FUNDS
prospectus. Any representation to the A GLOBAL INVESTMENT MANAGEMENT
contrary is a criminal offense. FIRM
101 Huntington Avenue, Boston,
Massachusetts 02199-7603
<PAGE>
CONTENTS
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A fund-by-fund look at goals, GROWTH AND INCOME FUND 4
strategies, risks, expenses and
financial history. INDEPENDENCE EQUITY FUND 6
SOVEREIGN BALANCED FUND 8
SOVEREIGN INVESTORS FUND 10
SPECIAL VALUE FUND 12
UTILITIES FUND 14
Policies and instructions for YOUR ACCOUNT
opening, maintaining and closing Choosing a share class 16
an account in any growth and How sales charges are calculated 16
income fund. Sales charge reductions and waivers 17
Opening an account 17
Buying shares 18
Selling shares 19
Transaction policies 21
Dividends and account policies 21
Additional investor services 22
Details that apply to the growth FUND DETAILS
and income funds as a group. Business structure 23
Sales compensation 24
More about risk 26
FOR MORE INFORMATION BACK COVER
<PAGE>
OVERVIEW
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GOAL OF THE GROWTH AND INCOME FUNDS
John Hancock growth and income funds invest for
varying combinations of income and capital
appreciation. Each fund has its own emphasis with
regard to income, growth and total return, and has
its own strategy and risk/reward profile. Because
you could lose money by investing in these funds,
be sure to read all risk disclosure carefully
before investing.
WHO MAY WANT TO INVEST
FUND INFORMATION KEY These funds may be appropriate for investors who:
Concise fund-by-fund * are looking for a more conservative alternative
descriptions begin on the to exclusively growth-oriented funds
next page. Each description * need an investment to form the core of a
provides the following portfolio
information: * seek above-average total return over the long
term
[GOAL GRAPHIC]GOAL AND * are retired or nearing retirement
STRATEGY The fund's
particular investment goals Growth and income funds may NOT be appropriate if
and the strategies it you:
intends to use in pursuing * are investing for maximum return over a long
those goals. time horizon
* require a high degree of stability of your
[PORTFOLIO principal
GRAPHIC]PORTFOLIO
SECURITIES The primary THE MANAGEMENT FIRM
types of securities in
which the fund invests. All John Hancock growth and income funds are
Secondary investments are managed by John Hancock Advisers, Inc. Founded in
described in "More about 1968, John Hancock Advisers is a wholly owned
risk" at the end of the subsidiary of John Hancock Mutual Life Insurance
prospectus. Company and manages more than $19 billion in
assets.
[RISK GRAPHIC]RISK FACTORS
The major risk factors
associated with the fund.
[TORSO GRAPHIC]PORTFOLIO
MANAGEMENT The individual
or group (including
subadvisers, if any)
designated by the
investment adviser to
handle the fund's
day-to-day management.
[% GRAPHIC]EXPENSES The
overall costs borne by an
investor in the fund,
including sales charges and
annual expenses.
[$ GRAPHIC]FINANCIAL
HIGHLIGHTS A table showing
the fund's financial
performance for up to ten
years, by share class. A
bar chart showing total
return allows you to
compare the fund's
historical risk level to
those of other funds.
<PAGE>
GROWTH AND INCOME FUND
REGISTRANT NAME: JOHN HANCOCK INVESTMENT TRUST TICKER SYMBOL CLASS A: TAGRX
CLASS B: TSGWX
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GOAL AND STRATEGY
[GOAL GRAPHIC]The fund seeks the highest total return (capital appreciation plus
current income) that is consistent with reasonable safety of capital. To pursue
this goal, the fund invests in a diversified portfolio of stocks, bonds and
money market instruments. Although the fund may concentrate in any of these
securities, under normal circumstances it invests primarily in stocks. The fund
may not invest more than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[PORTFOLIO GRAPHIC]The fund may invest in most types of securities, including:
* common and preferred stocks, warrants and convertible securities
* U.S. Government and agency debt securities, including mortgage-backed
securities
* corporate bonds, notes and other debt securities of any maturity
The fund favors stocks that have paid dividends in the past 12 months and show
potential for a dividend increase. The fund invests no more than 5% of assets in
junk bonds (bonds rated lower than BBB/Baa and their unrated equivalents), but
does not invest in bonds rated lower than B.
The fund may invest up to 25% of assets in foreign securities (35% during
adverse U.S. market conditions); however, foreign securities typically have not
exceeded 5% of assets. To a limited extent the fund also may invest in certain
higher-risk securities, and may engage in other investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[RISK GRAPHIC]As with any growth and income fund, the value of your investment
will fluctuate in response to stock and bond market movements.
To the extent that it invests in certain securities, the fund may be affected by
additional risks:
* foreign securities: currency, information, natural event and political risks
* mortgage-backed securities: extension and prepayment risks
These risks are defined in "More about risk" starting on page 26. This section
also details other higher-risk securities and practices that the fund may
utilize. Before you invest, please read "More about risk" carefully.
PORTFOLIO MANAGEMENT
[TORSO GRAPHIC]Timothy E. Keefe, leader of the fund's portfolio management team
since joining John Hancock Funds in July 1996, is a senior vice president of the
adviser and has been in the investment business since 1987.
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INVESTOR EXPENSES
<TABLE>
[% GRAPHIC]Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<CAPTION>
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SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
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<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
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ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
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<S> <C> <C>
Management fee 0.625% 0.625%
12b-1 fee(3) 0.250% 1.00%
Other expenses 0.445% 0.445%
Total fund operating expenses 1.320% 2.070%
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- --------------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $63 $90 $119 $201
Class B shares
Assuming redemption
at end of period $71 $95 $131 $221
Assuming no redemption $21 $65 $111 $221
This example is for comparison purposes only and is not a representation of
the fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
4 GROWTH AND INCOME FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
<TABLE>
[$ GRAPHIC]The figures below have
been audited by the fund's
independent auditors, Ernst & Young
LLP.
VOLATILITY, AS INDICATED BY CLASS A [BAR GRAPH]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) 19.90 22.58 (9.86) 23.47 0.18 23.80 10.47 13.64
<CAPTION>
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CLASS A - YEAR ENDED AUGUST 31, 1986 1987 1988 1989 1990 1991 1992 1993
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.42 $ 11.11 $ 12.04 $ 8.83 $ 10.19 $ 9.87 $ 11.77 $ 12.43
Net investment income (loss) 0.35 0.42 0.50 0.55 0.20 0.20 0.32(2) 0.40(2)
Net realized and unrealized gain (loss)
on investments 1.48 1.77 (1.73) 1.42 (0.18) 2.07 0.89 1.12
Total from investment operations 1.83 2.19 (1.23) 1.97 0.02 2.27 1.21 1.52
Less distributions:
Dividends from net investment income (0.36) (0.38) (0.49) (0.61) (0.27) (0.19) (0.25) (0.42)
Distributions from net realized gain on
investments sold (0.78) (0.88) (1.49) -- (0.07) (0.18) (0.30) (1.45)
Total distributions (1.14) (1.26) (1.98) (0.61) (0.34) (0.37) (0.55) (1.87)
Net asset value, end of period $ 11.11 $ 12.04 $ 8.83 $ 10.19 $ 9.87 $ 11.77 $ 12.43 $ 12.08
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(3) (%) 19.90 22.58 (9.86) 23.47 0.18 23.80 10.47 13.64
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 69,516 90,974 69,555 70,513 63,150 77,461 89,682 115,780
Ratio of expenses to average
net assets (%) 1.12 1.21 1.29 1.12 1.29 1.38 1.34 1.29
Ratio of net investment income (loss) to
average net assets (%) 3.53 3.86 5.45 6.07 1.96 1.90 2.75 3.43
Portfolio turnover rate (%) 150 138 120 214 69 70 119 107
Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A N/A N/A N/A
VOLATILITY, AS INDICATED BY CLASS A [BAR GRAPH]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) (2.39) 19.22 12.58(4)
<CAPTION>
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CLASS A - YEAR ENDED AUGUST 31, 1994 1995 1996(1)
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<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.08 $ 11.42 $ 13.38
Net investment income (loss) 0.32(2) 0.21(2) 0.11
Net realized and unrealized gain (loss)
on investments (0.61) 1.95 1.56
Total from investment operations (0.29) 2.16 1.67
Less distributions:
Dividends from net investment income (0.37) (0.20) (0.11)
Distributions from net realized gain on
investments sold -- -- (0.15)
Total distributions (0.37) (0.20) (0.26)
Net asset value, end of period $ 11.42 $ 13.38 $ 14.79
TOTAL INVESTMENT RETURN AT NET ASSET
VALUE(3) (%) (2.39) 19.22 12.58(4)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted)($) 121,160 130,183 135,820
Ratio of expenses to average
net assets (%) 1.31 1.30 1.16(5)
Ratio of net investment income (loss) to
average net assets (%) 2.82 1.82 1.60(5)
Portfolio turnover rate (%) 195 99 36
Average brokerage commission rate(6) ($) N/A N/A 0.0658
<CAPTION>
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CLASS B - YEAR ENDED AUGUST 31, 1991(7) 1992 1993 1994 1995 1996(1)
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<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $11.52 $ 11.77 $ 12.44 $ 12.10 $ 11.44 $ 13.41
Net investment income (loss) -- 0.23(2) 0.30(2) 0.24(2) 0.13(2) 0.07
Net realized and unrealized gain (loss)
on investments 0.25 0.89 1.12 (0.61) 1.96 1.56
Total from investment operations 0.25 1.12 1.42 (0.37) 2.09 1.63
Less distributions:
Dividends from net investment income -- (0.15) (0.31) (0.29) (0.12) (0.07)
Distributions from net realized gain on
investments sold -- (0.30) (1.45) -- -- (0.15)
Total distributions -- (0.45) (1.76) (0.29) (0.12) (0.22)
Net asset value, end of period $11.77 $ 12.44 $ 12.10 $ 11.44 $ 13.41 $ 14.82
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 2.17(4) 9.67 12.64 (3.11) 18.41 12.18(4)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 7,690 29,826 65,010 114,025 114,723 125,071
Ratio of expenses to average net assets (%) 2.19(5) 2.07 2.19 2.06 2.03 1.87(5)
Ratio of net investment income (loss) to average
net assets (%) 1.46(5) 2.02 2.53 2.07 1.09 0.89(5)
Portfolio turnover rate (%) 70 119 107 195 99 36
Average brokerage commission rate(6) ($) N/A N/A N/A N/A N/A 0.0658
(1) Six months ended February 29, 1996. (Unaudited.)
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
(6) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(7) Class B shares commenced operations on August 22, 1991.
</TABLE>
GROWTH AND INCOME FUND 5
<PAGE>
INDEPENDENCE EQUITY FUND
REGISTRANT NAME: JOHN HANCOCK CAPITAL SERIES
TICKER SYMBOL CLASS A: JHDCX
CLASS B: JHIDX
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GOAL AND STRATEGY
[LOGO]The fund seeks above-average total return (capital appreciation plus
current income). To pursue this goal, the fund invests primarily in a
diversified stock portfolio whose risk profile is similar to that of the S&P 500
index. The fund does not invest exclusively in S&P 500 stocks.
In choosing stocks, the fund uses a proprietary computer model (NIXDEX) to
identify stocks that appear to be undervalued. The fund favors those undervalued
stocks that are selected by its model and that are believed to have improving
fundamentals. The fund may not invest more than 25% of assets in any one
industry.
PORTFOLIO SECURITIES
[LOGO]Under normal circumstances, the fund invests at least 65% of assets in
common stocks. It may also invest in warrants, preferred stocks and investment-
grade convertible debt securities.
The fund may invest in foreign securities in the form of American Depository
Receipts (ADRs) and U.S. dollar-denominated securities of foreign issuers
traded on U.S. exchanges. To a limited extent the fund also may invest in
certain higher-risk securities, and may engage in other investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[LOGO]As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements. Because the fund
follows an index-tracking strategy, it is likely to remain fully invested even
if the fund's managers anticipate a market downturn.
To the extent that it invests in foreign securities, the fund may be affected by
additional risks, such as information, natural event and political risks. These
risks are defined in "More about risk" starting on page 26. This section also
details other higher-risk securities and practices that the fund may utilize.
Please read "More about risk" carefully before you invest.
MANAGEMENT/SUBADVISER
[LOGO]The fund's investment decisions are made by a portfolio management team,
and no individual is primarily responsible for making them. Team members are
employees of Independence Investment Associates, Inc., the fund's subadviser and
a subsidiary of John Hancock Mutual Life Insurance Company.
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INVESTOR EXPENSES
[LOGO]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<TABLE>
<CAPTION>
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SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
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ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.00% 0.00%
12b-1 fee(4) 0.30% 1.00%
Other expenses 1.00% 1.00%
Total fund operating expenses (after limitation)(3) 1.30% 2.00%
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
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SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -------------------------------------------------------------------------------
Class A shares $63 $89 $118 $199
Class B shares
Assuming redemption
at end of period $70 $93 $128 $215
Assuming no redemption $20 $63 $108 $215
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses. Without this
limitation, management fee would be 0.75% for each class and total fund
operating expenses would be 2.05% for Class A and 2.75% for Class B.
Management fee includes a subadviser fee equal to 55% of the management
fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
6 INDEPENDENCE EQUITY FUND
<PAGE>
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FINANCIAL HIGHLIGHTS
<TABLE>
[LOGO]The figures below have been audited by the fund's independent auditors,
Price Waterhouse LLP.
<CAPTION>
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART 10.95(4) 13.58 6.60 16.98 29.12]
- --------------------------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED MAY 31, 1992(1) 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $10.00 $ 10.98 $ 12.16 $ 12.68 $14.41
Net investment income (loss) 0.15 0.22 0.28(2) 0.32(2) 0.20(2)
Net realized and unrealized gain (loss) on investments 0.94 1.25 0.52 1.77 3.88
Total from investment operations 1.09 1.47 0.80 2.09 4.08
Less distributions:
Dividends from net investment income (0.11) (0.23) (0.23) (0.28) (0.22)
Distributions from net realized gain on
investments sold -- (0.06) (0.05) (0.08) (0.29)
Total distributions (0.11) (0.29) (0.28) (0.36) (0.51)
Net asset value, end of period $10.98 $ 12.16 $ 12.68 $ 14.41 $17.98
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 10.95(4) 13.58 6.60 16.98 29.12
Total adjusted investment return at net asset
value(3,5) (%) 9.23(4) 11.40 6.15 16.94 28.47
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 2,622 12,488 66,612 101,418 14,878
Ratio of expenses to average net assets (%) 1.66(6) 0.76 0.70 0.70 0.94
Ratio of adjusted expenses to average net assets(7) (%) 3.38(6) 2.94 1.15 0.74 1.59
Ratio of net investment income (loss) to average
net assets (%) 1.77(6) 2.36 2.20 2.43 1.55
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 0.05(6) 0.18 1.75 2.39 0.90
Portfolio turnover rate (%) 53 53 43 71 157
Fee reduction per share ($) 0.15 0.20 0.06(2) 0.005(2) 0.08(2)
Average brokerage commission rate(8) ($) N/A N/A N/A N/A N/A
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CLASS B - YEAR ENDED MAY 31, 1996(1)
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $15.25
Net investment income (loss) 0.09 (2)
Net realized and unrealized gain (loss) on investments 2.71
Total from investment operations 2.80
Less distributions:
Dividends from net investment income (0.09)
Net asset value, end of period $17.96
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 18.46 (4)
Total adjusted investment return at net asset value(3,5) (%) 17.59 (4)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 15,125
Ratio of expenses to average net assets (%) 2.00 (6)
Ratio of adjusted expenses to average net assets(7) (%) 3.21 (6)
Ratio of net investment income (loss) to average net assets (%) 0.78 (6)
Ratio of adjusted net investment income (loss) to average net assets(7) (%) (0.43)(6)
Portfolio turnover rate (%) 157
Fee reduction per share ($) 0.13 (2)
Average brokerage commission rate(8) ($) N/A
- ----------
(1) Class A and Class B shares commenced operations on June 10, 1991 and
September 7, 1995, respectively.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
</TABLE>
INDEPENDENCE EQUITY FUND 7
<PAGE>
SOVEREIGN BALANCED FUND
REGISTRANT NAME: JOHN HANCOCK SOVEREIGN INVESTORS FUND, INC.
TICKER SYMBOL CLASS A: SVBAX CLASS B: SVBBX
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GOAL AND STRATEGY
[LOGO]The fund seeks current income, long-term growth of capital and income, and
preservation of capital. To pursue these goals, the fund allocates its assets
among a diversified mix of debt and equity securities. While the relative
weightings of debt and equity securities will shift over time, at least 25% of
assets will be invested in senior debt securities. The fund may not invest more
than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[LOGO]The fund may invest in any type or class of security, including (but not
limited to) stocks, warrants, U.S. Government and agency securities, corporate
debt securities, investment-grade short-term securities, foreign currencies and
options and futures contracts.
The fund's stock investments are exclusively in companies that have increased
their dividend payout in each of the last ten years. Up to 25% of the fund's
bond investments may be rated from BB/Ba to C (junk bonds).
The fund may invest up to 35% of assets in foreign securities; however, these
typically have not exceeded 5% of assets. To a limited extent the fund also may
invest in certain higher-risk securities, and may engage in other investme nt
practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[LOGO]As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements. To the extent that it
invests in certain securities, the fund may be affected by additional risks:
* junk bonds: above-average credit, market and other risks
* foreign securities: currency, information, natural event and political risks
* mortgage-backed securities: extension and prepayment risks
These risks are listed and defined in "More about risk" starting on page 26.
This section also details other higher-risk securities and practices that the
fund may utilize. Please read "More about risk" carefully before you invest.
MANAGEMENT/SUBADVISER
[LOGO]John F. Snyder III and Barry H. Evans lead the fund's portfolio management
team. Mr. Snyder, an investment manager since 1971, is an executive vice
president of Sovereign Asset Management Corporation, the fund's subadviser and a
subsidiary of John Hancock Funds. Mr. Evans, a senior vice president of the
adviser, has been in the investment business since joining John Hancock Funds in
1986.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
[LOGO]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<CAPTION>
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------
Management fee(3) 0.60% 0.60%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.39% 0.39%
Total fund operating expenses 1.29% 1.99%
</TABLE>
<TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- -------------------------------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $62 $89 $117 $198
Class B shares
Assuming redemption
at end of period $70 $92 $127 $214
Assuming no redemption $20 $62 $107 $214
- ----------
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Management fee includes a subadviser fee equal to 40% of the stock portion
of the management fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
8 SOVEREIGN BALANCED FUND
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[LOGO]The figures below have been audited by the fund's independent auditors,
Ernst & Young LLP.
<CAPTION>
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART 2.37(4) 11.38 (3.51) 24.23]
- ---------------------------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED DECEMBER 31, 1992(1) 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 10.19 $ 10.74 $ 9.84
Net investment income (loss) 0.04 0.46 0.50 0.44(2)
Net realized and unrealized gain (loss) on investments 0.20 0.68 (0.88) 1.91
Total from investment operations 0.24 1.14 (0.38) 2.35
Less distributions:
Dividends from net investment income (0.05) (0.45) (0.50) (0.44)
Distributions from net realized gain on investments sold -- (0.14) (0.02) --
Total distributions (0.05) (0.59) (0.52) (0.44)
Net asset value, end of period $ 10.19 $ 10.74 $ 9.84 $ 11.75
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 2.37(4) 11.38 (3.51) 24.23
Total adjusted investment return at net asset value(3,5) (%) 2.22(4) -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 5,796 62,218 61,952 69,811
Ratio of expenses to average net assets (%) 2.79(6) 1.45 1.23 1.27
Ratio of adjusted expenses to average net assets(7) (%) 2.94(6) -- -- --
Ratio of net investment income (loss) to average net assets (%) 3.93(6) 4.44 4.89 3.99
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.78(6) -- -- --
Portfolio turnover rate (%) 0 85 78 45
Fee reduction per share ($) 0.0016 N/A N/A N/A
Average brokerage commission rate(8) ($) N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
CLASS B - YEAR ENDED DECEMBER 31, 1992(1) 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 10.00 $ 10.20 $ 10.75 $ 9.84
Net investment income (loss) 0.03 0.37 0.43 0.36(2)
Net realized and unrealized gain (loss) on investments 0.20 0.70 (0.89) 1.90
Total from investment operations 0.23 1.07 (0.46) 2.26
Less distributions:
Dividends from net investment income (0.03) (0.38) (0.43) (0.36)
Distributions from net realized gain on investments sold -- (0.14) (0.02) --
Total distributions (0.03) (0.52) (0.45) (0.36)
Net asset value, end of period $ 10.20 $ 10.75 $9.84 $11.74
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 2.29(4) 10.63 (4.22) 23.30
Total adjusted investment return at net asset value(3,5) (%) 2.14(4) -- -- --
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 14,311 78,775 79,176 87,827
Ratio of expenses to average net assets (%) 3.51(6) 2.10 1.87 1.96
Ratio of adjusted expenses to average net assets(7) (%) 3.66(6) -- -- --
Ratio of net investment income (loss) to average net assets (%) 3.21(6) 4.01 4.25 3.31
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) 3.06(6) -- -- --
Portfolio turnover rate (%) 0 85 78 45
Fee reduction per share ($) 0.0012 -- -- --
Average brokerage commission rate(8) ($) N/A N/A N/A N/A
(1) Class A and Class B shares commenced operations on October 5, 1992. This
period is covered by the report of other independent auditors (not included
herein).
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
</TABLE>
SOVEREIGN BALANCED FUND 9
<PAGE>
SOVEREIGN INVESTORS FUND
REGISTRANT NAME: JOHN HANCOCK SOVEREIGN INVESTORS FUND, INC.
TICKER SYMBOL CLASS A: SOVIX CLASS B:SOVBX
- -------------------------------------------------------------------------------
GOAL AND STRATEGY
[LOGO]The fund seeks long-term growth of capital and of income without assuming
undue market risks. Under normal circumstances, the fund invests most of its
assets in a diversified selection of stocks, although it may respond to market
conditions by investing in other types of securities such as bonds or short-term
securities. The fund may not invest more than 25% of assets in any one industry.
Currently, the fund utilizes a "dividend performers" strategy in selecting
portfolio stocks, investing exclusively in companies that have increased their
dividend payout in each of the last ten years.
PORTFOLIO SECURITIES
[LOGO]The fund may invest in most types of securities, including:
* common and preferred stocks, warrants and convertible securities
* U.S. Government and agency debt securities, including mortgage-backed
securities
* corporate bonds, notes and other debt securities of any maturity
The fund's bond investments are primarily investment-grade, although up to 5% of
assets may be invested in junk bonds rated as low as C and their unrated
equivalents. To a limited extent the fund may invest in certain higher-risk
securities, and may engage in other investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[LOGO]As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements.
To the extent that the fund invests in higher-risk securities, it takes on
additional risks that could adversely affect its performance. Before you invest,
please read "More about risk" starting on page 26.
MANAGEMENT/SUBADVISER
[LOGO]John F. Snyder III and Barry H. Evans lead the fund's portfolio management
team. Mr. Snyder, an investment manager since 1971, is an executive vice
president of Sovereign Asset Management Corporation, the fund's subadviser and a
subsidiary of John Hancock Funds. Mr. Evans, a senior vice president of the
adviser, has been in the investment business since joining John Hancock Funds in
1986.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
Fund investors pay various expenses, either directly or indirectly. The figures
below show the expenses for the past year, adjusted to reflect any changes.
Future expenses may be greater or less.
<CAPTION>
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------
Management fee(3) 0.58% 0.58%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.28% 0.34%
Total fund operating expenses 1.16% 1.92%
</TABLE>
<TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- -------------------------------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $61 $85 $111 $184
Class B shares
Assuming redemption
at end of period $70 $90 $124 $205
Assuming no redemption $20 $60 $104 $205
- ----------
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Management fee includes a subadviser fee equal to 40% of the management
fee.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
10 SOVEREIGN INVESTORS FUND
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[LOGO]The figures below have been audited by the fund's independent auditors,
Ernst & Young LLP.
VOLATILITY, AS INDICATED BY CLASS A [BAR CHART
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) 21.70 0.28 11.23 23.76 4.38 30.48 7.23 5.71 (1.85) 29.15
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED DECEMBER 31, 1986(1,2) 1987(1) 1988(1) 1989(1) 1990(1) 1991(1,3) 1992(1) 1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $11.31 $12.36 $10.96 $11.19 $12.60 $ 11.94 $ 14.31 $ 14.78 $ 15.10 $ 14.24
Net investment income (loss) 0.58 0.53 0.57 0.59 0.58 0.54 0.47 0.44 0.46 0.40
Net realized and unrealized gain (loss)
on investments 1.89 (0.45) 0.65 2.01 (0.05) 3.03 0.54 0.39 (0.75) 3.71
Total from investment operations 2.47 0.08 1.22 2.60 0.53 3.57 1.01 0.83 (0.29) 4.11
Less distributions:
Dividends from net investment income (0.55) (0.58) (0.61) (0.61) (0.59) (0.53) (0.45) (0.42) (0.46) (0.40)
Distributions from net realized gain
on investments sold (0.87) (0.90) (0.38) (0.58) (0.60) (0.67) (0.09) (0.09) (0.11) (0.08)
Total distributions (1.42) (1.48) (0.99) (1.19) (1.19) (1.20) (0.54) (0.51) (0.57) (0.48)
Net asset value, end of period $12.36 $10.96 $11.19 $12.60 $11.94 $ 14.31 $ 14.78 $ 15.10 $ 14.24 $ 17.87
TOTAL INVESTMENT RETURN AT NET
ASSET VALUE(4) (%) 21.70 0.28 11.23 23.76 4.38 30.48 7.23 5.71 (1.85) 29.15
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(000s omitted) ($) 34,708 40,564 45,861 66,466 83,470 194,055 872,932 1,258,575 1,090,231 1,280,321
Ratio of expenses to average
net assets (%) 0.70 0.85 0.86 1.07 1.14 1.18 1.13 1.10 1.16 1.14
Ratio of net investment income
(loss) to average net assets (%) 4.28 3.96 4.97 4.80 4.77 4.01 3.32 2.94 3.13 2.45
Portfolio turnover rate (%) 34 59 35 40 55 67 30 46 45 46
Average brokerage commission rate(5) ($) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B - YEAR ENDED DECEMBER 31, 1994(6) 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 15.02 $ 14.24
Net investment income (loss) 0.38 (7) 0.27(7)
Net realized and unrealized gain (loss) on investment (0.69) 3.71
Total from investment operations (0.31) 3.98
Less distributions:
Dividends from net investment income (0.36) (0.28)
Distributions from net realized gain on investments sold (0.11) (0.08)
Total distributions (0.47) (0.36)
Net asset value, end of period $ 14.24 $ 17.86
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(4) (%) (2.04)(8) 28.16
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 128,069 257,781
Ratio of expenses to average net assets (%) 1.86(9) 1.90
Ratio of net investment income (loss) to average net assets (%) 2.57(9) 1.65
Portfolio turnover rate (%) 45 46
Average brokerage commission rate(5) ($) N/A N/A
- ----------
(1) These periods are covered by the report of other independent auditors (not
included herein).
(2) Restated for 2-for-1 stock split effective April 29, 1987.
(3) On October 23, 1991, John Hancock Advisers, Inc. became the investment
adviser of the fund.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(5) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
(6) Class B shares commenced operations on January 3, 1994.
(7) Based on the average of the shares outstanding at the end of each month.
(8) Not annualized.
(9) Annualized.
</TABLE>
SOVEREIGN INVESTORS FUND 11
<PAGE>
SPECIAL VALUE FUND
REGISTRANT NAME: JOHN HANCOCK CAPITAL SERIES TICKER SYMBOL CLASS A: SPVAX
CLASS B: SPVBX
- --------------------------------------------------------------------------------
GOAL AND STRATEGY
[GOAL GRAPHIC]The fund seeks capital appreciation, with income as a secondary
consideration. To pursue this goal, the fund invests primarily in stocks that
appear comparatively undervalued and are out of favor. The fund looks for
companies of any size whose earnings power or asset value does not appear to be
reflected in the current stock price, and whose stocks thus have potential for
appreciation. The fund also takes a "margin of safety" approach, seeking those
stocks that are believed to have limited downside risk. The fund may not invest
more than 25% of assets in any one industry.
PORTFOLIO SECURITIES
[PORTFOLIO GRAPHIC]The fund invests primarily in the common stocks of U.S.
companies. It may also invest in warrants, preferred stocks and convertible
securities.
The fund may invest up to 50% of assets in foreign securities (including
American Depository Receipts), and under normal circumstances may invest up to
10% of net assets in investment-grade debt securities. To a limited extent the
fund also may invest in certain higher-risk securities and may engage in other
investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[RISK GRAPHIC]As with any growth and income fund, the value of your investment
will fluctuate. Even comparatively undervalued stocks typically fall in price
during broad market declines. Small- and medium-sized company stocks, which may
comprise a portion of the fund's portfolio, tend to be more volatile than the
market as a whole.
To the extent that it invests in foreign securities, the fund may be affected by
additional risks, such as currency, information, natural event and political
risks. These risks are defined in "More about risk" starting on page 26. This
section also details other higher-risk securities and practices that the fund
may utilize. Please read "More about risk" carefully before you invest.
PORTFOLIO MANAGEMENT
[TORSO GRAPHIC]Timothy E. Keefe, leader of the fund's portfolio management team
since August 1996, is a senior vice president of the adviser. He joined John
Hancock Funds in July 1996 and has been in the investment business since 1987.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
[% GRAPHIC]Fund investors pay various expenses, either directly or indirectly.
The figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<CAPTION>
- ---------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- ---------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
<CAPTION>
- ---------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- ---------------------------------------------------------------
<S> <C> <C>
Management fee (after expense
limitation)(3,4) 0.00% 0.00%
12b-1 fee(5) 0.30% 1.00%
Other expenses (after limitation)(3) 0.71% 0.71%
Total fund operating expenses
(after limitation)(3) 1.01% 1.71%
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- -----------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $60 $81 $103 $167
Class B shares
Assuming redemption
at end of period $67 $84 $113 $183
Assuming no redemption $17 $54 $ 93 $183
This example is for comparison purposes only and is not a representation of
the fund's actual expenses and returns, either past or future.
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses (except for
12b-1 and transfer agent expenses). Without this limitation, management fees
would be 0.70% for each class, other expenses would be 0.90% for each class,
and total fund operating expenses would be 1.90% for Class A and 2.60% for
Class B.
(4) Includes a subadviser fee equal to 0.40% of the management fee.
(5) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
12 SPECIAL VALUE FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
[$ GRAPHIC]The figures below have been audited
by the fund's independent auditors,
Ernst & Young LLP.
VOLATILITY, AS INDICATED BY CLASS A [BAR GRAPH]
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) 7.81(4) 20.26
<CAPTION>
- --------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED DECEMBER 31, 1994(1) 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.50 $ 8.99
Net investment income (loss) 0.18(2) 0.21(2)
Net realized and unrealized gain (loss) on investments 0.48 1.60
Total from investment operations 0.66 1.81
Less distributions:
Dividends from net investment income (0.17) (0.20)
Distributions from net realized gain on investments sold -- (0.21)
Total distributions (0.17) (0.41)
Net asset value, end of period $ 8.99 $ 10.39
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 7.81(4) 20.26
Total adjusted investment return at net asset value(3,5) (%) 7.30(4) 19.39
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 4,420 12,845
Ratio of expenses to average net assets (%) 0.99(6) 0.98
Ratio of adjusted expenses to average net assets(7) (%) 4.98(6) 1.85
Ratio of net investment income (loss) to average net assets (%) 2.10(6) 2.04
Ratio of adjusted net investment income (loss) to average
net assets(7) (%) (1.89)(6) 1.17
Portfolio turnover rate (%) 0.3 9
Fee reduction per share ($) 0.34(2) 0.09(2)
Average brokerage commission rate(8) ($) N/A N/A
<CAPTION>
- --------------------------------------------------------------------------------------------
CLASS B - YEAR ENDED DECEMBER 31, 1994(1) 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.50 $ 9.00
Net investment income (loss) 0.13(2) 0.12(2)
Net realized and unrealized gain (loss) on investments 0.48 1.59
Total from investment operations 0.61 1.71
Less distributions:
Dividends from net investment income (0.11) (0.12)
Distributions from net realized gain on investments sold -- (0.21)
Total distributions (0.11) (0.33)
Net asset value, end of period $ 9.00 $ 10.38
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) 7.15(4) 19.11
Total adjusted investment return at net asset value(3,5) (%) 6.64(4) 18.24
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 3,296 16,994
Ratio of expenses to average net assets (%) 1.72(6) 1.73
Ratio of adjusted expenses to average net assets(7) (%) 5.71(6) 2.60
Ratio of net investment income (loss) to average net assets (%) 1.53(6) 1.21
Ratio of adjusted net investment income (loss) to average net
assets(7) (%) (2.46)(6) 0.34
Portfolio turnover rate (%) 0.3 9
Fee reduction per share ($) 0.34(2) 0.09(2)
Average brokerage commission rate(8) ($) N/A N/A
(1) Class A and Class B shares commenced operations on January 3, 1994.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration fee reductions
by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
</TABLE>
SPECIAL VALUE FUND 13
<PAGE>
UTILITIES FUND
REGISTRANT NAME: JOHN HANCOCK CAPITAL SERIES
TICKER SYMBOL CLASS A: JHUAX CLASS B: JHUBX
- -------------------------------------------------------------------------------
GOAL AND STRATEGY
[LOGO]The fund seeks current income and, to the extent consistent with this
goal, growth of income and long-term growth of capital. To pursue this goal, the
fund invests primarily in public utilities companies, such as those whose
principal business involves the generation, handling or sale of electricity,
natural gas, water, waste management services or non-broadcast
telecommunications services. Under normal circumstances, the fund will invest at
least 65% of assets in these companies. The fund may invest in other industries
if fund management believes it would help the fund meet its goal.
PORTFOLIO SECURITIES
[LOGO]The fund invests primarily in the common stocks of U.S. and foreign
companies. It may also invest in warrants, preferred stocks and convertible
securities.
Foreign securities (including American Depository Receipts) and investment-grade
debt securities may each comprise up to 25% of portfolio investments. To a
limited extent the fund also may invest in certain higher-risk securities, and
may engage in other investment practices.
For temporary defensive purposes, the fund may invest some or all of its assets
in investment-grade short-term securities.
RISK FACTORS
[LOGO]As with any growth and income fund, the value of your investment will
fluctuate in response to stock and bond market movements. Because the fund
concentrates on a narrow segment of the economy, its performance is largely
dependent on that segment's performance. Utilities stocks may be adversely
affected by numerous factors, including government regulation and deregulation,
environmental issues, competition and rising interest rates.
To the extent that it invests in foreign securities, the fund may be affected by
additional risks such as currency, information, natural event and political
risks. These risks are defined in "More about risk" starting on page 26. This
section also details other higher-risk securities and practices that the fund
may utilize. Please read "More about risk" carefully before you invest.
PORTFOLIO MANAGEMENT
[LOGO]Gregory K. Phelps, leader of the fund's portfolio management team since
April 1996, is a vice president of the adviser. He joined John Hancock Funds in
January 1995 and has been in the investment business since 1981.
- -------------------------------------------------------------------------------
INVESTOR EXPENSES
<TABLE>
[LOGO]Fund investors pay various expenses, either directly or indirectly. The
figures below show the expenses for the past year, adjusted to reflect any
changes. Future expenses may be greater or less.
<CAPTION>
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% none
Maximum sales charge imposed on
reinvested dividends none none
Maximum deferred sales charge none(1) 5.00%
Redemption fee(2) none none
Exchange fee none none
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
- -------------------------------------------------------------------------------
Management fee (after expense limitation)(3) 0.26% 0.26%
12b-1 fee(4) 0.30% 1.00%
Other expenses 0.49% 0.49%
Total fund operating expenses (after limitation)(3) 1.05% 1.75%
</TABLE>
<TABLE>
EXAMPLE The table below shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
<CAPTION>
- -------------------------------------------------------------------------------
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $60 $82 $105 $172
Class B shares
Assuming redemption
at end of period $68 $85 $115 $188
Assuming no redemption $18 $55 $ 95 $188
This example is for comparison purposes only and is not a representation of the
fund's actual expenses and returns, either past or future.
- ----------
(1) Except for investments of $1 million or more; see "How sales charges are
calculated."
(2) Does not include wire redemption fee (currently $4.00).
(3) Reflects the adviser's temporary agreement to limit expenses (except for
12b-1 and transfer agent expenses). Without this limitation, management
fees would be 0.70% for each class and total fund operating expenses would
be 1.49% for Class A and 2.19% for Class B.
(4) Because of the 12b-1 fee, long-term shareholders may indirectly pay more
than the equivalent of the maximum permitted front-end sales charge.
</TABLE>
14 UTILITIES FUND
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
[LOGO]The figures below have been audited by the fund's independent auditors,
Price Waterhouse LLP.
<CAPTION>
VOLATILITY, AS INDICATED BY CLASS A
YEAR-BY-YEAR TOTAL INVESTMENT RETURN (%) [BAR CHART 2.82(4) 7.10 14.44]
- ------------------------------------------------------------------------------------------------------
CLASS A - YEAR ENDED MAY 31, 1994(1) 1995 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.50 $ 8.26 $ 8.48
Net investment income (loss) 0.12 (2) 0.44(2) 0.41(2)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.36) 0.12 0.79
Total from investment operations (0.24) 0.56 1.20
Less distributions:
Dividends from net investment income -- (0.34) (0.41)
Distributions from net realized gains on investments sold -- -- (0.10)
Total distributions -- (0.34) (0.51)
Net asset value, end of period $ 8.26 $ 8.48 $ 9.17
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) (2.82)(4) 7.10 14.44
Total adjusted investment return at net asset value(3,5) (13.89)(4) 6.44 14.01
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 781 19,229 22,574
Ratio of expenses to average net assets (%) 1.00 (6) 1.04 1.04
Ratio of adjusted expenses to average net assets(7) (%) 12.07 (6) 1.70 1.47
Ratio of net investment income (loss) to average net assets (%) 4.53 (6) 5.39 4.49
Ratio of adjusted net investment income (loss) to average
net assets(7)(%) (6.54)(6) 4.73 4.06
Portfolio turnover rate (%) 6 98 124
Fee reduction per share ($) 0.27 (2) 0.05(2) 0.04(2)
Average brokerage commission rate(8) ($) N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
CLASS B - YEAR ENDED MAY 31, 1994(1) 1995 1996
- ------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $ 8.50 $ 8.25 $ 8.45
Net investment income (loss) 0.08 (2) 0.38(2) 0.34(2)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions (0.33) 0.12 0.79
Total from investment operations (0.25) 0.50 1.13
Less distributions:
Dividends from net investment income -- (0.30) (0.34)
Distributions from net realized gains on investments sold -- -- (0.10)
Total distributions -- (0.30) (0.44)
Net asset value, end of period $ 8.25 $ 8.45 $ 9.14
TOTAL INVESTMENT RETURN AT NET ASSET VALUE(3) (%) (2.94)(4) 6.31 13.68
Total adjusted investment return at net asset value(3,5) (14.01)(4) 5.65 13.25
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) ($) 445 38,344 47,759
Ratio of expenses to average net assets (%) 1.72 (6) 1.71 1.77
Ratio of adjusted expenses to average net assets(7) (%) 12.79 (6) 2.37 2.20
Ratio of net investment income (loss) to average net assets (%) 4.20 (6) 4.64 3.77
Ratio of adjusted net investment income (loss) to average
net assets(7)(%) (6.87)(6) 3.98 3.34
Portfolio turnover rate (%) 6 98 124
Fee reduction per share ($) 0.27 (2) 0.05(2) 0.04(2)
Average brokerage commission rate(8) ($) N/A N/A N/A
- ----------
(1) Class A and Class B shares commenced operations on February 1, 1994.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration
fee reductions by the adviser during the periods shown.
(6) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
</TABLE>
UTILITIES FUND 15
<PAGE>
YOUR ACCOUNT
- -------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
All John Hancock growth and income funds offer two classes of shares, Class A
and Class B. Each class has its own cost structure, allowing you to choose the
one that best meets your requirements. Your financial representative can help
you decide.
- -------------------------------------------------------------------------------
CLASS A CLASS B
- -------------------------------------------------------------------------------
* Front-end sales charges, as * No front-end sales charge;
described below. There are all your money goes to work
several ways to reduce these for you right away.
charges, also described below.
* Higher annual expenses than
* Lower annual expenses than Class A shares.
Class B shares.
* A deferred sales charge on
shares you sell within six years
of purchase, as described below.
* Automatic conversion to Class A
shares after eight years, thus
reducing future annual expenses.
For actual past expenses of Class A and B shares, see the fund-by-fund
information earlier in this prospectus.
Sovereign Investors Fund offers Class C shares, which have their own expense
structure and are available to financial institutions only. Call Investor
Services for more information (see the back cover of this prospectus).
- -------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
<TABLE>
CLASS A Sales charges are as follows:
<CAPTION>
- -------------------------------------------------------------------------------
CLASS A SALES CHARGES
- -------------------------------------------------------------------------------
AS A % OF AS A % OF YOUR
YOUR INVESTMENT OFFERING PRICE INVESTMENT
<S> <C> <C>
Up to $49,999 5.00% 5.26%
$50,000 - $99,999 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
</TABLE>
<TABLE>
INVESTMENTS OF $1 MILLION OR MORE Class A shares are available with no front-end
sales charge. However, there is a contingent deferred sales charge (CDSC) on any
shares sold within one year of purchase, as follows:
<CAPTION>
- -------------------------------------------------------------------------------
CDSC ON $1 MILLION + INVESTMENTS
- -------------------------------------------------------------------------------
YOUR INVESTMENT CDSC ON SHARES BEING SOLD
<S> <C>
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the last day of that month.
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
<TABLE>
CLASS B Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a contingent deferred sales charge
(CDSC) on shares you sell within six years of buying them. There is no CDSC on
shares acquired through reinvestment of dividends. The CDSC is based on the
original purchase cost or the current market value of the shares being sold,
whichever is less. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
<CAPTION>
- -------------------------------------------------------------------------------
Class B deferred charges
- -------------------------------------------------------------------------------
YEARS AFTER PURCHASE CDSC ON SHARES BEING SOLD
<S> <C>
1st year 5.00%
2nd year 4.00%
3rd or 4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6 years None
</TABLE>
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the first day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
16 YOUR ACCOUNT
<PAGE>
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
REDUCING YOUR CLASS A SALES CHARGES There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. The first three ways can be
combined in any manner.
* Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge.
* Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had been
purchased at once.
* Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Investor Services to add these options.
GROUP INVESTMENT PROGRAM Allows established groups of four or more investors to
invest as a group. Each investor has an individual account, but for sales charge
purposes the group's investments are lumped together, making the investors
potentially eligible for reduced sales charges. There is no charge, no
obligation to invest (although initial aggregate investments must be at least
$250) and you may terminate the program at any time.
To utilize: contact your financial representative or Investor Services to find
out how to qualify.
CDSC WAIVERS As long as Investor Services is notified at the time you sell, the
CDSC for either share class will generally be waived in the following cases:
* to make payments through certain systematic withdrawal plans
* to make certain distributions from a retirement plan
* because of shareholder death or disability
To utilize: If you think you may be eligible for a CDSC waiver, contact your
financial representative or Investor Services, or consult the SAI (see the back
cover of this prospectus).
REINSTATEMENT PRIVILEGE If you sell shares of a John Hancock fund, you may
invest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge. If you paid a CDSC when you sold
your shares, you will be credited with the amount of the CDSC. All accounts
involved must have the same registration.
To utilize: contact your financial representative or Investor Services.
WAIVERS FOR CERTAIN INVESTORS Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
* government entities that are prohibited from paying mutual fund sales charges
* financial institutions or common trust funds investing $1 million or more for
non-discretionary accounts
* selling brokers and their employees and sales representatives
* financial representatives utilizing fund shares in fee-based investment
products under agreement with John Hancock Funds
* fund trustees and other individuals who are affiliated with these or other
John Hancock funds
* individuals transferring assets to a John Hancock growth fund from an
employee benefit plan that has John Hancock funds
* members of an approved affinity group financial services program
* certain insurance company contract holders (one-year CDSC usually applies)
* participants in certain retirement plans with at least 100 members (one-year
CDSC applies)
To utilize: if you think you may be eligible for a sales charge waiver, contact
Investor Services or consult the SAI.
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
* non-retirement account: $1,000
* retirement account: $250
* group investments: $250
* Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest
at least $25 a month
3 Complete the appropriate parts of the account application, carefully
following the instructions. If you have questions, please contact your
financial representative or call Investor Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges section of the
application. By applying for privileges now, you can avoid the delay and
inconvenience of having to file an additional application if you want to add
privileges later.
5 Make your initial investment using the table on the next page. You can
initiate any purchase, exchange or sale of shares through your financial
representative.
YOUR ACCOUNT 17
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
BUYING SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
BY CHECK
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[GRAPHIC: a check]
* Make out a check for the investment amount, payable * Make out a check for the investment amount payable
to "John Hancock Investor Services Corporation." to "John Hancock Investor Services Corporation."
* Deliver the check and your completed application to * Fill out the detachable investment slip from an account
your financial representative, or mail them to Investor statement. If no slip is available, include a note specifying
Services (address on next page). the fund name, your share class, your account number
and the name(s) in which the account is registered.
* Deliver the check and your investment slip or note to
your financial representative, or mail them to Investor
Services (address on next page).
- ---------------------------------------------------------------------------------------------------------------------------------
BY EXCHANGE
- ---------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC: two arrows]
* Call your financial representative or Investor Services * Call Investor Services to request an exchange.
to request an exchange.
- ---------------------------------------------------------------------------------------------------------------------------------
BY WIRE
- ---------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC: an arrow]
* Deliver your completed application to your financial * Instruct your bank to wire the amount of your
representative, or mail it to Investor Services. investment to:
First Signature Bank & Trust
* Obtain your account number by calling your financial Account # 900000260
representative or Investor Services. Routing # 211475000
Specify the fund name, your share class, your account
* Instruct your bank to wire the amount of your number and the name(s) in which the account is
investment to: registered. Your bank may charge a fee to wire funds.
First Signature Bank & Trust
Account # 900000260
Routing # 211475000
Specify the fund name, your choice of share class, the
new account number and the name(s) in which the account
is registered. Your bank may charge a fee to wire funds.
- ---------------------------------------------------------------------------------------------------------------------------------
BY PHONE
- ---------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC: a telephone]
See "By wire" and "By exchange." * Verify that your bank or credit union is a member of
the Automated Clearing House (ACH) system.
* Complete the "Invest-By-Phone" and "Bank Information"
sections on your account application.
* Call Investor Services to verify that these features
are in place on your account.
* Tell the Investor Services representative the fund name,
your share class, your account number, the name(s) in
which the account is registered and the amount of your
investment.
</TABLE>
To open or add to an account using the Monthly Automatic Accumulation
Program, see "Additional investor services."
18 YOUR ACCOUNT
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------
SELLING SHARES
- ------------------------------------------------------------------------------------------------------
<CAPTION>
DESIGNED FOR TO SELL SOME OR ALL OF YOUR SHARES
- ------------------------------------------------------------------------------------------------------
BY LETTER
- ------------------------------------------------------------------------------------------------------
<S> <C>
[GRAPHIC: a business envelope]
* Accounts of any type. * Write a letter of instruction or complete a stock power
indicating the fund name, your share class, your account
* Sales of any amount. number, the name(s) in which the account is registered
and the dollar value or number of shares you wish to sell.
* Include all signatures and any additional documents
that may be required (see next page).
* Mail the materials to Investor Services.
* A check will be mailed to the name(s) and address in
which the account is registered, or otherwise according
to your letter of instruction.
- ------------------------------------------------------------------------------------------------------
BY PHONE
- ------------------------------------------------------------------------------------------------------
[GRAPHIC: a telephone]
* Most accounts. * For automated service 24 hours a day using
your touch-tone phone, call the EASI-Line at
* Sales of up to $100,000. 1-800-338-8080.
* To place your order with a representative at John Hancock
Funds, call Investor Services between 8 a.m. and 4 p.m. on
most business days.
- ------------------------------------------------------------------------------------------------------
BY WIRE OR ELECTRONIC FUNDS TRANSFER (EFT)
- ------------------------------------------------------------------------------------------------------
[GRAPHIC: an arrow]
* Requests by letter to sell any * Fill out the "Telephone Redemption" section of your
amount (accounts of any type). new account application.
* Requests by phone to sell up to * To verify that the telephone redemption privilege is in
$100,000 (accounts with telephone place on an account, or to request the forms to add it
redemption privileges). to an existing account, call Investor Services.
* Amounts of $1,000 or more will be wired on the next
business day. A $4 fee will be deducted from your
account.
* Amounts of less than $1,000 may be sent by EFT or by
check. Funds from EFT transactions are generally
available by the second business day. Your bank may
charge a fee for this service.
- ------------------------------------------------------------------------------------------------------
BY EXCHANGE
- ------------------------------------------------------------------------------------------------------
[GRAPHIC: two arrows]
* Accounts of any type. * Obtain a current prospectus for the fund into which
you are exchanging by calling your financial
* Sales of any amount. representative or Investor Services.
* Call Investor Services to request an exchange.
</TABLE>
- -------------------------------------------
ADDRESS
John Hancock Investor Services Corporation
P.O. Box 9116 Boston, MA 02205-9116
PHONE
1-800-225-5291
Or contact your financial representative
for instructions and assistance.
- -------------------------------------------
To sell shares through a systematic withdrawal plan,
see "Additional investor services."
YOUR ACCOUNT 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:
* your address of record has changed within the past 30 days
* you are selling more than $100,000 worth of shares
* you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
* a broker or securities dealer
* a federal savings, cooperative or other type of bank
* a savings and loan or other thrift institution
* a credit union
* a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
SELLER REQUIREMENTS FOR WRITTEN REQUESTS [GRAPHIC: Envelope]
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Owners of individual, joint, sole proprietorship, UGMA/UTMA * Letter of instruction.
(custodial accounts for minors) or general partner accounts.
* On the letter, the signatures and titles of all persons
authorized to sign for the account, exactly as the account
is registered.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Owners of corporate or association accounts. * Letter of instruction.
* Corporate resolution, certified within the past 90 days
* On the letter and the resolution, the signature of the
person(s) authorized to sign for the account.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Owners or trustees of trust accounts. * Letter of instruction.
* On the letter, the signature(s) of the trustee(s).
* If the names of all trustees are not registered on the account,
please also provide a copy of the trust document certified
within the past 60 days.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Joint tenancy shareholders whose co-tenants are deceased. * Letter of instruction signed by surviving tenant.
* Copy of death certificate.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Executors of shareholder estates. * Letter of instruction signed by executor.
* Copy of order appointing executor.
* Signature guarantee if applicable (see above).
- ----------------------------------------------------------------------------------------------------------------------------------
Administrators, conservators, guardians and other sellers or * Call 1-800-225-5291 for instructions.
account types not listed above.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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) by dividing a class's
net assets by the number of its shares outstanding.
BUY AND SELL PRICES When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
EXECUTION OF REQUESTS Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is accepted by
Investor Services.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider using EASI-Line or sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
TELEPHONE TRANSACTIONS For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, Investor Services will take
measures to verify the identity of the caller, such as asking for name, account
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, Investor Services is
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Also for your protection, telephone transactions are not
permitted on accounts whose names or addresses have changed within the past 30
days. Proceeds from telephone transactions can only be mailed to the address of
record.
EXCHANGES You may exchange shares of your John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
Class B shares will continue to age from the original date and will retain the
same CDSC rate as they had before the exchange, except that the rate will change
to that of the new fund if the new fund's rate is higher. A CDSC rate that has
increased will drop again with a future exchange into a fund with a lower rate.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties that, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. A fund may change or cancel its exchange
privilege at any time, upon 60 days' notice to its shareholders. A fund may also
refuse any exchange order.
CERTIFICATED SHARES Most shares are electronically recorded. If you wish to
have certificates for your shares, please write to Investor Services.
Certificated shares can only be sold by returning the certificates to Investor
Services, along with a letter of instruction or a stock power and a signature
guarantee.
SALES IN ADVANCE OF PURCHASE PAYMENTS When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten calendar days after
the purchase.
ELIGIBILITY BY STATE You may only invest in, or exchange into, fund shares
legally available in your state.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
ACCOUNT STATEMENTS In general, you will receive account statements as follows:
* after every transaction (except a dividend reinvestment) that affects your
account balance
* after any changes of name or address of the registered owner(s)
* in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS The funds generally distribute most or all of their net earnings in
the form of dividends.Income dividends are typically paid quarterly, and capital
gains dividends, if any, are typically paid annually.
YOUR ACCOUNT 21
<PAGE>
DIVIDEND REINVESTMENTS Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or
if you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends mailed to you. However, if the check is not deliverable, your
dividends will be reinvested.
TAXABILITY OF DIVIDENDS As long as a fund meets the requirements for being a
tax-qualified regulated investment company, which each fund has in the past
and intends to in the future, it pays no federal income tax on the earnings
it distributes to shareholders.
Consequently, dividends you receive from a fund, whether reinvested or taken as
cash, are generally considered taxable. Dividends from a fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction for a portion of certain dividends they receive.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
TAXABILITY OF TRANSACTIONS Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the
sale price of the shares you sell or exchange, you may have a gain or a loss
on the transaction. You are responsible for any tax liabilities generated by
your transactions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Investor Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and
you can terminate your program at any time. To establish:
* Complete the appropriate parts of your account application.
* If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Investor Services
Corporation." Deliver your check and application to your financial
representative or Investor Services.
SYSTEMATIC WITHDRAWAL PLAN This plan may be used for routine bill payment or
periodic withdrawals from your account. To establish:
* Make sure you have at least $5,000 worth of shares in your account.
* Make sure you are not planning to invest more money in this account (buying
shares during a period when you are also selling shares of the same fund is
not advantageous to you, because of sales charges).
* Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they are
all on the same payment schedule.
* Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
* Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Investor Services.
RETIREMENT PLANS John Hancock Funds offers a range of qualified retirement
plans, including IRAs, SEPs, SARSEPs, 401(k) plans, 403(b) plans (including
TSAs) and other pension and profit-sharing plans. Using these plans, you can
invest in any John Hancock fund with a low minimum investment of $250 or, for
some group plans, no minimum investment at all. To find out more, call
Investor Services at 1-800-225-5291.
22 YOUR ACCOUNT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
HOW THE FUNDS ARE ORGANIZED Each John Hancock growth and income fund is an
open-end management investment company or a series of such a company.
Each fund is supervised by a board of trustees or a board of directors, an
independent body that has ultimate responsibility for the fund's activities. The
board retains various companies to carry out the fund's operations, including
the investment adviser, custodian, transfer agent and others (see diagram). The
board has the right, and the obligation, to terminate the fund's relationship
with any of these companies and to retain a different company if the board
believes it is in the shareholders' best interests.
[A flow chart that contains 8 rectangular-shaped boxes and illustrates the
hierachy of how the funds are organized. Within the flowchart, there are 5
tiers. The tiers are connected by shaded lines.
Shareholders represent the first tier. There is a shaded vertical arrow on the
left-hand side of the page. The arrow has arrowheads on both ends and is
contained within two horizontal, shaded lines. This is meant to highlight tiers
two and three which focus on Distribution and Shareholder Services.
Financial Services Firms and their Representatives are shown on the second tier.
Principal Distributor and Transfer Agent are shown on the third tier.
A shaded vertical arrow on the right-hand side of the page denotes those
entities involved in the Asset Management. The arrow has arrowheads on both ends
and is contained within two horizontal, shaded lines. This fourth tier includes
the Subadvisor, Investment Advisor and the Custodian.
The fifth tier contains the Trustees/Directors.]
At a mutual fund's inception, the initial shareholder (typically the adviser)
appoints the fund's board. Thereafter, the board and the shareholders determine
the board's membership. The boards of the John Hancock growth and income funds
may include individuals who are affiliated with the investment adviser. However,
the majority of board members must be independent.
The funds do not hold annual shareholder meetings, but may hold special meetings
for such purposes as electing or removing board members, changing fundamental
policies, approving a management contract or approving a 12b-1 plan (12b-1 fees
are explained in "Sales compensation").
FUND DETAILS 23
<PAGE>
ACCOUNTING COMPENSATION The funds compensate the adviser for performing tax
and financial management services. Annual compensation for 1996 will not
exceed 0.02% of each fund's average net assets.
PORTFOLIO TRADES In placing portfolio trades, the adviser may use brokerage
firms that market the fund's shares or are affiliated with John Hancock
Mutual Life Insurance Company, but only when the adviser believes no other
firm offers a better combination of quality execution (i.e., timeliness and
completeness) and favorable price.
INVESTMENT GOALS Except for Growth and Income Fund, Sovereign Balanced Fund
and Utilities Fund, each fund's investment goal is fundamental and may only
be changed with shareholder approval.
DIVERSIFICATION All of the growth and income funds are diversified.
- --------------------------------------------------------------------------------
SALES COMPENSATION
As part of their business strategies, the funds, along with John Hancock
Funds, pay compensation to financial services firms that sell the funds'
shares. These firms typically pass along a portion of this compensation to
your financial representative.
Compensation payments originate from two sources: from sales charges and from
12b-1 fees that are paid out of the fund in assets ("12b-1" refers to the
federal securities regulation authorizing annual fees of this type). The 12b-1
fee rates vary by fund and by share class, according to Rule 12b-1 plans adopted
by the funds' respective boards. The sales charges and 12b-1 fees paid by
investors are detailed in the fund-by-fund information. The portions of these
expenses that are reallowed to financial services firms are shown on the next
page.
<TABLE>
Distribution fees may be used to pay for sales compensation to financial
services firms, marketing and overhead expenses and, for Class B shares,
interest expenses.
- --------------------------------------------------------------------------------
CLASS B UNREIMBURSED DISTRIBUTION EXPENSES(1)
- --------------------------------------------------------------------------------
<CAPTION>
UNREIMBURSED AS A % OF
FUND EXPENSES NET ASSETS
<S> <C> <C>
Growth and Income $3,463,988 3.15%
- --------------------------------------------------------------------------------
Independence Equity $ 227,836 4.18%
- --------------------------------------------------------------------------------
Sovereign Balanced $3,097,061 3.72%
- --------------------------------------------------------------------------------
Sovereign Investors $1,907,573 1.00%
- --------------------------------------------------------------------------------
Special Value $ 807,110 7.50%
- --------------------------------------------------------------------------------
Utilities $1,584,645 3.41%
- --------------------------------------------------------------------------------
(1) As of the most recent fiscal year end covered by each fund's financial
highlights. These expenses may be carried forward indefinitely.
</TABLE>
INITIAL COMPENSATION Whenever you make an investment in a fund or funds, the
financial services firm receives either a reallowance from the initial sales
charge or a commission, as described below. The firm also receives the first
year's service fee at this time.
ANNUAL COMPENSATION Beginning with the second year after an investment is made,
the financial services firm receives an annual service fee of 0.25% of its total
eligible net assets. This fee is paid quarterly in arrears. Firms affiliated
with John Hancock, which include Tucker Anthony, Sutro & Company and John
Hancock Distributors, may receive an additional fee of up to 0.05% a year of
their total eligible net assets.
To compensate for continuing services, John Hancock Funds will pay Merrill
Lynch, Pierce, Fenner & Smith, Inc. an annual fee equal to 0.15% of the value of
Class A shares held by its customers for more than four years.
24 FUND DETAILS
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM
SALES CHARGE REALLOWANCE FIRST YEAR MAXIMUM
PAID BY INVESTORS OR COMMISSION SERVICE FEE TOTAL COMPENSATION(1)
(% of offering price) (% of offering price) (% of net investment) (% of offering price)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Up to $49,999 5.00% 4.01% 0.25% 4.25%
- ---------------------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 4.50% 3.51% 0.25% 3.75%
- ---------------------------------------------------------------------------------------------------------------------------------
$100,000 - $249,999 3.50% 2.61% 0.25% 2.85%
- ---------------------------------------------------------------------------------------------------------------------------------
$250,000 - $499,999 2.50% 1.86% 0.25% 2.10%
- ---------------------------------------------------------------------------------------------------------------------------------
$500,000 - $999,999 2.00% 1.36% 0.25% 1.60%
- ---------------------------------------------------------------------------------------------------------------------------------
REGULAR INVESTMENTS OF
$1 MILLION OR MORE
- ---------------------------------------------------------------------------------------------------------------------------------
First $1M - $4,999,999 - 0.75% 0.25% 1.00%
- ---------------------------------------------------------------------------------------------------------------------------------
Next $1 - $5M above that - 0.25% 0.25% 0.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Next $1 and more above that - 0.00% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------------------------
WAIVER INVESTMENTS(2) - 0.00% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MAXIMUM
REALLOWANCE FIRST YEAR MAXIMUM
OR COMMISSION SERVICE FEE TOTAL COMPENSATION
(% of offering price) (% of net investment) (% of offering price)
- ---------------------------------------------------------------------------------------------------------------------------------
All amounts 3.75% 0.25% 4.00%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Reallowance/commission percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percenta ges if combined using simple addition.
(2) Refers to any investments made by municipalities, financial institutions,
trusts and affinity group members that take advantage of the sales charge
waivers described earlier in this prospectus.
</TABLE>
CDSC revenues collected by John Hancock Funds may be used to fund commission
payments when there is no initial sales charge.
FUND DETAILS 25
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of each fund's
risk profile in the fund-by-fund information.
The funds are permitted to utilize -- within limits established by the trustees
- -- certain other securities and investment practices that have higher risks and
opportunities associated with them. On the following page are brief descriptions
of these securities and practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the performance of a John
Hancock growth and income fund will be positive over any period of time.
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the asset being hedged (hedging is the use of one
investment to offset the effects of another investment).
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK The risk that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment.
EXTENSION RISK The risk that an unexpected rise in interest rates will
extend the life of a mortgage-backed security beyond the expected prepayment
time, typically reducing the security's value.
INFORMATION RISK The risk that key information about a security or market is
inaccurate or unavailable.
INTEREST RATE RISK The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates
typically causes a fall in values, while a fall in rates typically causes a
rise in values.
LEVERAGE RISK Associated with securities or practices (such as borrowing)
that multiply small index or market movements into large changes in value.
* 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.
* SPECULATIVE To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
LIQUIDITY RISK The risk that certain securities may be difficult or
impossible to sell at the time and the price that the seller would like.
MANAGEMENT RISK The risk that a strategy used by a fund's management may
fail to produce the intended result. Common to all mutual funds.
MARKET RISK The risk that the market value of a security may move up and
down, sometimes rapidly and unpredictably. Common to all stocks and bonds and
the mutual funds that invest in them.
NATURAL EVENT RISK The risk of losses attributable to natural disasters,
crop failures and similar events.
OPPORTUNITY RISK The risk of missing out on an investment opportunity
because the assets necessary to take advantage of it are tied up in less
advantageous investments.
POLITICAL RISK The risk of losses directly attributable to government or
political actions of any sort.
PREPAYMENT RISK The risk that unanticipated prepayments may occur, reducing
the value of mortgage-backed securities.
VALUATION RISK The risk that a fund has valued certain of its securities at
a higher price than it can sell them for.
<TABLE>
- --------------------------------------------------------------------------------
ANALYSIS OF FUNDS WITH 5% OR MORE IN JUNK BONDS(1)
- --------------------------------------------------------------------------------
<CAPTION>
QUALITY RATING
(S&P/MOODY'S)(2) SOVEREIGN BALANCED FUND
<S> <C> <C>
AAA/Aaa 16.0%
INVESTMENT- AA/Aa 2.2%
GRADE BONDS A/A 6.8%
BBB/Baa 5.7%
- --------------------------------------------------------------------------------
BB/Ba 3.5%
B/B 5.3%
JUNK BONDS CCC/Caa 0.0%
CC/Ca 0.0%
C/C 0.0%
% OF PORTFOLIO IN BONDS 39.5%
- -- Rated by S&P or Moody's.
(1) Data as of fund's last fiscal year end.
(2) In cases where the S&P and Moody's ratings for a given bond issue do not
agree, the issue has been counted in the higher category.
</TABLE>
26 FUND DETAILS
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
HIGHER-RISK SECURITIES AND PRACTICES
- ------------------------------------------------------------------------------------------------------------------------------------
This table shows each fund's investment limitations as a percentage of portfolio assets.
In each case the principal types of risk are listed (see previous page for definitions).
Numbers in this table show allowable usage only; for actual usage, consult the fund's
annual/semi-annual reports.
<CAPTION>
10 Percent of total assets (italic type)
10 Percent of net assets (roman type)
* No policy limitation on usage; fund may be using currently
@ Permitted, but has not typically been used GROWTH INDEPENDENCE SOVEREIGN SOVEREIGN SPECIAL
- - Not permitted AND INCOME EQUITY BALANCED INVESTORS VALUE UTILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT PRACTICES
BORROWING; REVERSE REPURCHASE AGREEMENTS The borrowing of money
from banks or through reverse repurchase agreements. Leverage,
credit risks. 33.3 33.3 33 - 33.3 33.3
REPURCHASE AGREEMENTS The purchase of a security that must later
be sold back to the issuer at the same price plus interest.
Credit risk. * * * * * *
SECURITIES LENDING The lending of securities to financial
institutions, which provide cash or government securities as
collateral. Credit risk. 33 33.3 33.3 33.3 33.3 33.3
SHORT SALES The selling of securities which have been borrowed
on the expectation that the market price will drop.
* Hedged. Hedged leverage, market, correlation, liquidity,
opportunity risks. - @ @ @ @ @
* Speculative. Speculative leverage, market, liquidity risks. - @ - - @ -
SHORT-TERM TRADING Selling a security soon after purchase. A
portfolio engaging in short-term trading will have higher
turnover and transaction expenses. Market risk. * * * * * *
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Market, opportunity,
leverage risks. * * * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
CONVENTIONAL SECURITIES
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities rated
below BBB/Baa are considered junk bonds. Credit, market,
interest rate, liquidity, valuation and information risks. 5 - 25 5 - -
FOREIGN SECURITIES Securities issued by foreign companies,
as well as American or European depository receipts, which
are dollar-denominated securities typically issued by American
or European banks and are based on ownership of securities issued
by foreign companies. Market, currency, information, natural
event, political risks. 35 * 35 - 50 25
RESTRICTED AND ILLIQUID SECURITIES Securities not traded on the
open market. May include illiquid Rule 144A securities. Liquidity,
valuation, market risks. 10 15 15 15 15 15
- ------------------------------------------------------------------------------------------------------------------------------------
LEVERAGED DERIVATIVE SECURITIES
FINANCIAL FUTURES AND OPTIONS; SECURITIES AND INDEX OPTIONS
Contracts involving the right or obligation to deliver or
receive assets or money depending on the performance of one
or more assets or an economic index.
* Futures and related options. Interest rate, currency, market,
hedged or speculative leverage, correlation, liquidity,
opportunity risks. * @ * - * @
* Options on securities and indices. Interest rate, currency,
market, hedged or speculative leverage, correlation, liquidity,
credit, opportunity risks. 10(1) @ 5(1) 5(1) 5(1) @
CURRENCY CONTRACTS Contracts involving the right or obligation to
buy or sell a given amount of foreign currency at a specified
price and future date.
* Hedged. Currency, hedged leverage, correlation, liquidity,
opportunity risks. * - * - * *
* Speculative. Currency, speculative leverage, liquidity risks. - - - - - -
(1)Applies to purchased options only.
</TABLE>
FUND DETAILS 27
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Two documents are available that offer further information on John Hancock
growth and income funds:
ANNUAL/SEMI-ANNUAL 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/semi-annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference (is legally a part of this prospectus).
To request a free copy of the current annual/semi-annual report or the SAI,
please write or call:
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, MA 02205-9116
Telephone: 1-800-225-5291
EASI-Line: 1-800-338-8080
TDD: 1-800-544-6713
[LOGO] JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 Huntington Avenue
Boston, Massachusetts 02199-7603
[Copyright] 1996 John Hancock Funds, Inc.
GINPN 8/96
[LOGO]
JOHN HANCOCK
FINANCIAL SERVICES
<PAGE>
JOHN HANCOCK
SOVEREIGN BALANCED FUND
CLASS A AND CLASS B SHARES
Statement of
Additional Information
August 30, 1996
This Statement of Additional Information provides information about John
Hancock Sovereign Balanced Fund (the "Fund") in addition to the information that
is contained in the Fund's Prospectus dated August 30, 1996 (the "Prospectus").
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-(800)-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund................................................. 3
Investment Objectives, Policies and
Risk Considerations................................................. 3
Certain Investment Practices............................................. 6
Investment Restrictions.................................................. 22
Ratings.................................................................. 27
Those Responsible for Management......................................... 27
Investment Advisory and Other Services................................... 36
Net Asset Value.......................................................... 38
Distribution Contracts................................................... 39
Initial Sales Charge on Class A Shares................................... 41
Deferred Sales Charge on Class B Shares.................................. 44
Additional Services and Programs for Class A and
Class B Shares......................................................... 48
Tax Status............................................................... 49
Description of Fund Shares............................................... 55
Calculation of Performance............................................... 56
<PAGE>
Brokerage Allocation..................................................... 59
Transfer Agent Services.................................................. 61
Custody of Portfolio..................................................... 61
Independent Auditors..................................................... 61
Appendix................................................................. A-1
Financial Statements..................................................... F-1
2
<PAGE>
ORGANIZATION OF THE FUND
John Hancock Sovereign Balanced Fund (the "Fund") is a separate diversified
portfolio of John Hancock Sovereign Investors Fund, Inc. (the "Company ), an
open- end investment management company.
The Company was organized as a corporation in the State of Delaware in 1936
and reincorporated in Maryland in 1990. The Board of Directors of the Company
has authority under the Company's charter to create and classify shares into
separate series and to classify and reclassify any series or portfolio of shares
into one or more classes without further action by shareholders. Pursuant
thereto, the Board of Directors has created the Fund and one additional series
of the Company known as John Hancock Sovereign Investors Fund ("Investors
Fund"). Additional series may be added in the future from time to time. As of
the date of this Statement of Additional Information, the Board of Directors
have authorized the issuance of two classes of shares of the Fund: Class A and
Class B. See "Description of Fund Shares."
The Fund is managed by John Hancock Advisers, Inc. (the "Adviser"). The
Adviser is an indirect wholly-owned subsidiary of the John Hancock Mutual Life
Company (the "Life Company"), chartered in 1862, with national headquarters at
John Hancock Place, Boston, Massachusetts.
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The Fund's investment objective and certain policies are set forth in the
Prospectus, which is incorporated herein by reference. The following information
augments the Prospectus. The investment objectives of the Fund are to provide
current income, long-term growth of capital and income and preservation of
capital without assuming what the Adviser believes to be undue market risks. At
times, however, because of market conditions, the Fund may invest primarily for
current income. There is no assurance that the Fund's objectives will be
achieved. The Fund will allocate its investments among different types and
classes of securities in accordance with the Adviser's appraisal of economic and
market conditions. Shareholder approval is not required to effect changes in the
Fund's investment objectives.
The Fund may invest in any type or class of security. At least 25% of the
value of the Fund's total assets will be invested in fixed income senior
securities. Fixed income securities may include both convertible and
non-convertible debt securities and preferred stock, and only that portion of
their value attributed to their fixed income characteristics, as determined by
the Adviser, can be used in applying the 25% test. The balance of the Fund's
total assets may consist of cash or (i) equity securities of established
companies, (ii) equity and fixed income securities of foreign corporations,
3
<PAGE>
governments or other issuers meeting applicable quality standards as determined
by the Fund's investment adviser, (iii) foreign currencies, (iv) securities that
are issued or guaranteed as to interest and principal by the U.S. Government,
its agencies, authorities or instrumentalities, (v) obligations and equity
securities of banks or savings and loan associations (including certificates of
deposit and bankers' acceptances); and (vi) to the extent available and
permissible, options and futures contracts on securities, currencies and
indices. Each of these investments is more fully described below. The Fund's
portfolio securities are selected mainly for their investment character based
upon generally accepted elements of intrinsic value, including industry
position, management, financial strength, earning power, marketability and
prospects for future growth. The distribution or mix of various types of
investments is based on general market conditions, the level of interest rates,
business and economic conditions and the availability of investments in the
equity or fixed income markets.
While there is considerable flexibility in the investment quality and type
of securities in which the Fund may invest, the Fund's investments in equity
securities are limited to securities of companies who have (or whose
predecessors have) been in business continuously for at least five years and
have total assets of at least $10 million. Equity securities, for purposes of
the Fund's investment policy, are limited to common stocks, preferred stocks,
investment grade convertible securities and warrants. In addition, the Fund
utilizes a strategy of investing only in those common stocks which have a record
of having increased their shareholder dividend in each of the preceding ten or
more years. This dividend performers strategy may be changed at any time.
At least 75% of the Fund's total investments in fixed income securities
(other than commercial paper) will be rated within the four highest grades as
determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or
Standard & Poor's Ratings Group ("S&P") (AAA, AA, A or BBB). Fixed income
securities rated Baa or BBB are considered medium grade obligations with
speculative characteristics; and adverse economic conditions or changing
circumstances may weaken their issuers' capacity to pay interest and repay
principal.
The Fund diversifies its investments among a number of industry groups
without concentrating more than 25% of its assets in any particular industry.
The Fund's investments are subject to market fluctuation and the risks inherent
in all securities. There is no assurance that the Fund will achieve its
investment objectives.
Assuming relatively stable economic conditions, it is anticipated that the
annual portfolio turnover rate will not usually exceed 100%. However, under
certain economic conditions, a higher turnover may be advisable to achieve the
Fund's objectives.
4
<PAGE>
Foreign Securities. The Fund may invest up to 35% of its total assets in
securities of foreign companies. The actual percentage 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.
Global Risks. Investments in foreign securities may involve risks not
present in domestic securities 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 government
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.
These risks may be intensified in the case of investments in emerging
markets or countries with limited or developing capital markets. These countries
are located in the Asia-Pacific region, Eastern Europe, Latin and South America
and Africa. Security prices in these markets can be significantly more volatile
than in more developed countries, reflecting the greater uncertainties of
investing in less established markets and economies. Political, legal and
economic structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. The Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries.
Securities of issuers located in these countries may have limited marketability
5
<PAGE>
and may be subject to more abrupt or erratic price movements.
CERTAIN INVESTMENT PRACTICES
Forward Commitment and When-Issued Securities. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers to
securities whose terms are available and for which a market exists, but which
have not been issued. The Fund will engage in when-issued transactions with
respect to securities purchased for its portfolio in order to obtain what is
considered to be an advantageous price and yield at the time of the transaction.
For when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions,
it relies on the seller to consummate the transaction. The failure of the issuer
or seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash or
securities will be segregated in a separate account to the extent that the total
value of the assets in the account declines below the amount of the when-issued
commitments. Alternatively, the Fund may enter into offsetting contracts for the
forward sale of other securities that it owns.
Repurchase Agreements. A repurchase agreement is a contract under which the
Fund would acquire a security for a relatively short period (usually not more
than 7 days) subject to the obligation of the seller to repurchase and the Fund
to resell such security at a fixed time and price (representing the Fund's cost
plus interest). The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System and with "primary dealers" in U.S.
Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom it enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving
as collateral for each repurchase agreement must be delivered to the Fund's
6
<PAGE>
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in or be
prevented from liquidating the underlying securities and could experience
losses, including the possible decline in the value of the underlying securities
during the period while the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and lack of access to income during this period, and
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. In addition, 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.
Financial Futures Contracts. The Fund may hedge its portfolio by selling
financial futures contracts as an offset against the effect of expected
increases in interest rates or declines in security or foreign currency values
and by purchasing such futures contracts as an offset against the effect of
expected declines in interest rates or increases in security or foreign currency
values. Although other techniques could be used to reduce the Fund's exposure to
interest rate, securities market and currency fluctuations, the Fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
financial futures contracts. The Fund will enter into financial futures
contracts for hedging, speculative and other non-hedging purposes.
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the Commodity Futures Trading
Commission ("CFTC"). Futures contracts are traded on these markets in a manner
that is similar to the way a stock is traded on a stock exchange. The boards of
trade, through their clearing corporations, guarantee that the contracts will be
7
<PAGE>
performed. It is expected that if new types of financial futures contracts are
developed and traded the Fund may engage in transactions in such contracts.
Although some financial futures contracts by their terms call for actual
delivery or acceptance of financial instruments, in most cases the contracts are
closed out prior to delivery by offsetting purchases or sales of matching
financial futures contracts (same exchange, underlying security or currency and
delivery month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than the Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. The Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing transaction. For a discussion of the Federal income tax considerations
of transactions in financial futures contracts, see the information under the
caption "Tax Status" below.
At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
Government securities, known as "initial margin." The margin required for a
financial futures contract is set by the board of trade or exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the financial futures contract which is returned to the Fund upon termination of
the contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. Each day, the
futures contract is valued at the official settlement price of the board of
trade or exchange on which it is traded. Subsequent payments, known as
"variation margin," to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. This process is known
as "mark to market." Variation margin does not represent a borrowing or lending
by the Fund but is instead a settlement between the Fund and the broker of the
amount one would owe the other if the financial futures contract expired. In
computing net asset value, the Fund will mark to the market its open financial
futures positions.
Successful hedging depends on the extent of correlation between the market
for the underlying securities and the futures contract market for those
securities or currency. There are several factors that will probably prevent
this correlation from being perfect, and even a correct forecast of general
interest rate, securities market or currency trends may not result in a
successful hedging transaction. There are significant differences between the
securities or currency markets and the futures markets which could create an
imperfect correlation between the markets and which could affect the success of
a given hedge. The degree of imperfection of correlation depends on
8
<PAGE>
circumstances such as: variations in speculative market demand for financial
futures and debt and equity securities, including technical influences in
futures trading and differences between the financial instruments being hedged
and the instruments underlying the standard financial futures contracts
available for trading in such respects as interest rate levels, maturities and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower-rated, and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected interest rate, securities market
or currency trends. The Fund will bear the risk that the price of the securities
being hedged will not move in complete correlation with the price of the futures
contracts used as a hedging instrument. Although the Adviser believes that the
use of financial futures contracts will benefit the Fund, an incorrect
prediction could result in a loss on both the hedged securities or currency in
the Fund's portfolio and the futures position so that the Fund's return might
have been better had hedging not been attempted. However, in the absence of the
ability to hedge, the Adviser might have taken portfolio actions in anticipation
of the same market movements with similar investment results but, presumably, at
greater transaction costs. The low margin deposits required for futures
transactions permit an extremely high degree of leverage. A relatively small
movement in the price of instruments underlying a futures contract may result in
losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount the price of a futures contract may vary either up or down
from the previous day's settlement price, at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
Finally, although the Fund engages in financial futures transactions only
on boards of trade or exchanges where there appears to be an adequate secondary
market, there is no assurance that a liquid market will exist for a particular
futures contract at any given time. The liquidity of the market depends on
participants closing out contracts rather than making or taking delivery. In the
event participants decide to make or take delivery, liquidity in the market
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could be reduced. In addition, the Fund could be prevented from executing a buy
or sell order at a specified price or closing out a position due to limits on
open positions or daily price fluctuation limits imposed by the exchanges or
boards of trade. If the Fund cannot close out a position, it will be required to
continue to meet margin requirements until the position is closed.
The Fund will not engage in a transaction in futures or options on futures
for speculative purposes if, immediately thereafter, the sum of initial margin
deposits and premiums required to establish speculative positions in futures
contracts and options on futures would exceed 5% of the Fund's total assets. The
risk of loss on futures transactions is potentially unlimited and may exceed the
amount invested or of the premium received.
Options on Financial Futures Contracts. The Fund may purchase and write
call and put options on financial futures contracts. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time during the period of the option. Upon exercise, the writer of the option
delivers the futures contract to the holder at the exercise price. The Fund
would be required to deposit with its custodian initial and variation margin
with respect to put and call options on futures contracts written by it.
Options on futures contracts involve risks similar to the risks relating to
transactions in financial futures contracts. Also, an option purchased by the
Fund may expire worthless, in which case the Fund would lose the premium paid
therefor.
Restrictions on Use of Futures Transactions and Options. The Fund intends
to comply with CFTC Regulation 4.5 and thereby avoid the status of "commodity
pool operator."
When futures contracts or options thereon are purchased to protect against
a price increase in securities intended to be purchased later, it is anticipated
that at least 75% of such intended purchases will be completed. As an
alternative to this test of bona fine hedging intent, a CFTC regulation permits
the Fund to elect to comply with a different test, under which the Fund will not
enter into a futures contract or purchase an option thereon for non-hedging
purposes if immediately thereafter the initial margin deposits and premiums
required to establish non-hedging positions in futures contracts and options on
futures would exceed 5% of the Fund's total assets.
When the Fund purchases a futures contract, writes a put option thereon or
purchases a call option thereon, an amount of cash or high grade liquid debt
securities (i.e., securities rated in one of the top three ratings categories by
Moody's or S&P will be deposited in a segregated account with the Fund's
custodian which is equal to the underlying value of the futures contract reduced
by the amount of initial and variation margin held in the account of its broker.
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Options Transactions. The Fund may write listed and over-the-counter
covered call options and covered put options on securities and foreign currency
in order to earn additional income from the premiums received. In addition, the
Fund may purchase listed and over-the-counter call and put options. The extent
to which covered options will be used by the Fund will depend upon market
conditions and the availability of alternative strategies. The Fund may purchase
listed and over-the-counter call and put options on securities and currency with
an aggregate value not exceeding 5% of the Fund's total assets.
The Fund will write listed and over-the-counter call options only if they
are "covered," which means that the Fund owns or has the immediate right to
acquire the securities underlying the options without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio. A call option written by the Fund will also be "covered" if the Fund
holds on a share-for-share basis a covering call on the same securities where
(i) the exercise price of the covering call held is equal to or less than the
exercise price of the call written or, if the exercise price of the covering
call is greater than that of the call written, the difference is maintained by
the Fund in cash, U.S. Treasury bills or high grade liquid debt obligations in a
segregated account with the Fund's custodian, and (ii) the covering call expires
at the same time as or later than the call written. If a covered call option is
not exercised, the Fund would keep both the option premium and the underlying
security. If the covered call option written by the Fund is exercised and the
exercise price, less the transaction costs, exceeds the cost of the underlying
security, the Fund would realize a gain in addition to the amount of the option
premium it received. If the exercise price, less transaction costs, is less than
the cost of the underlying security, the Fund's loss would be reduced by the
amount of the option premium.
As writer of a covered put option, the Fund will write a put option only
with respect to securities it intends to acquire for the Fund's portfolio and
will maintain in a segregated account with its custodian bank cash, U.S.
Government securities, or high- grade liquid debt securities with a value equal
to the price at which the underlying security may be sold to the Fund in the
event the put option is exercised by the purchaser. The Fund can also write a
"covered" put option by purchasing on a share- for-share basis a put on the same
security as the put written by the Fund if the exercise price of the covering
put held is equal to or greater than the exercise price of the put written and
the covering put expires at the same time or later than the put written.
In writing listed and over-the-counter covered put options on securities,
the Fund would earn income from the premiums received. If a covered put option
is not exercised, the Fund would keep the option premium and the assets
maintained to cover the option. If the option is exercised and the exercise
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<PAGE>
price, including transaction costs, exceeds the market price of the underlying
security, the Fund would realize a loss, but the amount of the loss would be
reduced by the amount of the option premium.
If the writer of an exchange-traded option wishes to terminate its
obligation prior to its exercise, it may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that the Fund's
position will be offset by the Options Clearing Corporation. The Fund may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. There is no guarantee that a closing purchase transaction can be
effected. Although the Fund will generally write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular option or at any particular time, and for some options no secondary
market on an exchange may exist.
In the case of a written call option, effecting a closing transaction will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In the case of a
written put option, it will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option.
The Fund will realize a loss from a closing transaction if the cost of the
closing transaction is more than the premium received for writing the option.
However, because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Fund.
Over-the-Counter Options. The Fund may engage in options transactions on
exchanges and in the over-the-counter markets. In general, exchange-traded
options are third-party contracts (i.e., performance of the parties' obligations
is guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. Over-the-counter ("OTC") transactions are two-party
contracts with price and terms negotiated by the buyer and seller. The Fund will
acquire only those OTC options for which management believes the Fund can
receive on each business day at least two separate bids or offers (one of which
will be from an entity other than a party to the option) or those OTC options
valued by an independent pricing service. The Fund will write and purchase OTC
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<PAGE>
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or their affiliates which have capital of at least
$50 million or whose obligations are guaranteed by an entity having capital of
at least $50 million. The SEC has taken the position that OTC options are
illiquid securities subject to the restriction that illiquid securities are
limited to not more than 15% of the Fund's assets. The SEC, however, has a
partial exemption from the above restrictions on transactions in OTC options.
The SEC allows the Fund to exclude from 15% limitation on illiquid securities a
portion of the value of the OTC options written by the Fund, provided that
certain conditions are met. First, the other party to the OTC options has to be
a primary U.S. Government securities dealer designated as such by the Federal
Reserve Bank. Second, the Fund would have an absolute contractual right to
repurchase the OTC options at a formula price. If the above conditions are met,
a Fund must treat as illiquid only that portion of the OTC option's value (and
the value of its underlying securities) which is equal to the formula price for
repurchasing the OTC option, less the OTC option's intrinsic value.
While transactions in options may reduce certain risks, they may entail
other risks. Certain risks arise due to the imperfect correlations between
movements in the price of options contracts and movements in the prices of the
securities or currency underlying the contracts.
The Fund's ability to use options to hedge or earn income successfully will
depend on the Adviser's ability to predict accurately the future direction of
interest rate changes, currency rate fluctuations and other market factors. The
success of hedging transactions will also depend on the degree of correlation
between the options markets and the securities markets. The risk of loss on
written options transactions is potentially unlimited and may exceed the amount
invested or of the premium received. In addition, the Fund could be prevented
from opening, or realizing the benefits of closing out, an options position
because of position limits or limits on daily price fluctuations imposed by an
exchange.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the loaned securities. As a result, the Fund may
incur a loss or in the event of the borrower's bankruptcy may be delayed in or
prevented from liquidating the collateral. It is a fundamental policy of the
Fund not to lend portfolio securities having a total value in excess of 33 1/3%
of its total assets.
Restricted Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933 ("1933
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<PAGE>
Act"), including securities offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act. However, the Fund will not invest more than
15% of its assets in illiquid investments, which include repurchase agreements
maturing in more than seven days, securities that are not readily marketable and
restricted securities. However, if the Board of Trustees determines, based upon
a continuing review of the trading markets for specific Rule 144A securities,
that they are liquid, then such securities may be purchased without regard to
the 15% limit. The Trustees may adopt guidelines and delegate to the Adviser the
daily function of determining the monitoring and liquidity of restricted
securities. The Trustees, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Trustees will carefully
monitor the Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in the Fund if qualified institutional buyers become for a time
uninterested in purchasing these restricted securities.
The Fund may acquire other restricted securities including securities for
which market quotations are not readily available. These securities may be sold
only in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933.
Where registration is required, the Fund may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair market value as determined in good faith by the Fund's
Trustees. If through the appreciation of restricted securities or the
depreciation of unrestricted securities, the Fund should be in a position where
more than 15% of the value of its assets is invested in illiquid securities
(including repurchase agreements which mature in more than seven days and
options which are traded over-the-counter and their underlying securities), the
Fund will bring its holdings of illiquid securities below the 15% limitation.
Government Securities. Certain U.S. Government securities, including U.S.
Treasury bills, notes and bonds, and Government National Mortgage Association
certificates ("Ginnie Maes"), are supported by the full faith and credit of the
United States. Certain other U.S. Government securities, issued or guaranteed by
Federal agencies or government sponsored enterprises, are not supported by the
full faith and credit of the United States, but may be supported by the right of
the issuer to borrow from the U.S. Treasury. These securities include
obligations of the Federal Home Loan Mortgage Corporation ("Freddie Macs"), and
obligations supported by the credit of the instrumentality, such as Federal
National Mortgage Association Bonds ("Fannie Maes"). No assurance can be given
that the U.S. Government will provide financial support to such Federal
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<PAGE>
agencies, authorities, instrumentalities and government sponsored enterprises in
the future.
Ginnie Maes, Freddie Macs and Fannie Maes are mortgage-backed securities
which provide monthly payments which are, in effect, a "pass-through" of the
monthly interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans. Collateralized mortgage
obligations ("CMOs") in which the Fund may invest are securities issued by a
U.S. Government instrumentality that are collateralized by a portfolio of
mortgages or mortgage-backed securities. Mortgage-backed securities may be less
effective than traditional debt obligations of similar maturity at maintaining
yields during periods of declining interest rates. The Fund will not invest more
than 50% of its assets in mortgage-backed securities.
Forward Foreign Currency Transactions. The foreign currency transactions of
the Fund may be conducted on a spot (i.e., cash) basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. The
Fund may also enter into forward foreign currency contracts involving currencies
of the different countries in which it will invest as a hedge against possible
variations in the foreign exchange rate between these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
The Fund's transactions in forward foreign currency contracts will be limited to
hedging either specified transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency contracts with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities 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 purchases a forward contract, 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 securities in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
be equal to the amount of the Fund's commitment with respect to such contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
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not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the Fund of engaging in foreign currency transactions varies
with such factors as the currency involved, the length of the contract period
and the market conditions then prevailing. Since transactions in foreign
currency are usually conducted on a principal basis, no fees or commissions are
involved.
Lower Rated High Yield Securities. Up to 25% of the Fund's total
investments in fixed income securities may be in high yielding, fixed income
securities rated as low as C by Moody's or S&P. These lower rated securities are
speculative to a high degree and often have very poor prospects of attaining
real investment standing. Lower rated securities are generally referred to as
junk bonds. Ratings are based largely on the historical financial condition of
the issuer. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate.
The values of lower-rated securities generally fluctuate more than those of
high- rated securities. In addition, the lower rating reflects a greater
possibility of an adverse change in financial condition affecting the ability of
the issuer to make payments of interest and principal. The Adviser seeks to
minimize these risks through diversification, investment analysis and attention
to current developments in interest rates and economic conditions. 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 exclusively in securities in the higher rated
categories. See the Appendix attached to this Statement of Additional
Information which describes the characteristics of the securities in the various
ratings categories. The Fund may invest in unrated securities which, in the
opinion of the Adviser, are of comparable quality and offer yields and risks
which are comparable to those of rated securities.
The Fund may invest in pay-in-kind (PIK) securities, which pay interest in
either cash or additional securities, at the issuer's option, for a specified
period. The Fund also may invest in zero coupon bonds, which have a determined
interest rate, but payment of the interest is deferred until maturity of the
bonds. Both kinds of bonds may be more speculative and subject to greater
fluctuations in value than securities which pay interest periodically and in
cash, due to changes in interest rates.
The market value of high yield 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.
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Similarly, when such yields increase, the market value of a portfolio already
invested at lower yields can be expected to decline. The Fund's portfolio may
include debt securities which sell at substantial discounts from par. These
securities are low coupon bonds which, during periods of high interest rates,
because of their lower acquisition cost tend to sell on a yield basis
approximating current interest rates.
Risk Factors Associated with Lower Rated Securities. The Fund is not
obligated to dispose of securities whose issuers subsequently are in default or
which are downgraded below the above-stated ratings. The credit ratings of the
rating agencies, such as those ratings described here, may not be changed by the
rating agencies in a timely fashion to reflect subsequent economic events. The
credit ratings of securities do not reflect an evaluation of market risk. Debt
obligations rated in the lower ratings categories, or which are unrated, involve
greater price volatility and risk of principal and income loss. The market price
and liquidity of lower rated fixed income securities generally respond more to
short-term corporate and market developments than do those of higher rated
securities, because these developments are perceived to have a more direct
relationship to the ability of an issuer of lower rated securities to meet its
ongoing debt obligations. Increasing rate note securities are typically
refinanced by the issuers within a short period of time.
Reduced volume and liquidity in the high yield market or the reduced
availability of market quotations will make it more difficult to dispose of the
securities and to value accurately the Fund's assets. The reduced availability
of reliable, objective data may increase the Fund's reliance on management's
judgment in valuing high yield securities. In addition, the Fund's investments
in lower-rated 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.
Investments in corporate fixed income securities may be in bonds,
convertible debentures and convertible or non-convertible preferred stock. The
value of convertible securities, while influenced by the level of interest
rates, is also affected by the changing value of the underlying common stock
into which the securities are convertible. The value of fixed income securities
varies inversely with interest rates.
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
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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 which are rated in the highest rating category by a
nationally recognized statistical rating organization (e.g., Standard & Poor's
Corporation or Moody's Investors Services, Inc.) or if not so rated, of
equivalent investment quality in the opinion of the Adviser.
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.
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. 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
18
<PAGE>
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.
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, Floor and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
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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.
Participation Interests. Participation interests, which may take the form
of interests in, or assignments of certain loans, are acquired from banks who
have made these loans or are members of a lending syndicate. The Fund's
investments in participation interests are subject to its 15% limitation on
investments in liquid securities. The Fund may purchase only those participation
interest that mature in 60 days or less, or, if maturing in more than 60 days,
that have a floating rate that is automatically adjusted at least once every 60
days.
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 also invest in so-called "Brady Bonds." The Fund
20
<PAGE>
may invest in Brady Bonds and other sovereign debt securities of countries that
have restructured or are in the process of restructuring sovereign debt pursuant
to the Brady Plan. Brady Bonds are debt securities issued under the framework of
the Brady Plan, an initiative announced 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 "IF"). The Brady Plan framework,
as it has developed, contemplates the exchange of commercial bank debt for newly
issued bonds (Brady Bonds). The World Bank and/or the IF support the
restructuring by providing 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
with the World Bank and/or the IF, debtor nations have been required to agree to
the implementation of certain domestic monetary and fiscal reforms. Such 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 seek to promote the debtor
country's ability to service its external obligations and promote its economic
growth and development. Investors should recognize that 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, 1996, 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
21
<PAGE>
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 IF, 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.
Short Term Trading and Portfolio Turnover. The Fund may attempt to maximize
current income through short-term portfolio trading. This will involve selling
portfolio instruments and purchasing different instruments to take advantage of
yield disparities in different segments of the market for Government
Obligations. Short-term trading may have the effect of increasing portfolio
turnover rate. A high rate of portfolio turnover (100% or greater) involves
corresponding higher transaction expenses and may make it more difficult for the
Fund to qualify as a regulated investment company for federal income tax
purposes.
Defensive Investments. When the Adviser believes unfavorable investment
conditions exist requiring the Fund to assume a temporary defensive investment
posture, the Fund may hold cash or invest all or a portion of its assets in
short-term instruments, including: short-term U.S. Government securities and
repurchase agreements in respect thereof; bank certificates of deposit, bankers'
acceptances, time deposits and letters of credit; and commercial paper
(including so called Section 4(2) paper) rated at least A-2 by S&P or P-2 by
Moody's or if unrated, considered by the Adviser to be of comparable quality.
The Fund's temporary defensive investments may also include: debt obligations of
U.S. companies rated at least A by S&P or Moody's or, if unrated, of comparable
quality in the opinion of the Adviser; commercial paper and corporate debt
obligations not satisfying the above credit standards if they are (a) subject to
demand features or puts or (b) guaranteed as to principal and interest by a
domestic or foreign bank having total assets in excess of $1 billion, by a
company whose commercial paper may be purchased by the Fund, or by a foreign
government having an existing debt security rated at least A by S&P or Moody's;
and other short-term investments which the Adviser determines present minimal
credit risks and which are of "high quality" as determined by any major rating
service or, in the case of an instrument that is not rated, of comparable
quality as determined by the Adviser.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions
will not be changed without approval of a majority of the Fund's outstanding
22
<PAGE>
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means approval by the lesser of (1) the holders of 67%
or more of the Fund's shares represented at a meeting if at least 50% of the
Fund's outstanding shares are present in person or by proxy at the meeting or
(2) the holders of more than 50% of the Fund's outstanding shares.
The Fund observes the fundamental restrictions listed in items (1) through (9)
below.
The Fund may not:
(1) Issue senior securities, except as permitted by paragraph (2) below.
For purposes of this restriction, the issuance of shares 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 borrowings 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 the
assets subject to such pledging, mortgaging or hypothecation do not
exceed 33% 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, including real
estate limited partnerships, 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 for collateralized loans of portfolio securities in
accordance with the Fund's investment policies. The Fund does not, for
this purpose, consider the purchase of all or a portion of an issue of
bonds, bank certificates of deposit, bankers' acceptances, debentures
or other securities, whether or not the purchase is made upon the
original issuance of the securities, to be the making of a loan.
23
<PAGE>
(7) Buy or sell commodities, commodity contracts, puts, calls or
combinations thereof, except futures contracts and options on
securities, securities indices, currency and other financial
instruments, options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, interest rate or
currency swaps, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment
policies.
(8) Purchase the securities of issuers conducting their principal 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, with respect to 75% of the Fund's
total assets,
(i) more than 5% of the Fund's total assets taken at market value
would be invested in the securities of such issuer, or,
(ii) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the
Fund.
In connection with the lending of portfolio securities under item (6)
above, such loans must at all times be fully collateralized and the Fund's
custodian must take possession of the collateral either physically or in book
entry form. Securities used as collateral must be marked to market daily.
Nonfundamental Investment Restrictions. The following investment
restrictions are designated as nonfundamental and may be changed by the Board of
Directors without shareholders' approval.
The Fund may not:
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The `bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser to save commissions or to average prices
among them is not deemed to result in a joint securities trading
account.
(b) Purchase securities on margin (except that it may obtain such
short-term credits as may be necessary for the clearance of
24
<PAGE>
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, without the payment of any additional
consideration, securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is made
upon the same conditions.
(c) Purchase securities of an issuer if, to the Fund's knowledge, one or
more of the Directors or officers of the Company or the directors or
officers of the Adviser individually owns beneficially more than 0.5%
and together own beneficially more than 5% of the securities of such
issuer.
(d) Purchase a security if, as a result, (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
Directors/Directors, purchase securities of other investment companies
within the John Hancock Group of Funds. The Fund may not purchase the
shares of any closed-end investment company except in the open market
where no commission or profit to a sponsor or dealer results from the
purchase, other than customary brokerage fees.
(e) Purchase securities of any issuer which, together with any
predecessor, has a record of less than three years' continuous
operations if such purchase would cause investments of the Fund in all
such issuers to exceed 5% of the value of the total assets of the
Fund.
(f) Invest for the purpose of exercising control over or management of any
company.
(g) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Fund's total assets would be invested
in warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange or more than 5% of the value of the total
assets of the Fund would be invested in warrants generally, whether or
25
<PAGE>
not so listed. For these purposes, warrants are to be valued at the
lesser of cost or market, but warrants acquired by the Fund in units
with or attached to debt securities shall be deemed to be without
value.
(h) Purchase any security, including any repurchase agreement maturing in
more than 7 days, which is not readily marketable, if more than 15% of
the net assets of the Fund, taken at market value, would be invested
in such securities. (The staff of the Securities and Exchange
Commission may consider over-the- counter options to be illiquid
securities subject to the 15% limit.)
(i) Purchase interests in oil, gas or other mineral leases or exploration
programs or leases; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or
transmission of oil, gas or other minerals.
(j) Purchase a security if, as a result, more than 15% of the Fund's
assets would be invested in securities which are restricted as to
disposition; however, this policy will not restrict the acquisition of
restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act of 1933 or to foreign
securities purchased in accordance with Regulation S under the
Securities Act of 1933.
In order to permit the sale of shares of the Fund in certain states, the
Board of Directors may, in its sole discretion, adopt restrictions or investment
policies more restrictive than those described above. Should the Board of
Directors determine that any such more restrictive policy is no longer in the
best interest of the Fund and its shareholders, the Fund may cease offering
shares in the state involved and the Board may revoke such restrictive policy.
Moreover, if the states involved shall no longer require any such restrictive
policy, the Board of Directors may, at its sole discretion, revoke such policy.
The Fund has agreed with state securities administrators that it will not
purchase the following securities:
The Fund agrees that, in accordance with the Ohio Securities Division and
until such regulations are no longer required, it will comply with rule
1301:6-3-09(E)(9) by not investing in the securities of other open-end and
closed-end investment companies except by purchase in the open market where no
commission or profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or except when the purchase is part of a plan
of merger, consolidation, reorganization or acquisition.
If a percentage restriction on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value of the Fund's assets will not be
considered a violation of the restriction.
26
1
<PAGE>
RATINGS
As described in this Statement of Additional Information, at least 75% of
the Fund's investments in fixed income securities will be comprised of
securities in the four highest applicable ratings of S&P and Moody's or their
equivalent or unrated securities deemed of comparable quality by the Adviser.
See the Appendix attached to this Statement of Additional Information, which
describes the characteristics of the securities in the various categories.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Board of Directors who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Board of Directors. Several of the officers
and Directors of the Company are also officers or directors of the Adviser or
officers or directors of John Hancock Funds, Inc. ("John Hancock Funds") the
Fund's principal distributor.
The following table sets forth the principal occupation or employment of
the Directors of the Company and principal officers of the Company during the
past five years:
27
<PAGE>
<TABLE>
<CAPTION>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
<S> <C> <C>
*Edward J. Boudreau, Jr. Chairman (1,2) Chairman and Chief Executive
October, 1944 Officer, the Adviser and The
Berkeley Financial Group ("The
Berkeley Group"); Chairman NM
Capital Management, Inc. ("NM
Capital"); John Hancock Advisers
International Limited ("Advisers
International"; John Hancock Funds;
John Hancock Investor Services
Corporation ("Investor Services")
and Sovereign Asset Management
Corporation ("SAMCorp");
(hereinafter the Adviser, The
Berkeley Group, NM Capital,
Advisers International, John
Hancock Funds, Investor Services
and SAMCorp are collectively
referred to as the "Affiliated
Companies"); Chairman, First
Signature Bank & Trust; Director,
John Hancock Freedom Securities
Corp., John Hancock Capital Corp.
and New England/Canada Business
Counsel; Member, Investment Company
- ------------------
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) A Member of the Audit Committee and the Administration Committee.
28
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April
1994).
Dennis S. Aronowitz Trustee(3) Professor of Law, Boston University
Boston University School of Law; Trustee, Brookline
Boston, Massachusetts Savings Bank.
June 1931
Richard P. Chapman, Jr. Trustee (1,3) President, Brookline Savings Bank;
160 Washington Street Director, Federal Home Loan Bank of
Brookline, Massachusetts Boston (lending; Director, Lumber
February 1935 Insurance Companies (fire and
casualty insurance); Trustee,
Northeastern University
(education); Director, Depositors
Insurance Fund, Inc. (insurance).
William J. Cosgrove Trustee(3) Vice President, Senior Banker and
20 Buttonwood Place Senior Credit Officer, Citibank,
Saddle River, New Jersey N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.; EVP
- ------------------
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) A Member of the Audit Committee and the Administration Committee.
29
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Resource Evaluation, Inc.
(consulting) (until October 1993);
Trustee, the Hudson City Savings
Bank (since 1995).
Douglas M. Costle Trustee (1,3) Director, Chairman of the Board and
RR2 Box 480 Distinguished Senior Fellow,
Woodstock, Vermont 05091 Institute for Sustainable
July 1939 Communities, Montpelier, Vermont
(since 1991); Dean, Vermont Law
School (until 1991); Director, Air
and Water Technologies Corporation
(environmental services and
equipment), Niagara Mohawk Power
Company (electric services) and
Mitretek Systems (governmental
consulting services).
Leland O. Erdahl Trustee (3) Director of Santa Fe Ingredients
9449 Navy Blue Court Company of California, Inc. and
Las Vegas, NV 89117 Santa Fe Ingredients Company, Inc.
December 1928 (private food processing
companies); Director of Uranium
Resources, Inc.; President of
Stolar, Inc. (from 1987-1991) and
President of Albuquerque Uranium
- ------------------
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) A Member of the Audit Committee and the Administration Committee.
30
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Corporation (from 1985-1992);
Director of Freeport-McMoRanCopper
& Cold Company Inc., Hecla Mining
Company, Canyon Resources
Corporation and Original Sixteen to
One Mine, Inc. (from 1984-1987 and
from 1991 to 1995) (management
consultant).
Richard A. Farrell Trustee (3) President of Farrell, Healer & Co.,
Farrell, Healer & Company, Inc. (venture capital management firm)
160 Federal Street (since 1980); Prior to 1980, headed
23rd Floor the venture capital group at Bank
Boston, MA 02110 of Boston Corporation.
Gail D. Fosler Trustee (3) Vice President and Chief Economist,
4104 Woodbine Street The Conference Board (non-profit
Chevy Chase, MD economic and business research).
December 1947
William F. Glavin Trustee (3) President, Babson College; Vice
Babson College Chairman, Xerox Corporation (until
Horn Library June 1989); Director, Caldor Inc.,
Babson Park, MA 02157 Reebok, Ltd. (since 1994), and Inco
March 1931 Ltd.
*Anne C. Hodson Trustee and President President and Chief Operating
April 1953 (1,2) Officer, the Adviser; Executive
Vice President, the Adviser (until
- ------------------
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) A Member of the Audit Committee and the Administration Committee.
31
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
December 1994); Senior Vice
President, the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Dr. John A. Moore Trustee (3) President and Chief Executive
Institute for Evaluating Officer, Institute for Evaluating
Health Risks Health Risks (nonprofit
1101 Vermont Avenue N.W. institution) (since September
Suite 608 1989).
Washington, DC 20005
February 1939
Patti McGill Peterson Trustee (3) Cornell Institute of Public
Institute of Public Affairs Affairs, (since August 1996);
364 Upson Hall President Emeritus of Wells College
Cornell University and St. Lawrence University;
Ithaca, NY 14853 Director, Niagara Mohawk Power
May 1943 Corporation (electric utility) and
John W. Pratt Trustee (3) Professor of Business
2 Gray Gardens East Administration at Harvard
Cambridge, MA 02138 University Graduate School of
September 1931 Business Administration (since
1961).
*Richard S. Scipione Trustee (1) General Counsel, the Life Company;
John Hancock Place Director, the Adviser, the
P.O. Box 111 Affiliated Companies, John Hancock
Boston, Massachusetts Distributors, Inc., JH Networking
August 1937
- ------------------
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) A Member of the Audit Committee and the Administration Committee.
32
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
Insurance Agency, Inc., John
Hancock Subsidiaries, Inc. and John
Hancock Property and Casualty
Insurance and its affiliates (until
November, 1993).
Edward J. Spellman, CPA Trustee (3) Partner, KPMG Peat Marwick LLP
259C Commercial Bld. (retire June 1990).
Fort Lauderdale, FL
November 1932
*Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment
July 1938 Investment Officer (2) Officer, the Adviser; President,
the Adviser (until December 1994);
Director, the Adviser, Advisers
International, John Hancock Funds,
Investor Services, SAMCorp and NM
Capital; Senior Vice President, The
Berkeley Group.
*James B. Little Senior Vice President and Senior Vice President, the Adviser,
February 1935 Chief Financial Officer The Berkeley Group, John Hancock
Funds and Investor Services; Senior
Vice President and Chief Financial
Officer, each of the John Hancock
funds.
- ------------------
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) A Member of the Audit Committee and the Administration Committee.
33
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Date of Birth With Registrant During Past 5 Years
- ----------------- --------------- -------------------
*John A. Morin Vice President Vice President, the Adviser; Vice
July 1950 President, Investor Services, John
Hancock Funds and each of the John
Hancock funds; Compliance Officer,
certain John Hancock funds;
Counsel, the Life Company; Vice
President and Assistant Secretary,
The Berkeley Group.
Susan S. Newton Vice President and Vice President and Assistant
March 1950 Secretary Secretary, the Adviser; Vice
President and Secretary, certain
John Hancock funds; Vice President
and Secretary, John Hancock Funds,
Investor Services and John Hancock
Distributors, Inc. (until 1994);
Secretary, SAMCorp; Vice President,
The Berkeley Group.
*James J. Stokowski Vice President and Vice President, the Adviser; Vice
November 1946 Treasurer President and Treasurer, each of
the John Hancock funds.
</TABLE>
- ------------------
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act of 1940.
(1) A Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) A Member of the Audit Committee and the Administration Committee.
34
<PAGE>
As of May 17, 1996, the officers and Directors of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund and to the
knowledge of the registrant, no persons owned of record or beneficially 5% or
more of any class of the registrant's outstanding securities.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Directors and officers may also be officers
and/or directors and/or Directors of one or more other funds for which the
Adviser serves as investment adviser.
The following table provides information regarding the compensation paid by
the Fund and the other investment companies in the John Hancock Fund Complex to
the Independent Directors for their services for the Fund's most recently
completed fiscal year. The four non-independent Directors, Messrs. Boudreau,
Cameron, Scipione and Ms. Hodsdon and each of the officers of the Fund are
interested persons of the Adviser, are compensated by the Adviser and received
no compensation from the Fund for their services.
Total Compensation
Aggregate From the Fund and
Independent Compensation John Hancock Fund
Directors From the Fund Complex to Directors(1)
--------- ------------- -----------------------
James F. Carlin $ 1,777 $ 60,700
Charles F. Fretz 2,568 56,200
Harold R. Hiser, Jr.* -- 60,200
Charles L. Ladner 1,510 60,700
Patricia P. McCarter 1,510 60,700
Steven R. Pruchansky 1,560 62,700
Norman H. Smith 1,560 62,700
John P. Toolan* -- 60,700
------- --------
$10,485 $627,500
(1) The total compensation paid by the John Hancock Fund Complex to the
Independent Directors is as of the calendar year ended December 31, 1995.
As of this date there were sixty-one funds in the John Hancock Fund
Complex, of which each of the Independent Directors served as Directors or
Trustees of thirty-three funds.
* As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock Fund Complex for Mr. Hiser
was $31,324 and for Mr. Toolan was $71,437 under the John Hancock Deferred
Compensation Plan for Independent Trustees.
35
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Each of the Directors and principal officers affiliated with the Company
who is also an affiliated person of the Adviser is named above, together with
the capacity in which such person is affiliated with the Company or the Adviser.
The Fund has entered into an investment management contract with the
Adviser, under which the Adviser provides the Fund with a continuous investment
program, consistent with the Fund's stated investment objective and policies.
The Adviser is responsible for the day to day management of the Fund's portfolio
assets.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or any affiliate provides investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made, insofar as feasible,
for the respective funds or clients in a manner deemed equitable to all of them.
To the extent that transactions on behalf of more than one client of the Adviser
or affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
No person other than the Adviser and its directors and employees regularly
furnish advice to the Fund with respect to the desirability of the Fund's
investing in, purchasing or selling securities. The Adviser may from time to
time receive statistical or other similar factual information, and information
regarding general economic factors and trends, from the Life Company and its
affiliates.
All expenses which are not specifically paid by the Adviser and which are
incurred in the operation of the Fund, including fees of Directors of the
Company who are not "interested persons," as such term is defined in the
Investment Company Act (the "Independent Directors") and the continuous public
offering of the shares of the Fund are borne by the Fund but excluding certain
distribution-related activities required to be paid by the Adviser or John
Hancock Funds.
As discussed in the Prospectus and as provided by the investment management
contract, the Fund pays the Adviser monthly an investment management fee, which
is accrued daily, based on an annual rate of 0.60% of the average of the daily
net assets of the Fund. 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 net assets. The Adviser retains the right to re-impose a fee and
recover other payments to the extent that, at the end of any fiscal year, the
Fund's actual expenses at year end fall below any such limit.
36
<PAGE>
Investment Advisory fees to the Adviser during the fiscal year ended
December 31, 1995, 1994 and 1993 amounted to $891,221, $864,666 and $474,915,
respectively.
The Fund compensates the Adviser for performing necessary tax and financial
management services. The compensation for 1996 is estimated to be an annual rate
of 0.01875% of the average net assets of the Fund.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of any state limit where the
Fund is registered to sell its shares, the fee payable to the Adviser will be
reduced to the extent of such excess. At this time, the most restrictive limit
applicable to the Fund is 2.5% of the first $30,000,000 of the Fund's average
daily net assets, 2% of the next $70,000,000 of such assets and 1.5% of the
remaining average daily net assets. When calculating the Fund's expense ratio
for this purpose, the Fund may exclude interest, brokerage commissions and
extraordinary expenses.
Pursuant to the investment management contract, the Adviser is not liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which the investment management contract
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its duties or from
reckless disregard of its obligations and duties under the investment management
contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-
7603, was organized in 1968 and currently has more than $18 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 1,080,000 shareholders. The Adviser is
an affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $80 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries high ratings from S&P and A.M.
Best's. Founded in 1862, the Life Company has been serving clients for over 130
years.
Under the investment management contract, the Fund may use the name `John
Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Company may grant the 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
37
<PAGE>
affiliate thereof or any successor to the business of any subsidiary or
affiliate thereof shall be the investment adviser.
The Adviser has entered into a service agreement with Sovereign Asset
Management Corporation (SAMCORP) which is an indirect wholly-owned subsidiary of
the Life Company. The service agreement provides that SAMCORP will provide to
the Adviser certain portfolio management services with respect to the equity
securities held in the portfolio of the Fund. The service agreement further
provides that the Adviser will remain ultimately responsible for all of its
obligations under the investment management contract between the Adviser and the
Fund. Subject to the supervision of the Adviser, SAMCORP furnishes the Fund with
recommendations with respect to the purchase, holding and disposition of equity
securities in the Fund's portfolio; furnishes the Fund with research, economic
and statistical data in connection with the Fund's equity investments; and
places orders for transactions in equity securities.
The Adviser pays to SAMCORP 40% of the monthly investment management fee
received by the Adviser with respect to the equity securities held in the
portfolio of the Fund during such month. The fees paid by the Fund to the
Adviser under the investment management contract are not affected by this
arrangement.
During the fiscal years ended December 31, 1995, 1994 and 1993, the Adviser
paid SAMCORP the sum of $118,896, $105,821, and $73,242, respectively, in
connection with the service agreement with SAMCORP.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished
by a principal market maker or a pricing service, both of which generally
utilize electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
38
<PAGE>
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Directors.
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded. If quotations are not readily available or the
value has been materially affected by events occurring after the closing of a
foreign market, assets are valued by a method that the Directors believe
accurately reflects their value.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank based on London currency
exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of a Fund's NAV.
The Fund will not price its securities on the following national holidays:
New Year's Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day. On any day an international
market is closed and the New York Stock Exchange is open, any foreign securities
will be valued at the prior day's close with the current day's exchange rate.
Trading of foreign securities may take place on Saturdays and U.S. business
holidays on which the Fund's NAV is not calculated. Consequently, the Fund's
portfolio securities may trade and the NAV of the Fund's redeemable securities
may be significantly affected on days when a shareholder has no access to the
Fund.
DISTRIBUTION CONTRACTS
The Fund has entered into a distribution contract with John Hancock Funds.
Under the contract, John Hancock Funds is obligated to use its best efforts to
sell shares of each class of the Fund. Shares of the Fund are also sold by
selected broker-dealers (the "Selling Brokers") which have entered into selling
agency agreements with John Hancock Funds. John Hancock Funds accepts orders for
the purchase of the shares of the Fund which are continually offered at net
asset value next determined, plus any applicable sales charge. In connection
with the sale of Class A or Class B shares, John Hancock Funds and Selling
Brokers receive compensation in the form of a sales charge imposed, in the case
of Class A shares, at the time of sale or, in the case of Class B shares, on a
deferred basis. The sales charges are discussed further in the Prospectus.
The Fund's Directors adopted Distribution Plans with respect to Class A and
Class B shares ("the Plans"), pursuant to Rule 12b-1 under the Investment
Company Act. Under the Plans, the Fund will pay distribution and service fees at
an aggregate annual rate of up to 0.30% and 1.00% respectively, of the Fund's
daily net assets attributable to shares of that class. However, the service fee
will not exceed 0.25% of the Fund's average daily net assets attributable to
each class of shares. The distribution fees are used to reimburse John Hancock
39
<PAGE>
Funds for its distribution expenses, including but not limited to: (i) initial
and ongoing sales compensation to Selling Brokers and others (including
affiliates of John Hancock Funds) engaged in the sale of Fund shares; (ii)
marketing, promotional and overhead expenses incurred in connection with the
distribution of Fund shares; and (iii) with respect to Class B shares only,
interest expenses on unreimbursed distribution expenses. The service fees will
be used to compensate Selling Brokers for providing personal and account
maintenance services to shareholders. In the event that John Hancock Funds is
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. In the event that John Hancock Funds is not fully reimbursed for
expenses incurred by it under the Class B Plan in any fiscal year, John Hancock
Funds may carry these expenses forward together with interest on the balance of
these unreimbursed expenses, provided, however, that the Directors may terminate
the Class B Plan and thus the Fund's obligation to make further payments at any
time. Accordingly, the Fund does not treat unreimbursed expenses relating to the
Class B shares as a liability of the Fund. The Plans were approved by a majority
of the voting securities of the Fund. The Plans and all amendments were approved
by the Directors, including a majority of the Directors 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 Directors"), by votes cast in person at
meetings called for the purpose of voting on such Plans.
For the year ended December 31, 1995, an aggregate of $3,097,061 of
distribution expenses or 3.7% of the average net assets of Class B shares were
not reimbursed or recovered by John Hancock Funds through the receipt of
deferred sales charges or 12b-1 fees.
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 the expenditures were made. The Directors review these reports
on a quarterly basis.
During the fiscal year ended December 31, 1995 the Funds paid John Hancock
Funds the following amounts of expenses with respect to the Class A and Class B
shares of the Funds:
40
<PAGE>
<TABLE>
<CAPTION>
Expense Items
Printing and Interest
Mailing of Expenses Carrying
Prospectus to of John or Other
New Compensation to Hancock Finance
Advertising Shareholders Selling Brokers Funds Charges
----------- ------------ --------------- ----- -------
<S> <C> <C> <C> <C> <C>
Class A Shares $33,515 $3,846 $ 98,915 $59,699 None
Class B Shares $53,861 $4,475 $328,674 $83,603 $351,388
</TABLE>
41
<PAGE>
Each of the Plans provides that it will continue in effect only so long as
their continuance is approved at least annually by the Board of Directors and by
the Independent Directors. Each of the Plans provides that it may be terminated
without penalty (a) by vote of a majority of the Independent Directors (b) by a
majority of the Fund's outstanding shares of the applicable class having voting
rights with respect to the Plan upon 60 days' written notice to John Hancock
Funds, and (c) automatically in the event of assignment. Each of the Plans
further provides that it may not be amended to increase the maximum amount of
the fees for the services described therein without the approval of a majority
of the outstanding shares of the class of the Fund which has voting rights with
respect to the Plan. Each of the Plans also provides that no material amendment
to the Plan will, in any event, be effective unless it is approved by a vote of
the Board of Directors and the Independent Directors of the Fund. The holders of
Class A shares and Class B shares have exclusive voting rights with respect to
the Plan applicable to their respective class of shares. In adopting the Plans,
the Directors concluded that, in their judgment, there is a reasonable
likelihood that each Plan will benefit the holders of the applicable class of
shares of the Fund.
When the Fund seeks an Independent Director to fill a vacancy or as a
nominee for election by shareholders, the selection or nomination of the
Independent Director is, under resolutions adopted by the Directors
contemporaneously with their adoption of the Plans, committed to the discretion
of the Committee on Administration of the Directors. The members of the
Committee on Administration are all Independent Directors and are identified in
this Statement of Additional Information under the caption "Management of the
Fund."
INITIAL SALES CHARGE ON CLASS A SHARES
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, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A shares of the Fund owned by the investor, or if
John Hancock Investor Services Corporation ("Investor Services") is notified by
the investor's dealer or the investor at the time of the purchase, the cost of
the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined if made by
(a) an individual, his spouse and their children under the age of 21, purchasing
securities for his or their own account, (b) a trustee or other fiduciary
purchasing for a single trust, estate or fiduciary account, and (c) certain
groups of four or more individuals making use of salary deductions or similar
42
<PAGE>
group methods of payment whose funds are combined for the purchase of mutual
fund shares. Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Investor Services or
a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end
sales charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee/Director or officer of the Fund; a Director or officer of the
Adviser and its affiliates or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, mother, father, sister, brother, mother-in-law,
father-in-law) of any of the foregoing; or any fund, pension, profit
sharing or other benefit plan for the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of
the Fund account, may purchase Class A shares with no initial sales charge.
However, if the shares are redeemed within 12 months after the end of the
calendar year in which the purchase was made, a CDSC will be imposed at the
following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 million to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
43
<PAGE>
Accumulation Privilege. Investors (including investors combining purchases)
who are already Class A shareholders may also obtain the benefit of a reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or current value of the Class A shares already held by
such person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Prospectus) also are available to an investor based on the
aggregate amount of his concurrent and prior investments in Class A shares of
the Fund and shares of all other John Hancock funds which carry a sales charge.
Letter of Intention. The reduced sales charges are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may opt to make the necessary
investments called for by the LOI over a forty-eight (48) month period. These
qualified retirement plans include group IRA's, SEP, SARSEP, TSA, 401(k) plans,
403(b) plans, and Section 457 plans. Such an investment (including accumulations
and combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Investor Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period
(either 13 or 48 months), the sales charge applicable will not be higher than
that which would have been applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the 13-month period, at which time the
escrowed Class A shares will be released. If the total investment specified in
the LOI is not completed, the Class A shares held in escrow may be redeemed and
the proceeds used as required to pay such sales charge as may be due. By signing
the LOI, the investor authorizes Investor 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.
44
<PAGE>
Existing full service clients of the Use Company who were group annuity
contract holders as of September 1, 1994, and participant directed defined
contribution plans with at least 100 eligible employees at the inception of the
Fund account may purchase Class A shares with no initial sales charge. However,
if the shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the above rate.
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per share
without the imposition of an initial sales charge so that the Fund will receive
the full amount of the purchase 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
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
account value above the initial purchase price, including shares derived from
reinvestment of dividends or capital gains distributions.
Class B shares are not available to full-service defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation will
be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the [six-year] CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the [six-year] period. For this purpose, the amount
45
<PAGE>
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please indicate
if you require the proceeds to equal the dollar amount requested. If not
indicated, only the specified dollar amount will be redeemed from your account
and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
-----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to Investor Services and are used in whole
or in part by Investor Services to defray its expenses related to providing
distribution- related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to select Selling Brokers
for selling Class B shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the
Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in 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.
46
<PAGE>
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Investor Services.
(Please note, this waiver does not apply to periodic withdrawal plan
redemptions of Class A shares that are subject to a CDSC.)
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b),
401(k), Money Purchase Pension Plan, Profit-Sharing Plan and other qualified
plans as described in the Internal Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory distributions under the Internal
Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under Section 401(a) of the Code
(such as 401(k), Money Purchase Pension Plan 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.
47
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions or in periodic
12% of account payments
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or 12% value annually
of account value in periodic
annually in payments
periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for annuity Waived for annuity Waived for annuity 12% of account
payments (72t)or payments (72t)or payments (72t)or value annually
12% of account 12% of account 12% of account in periodic
value annually in value annually in value annually in payments
periodic payments periodic payments periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Return of
Excess Waived Waived Waived Waived N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must
notify Investor Services at the time you make your redemption. The waiver will
be granted once Investor Services has confirmed that you are entitled to the
waiver.
48
<PAGE>
ADDITIONAL SERVICES AND PROGRAMS FOR CLASS A AND CLASS B SHARES
Exchange Privilege. As described more fully in the Prospectus, the Fund
permits exchanges of shares of the Fund for shares of the same class in any
other John Hancock fund offering that class.
Systematic Withdrawal Plan. The Fund permits the establishment of a
Systematic Withdrawal Plan. Payments under this plan represent proceeds arising
from the redemption of shares of the Fund. Since the redemption price of the
shares of the Fund may be more or less than the shareholder's cost, depending
upon the market value of the securities owned by the Fund at the time of
redemption, the distribution of cash pursuant to this plan may result in
realization of gain or loss for purposes of Federal, state and local income
taxes. The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional Class A or Class B shares of the Fund could be
disadvantageous to a shareholder because of the initial sales charge payable on
purchases of Class A shares and the CDSC imposed on redemptions of Class B
shares and because redemptions are taxable events. Therefore, a shareholder
should not purchase Class A or Class B shares at the same time as a Systematic
Withdrawal Plan is in effect. The Fund reserves the right to modify or
discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior
written notice to such shareholder, or to discontinue the availability of such
plan in the future. The shareholder may terminate the plan at any time by giving
proper notice to Investor Services.
Monthly Automatic Accumulation Program (MAAP). This program is explained
more fully in the Prospectus. The program, as it relates to automatic investment
drafts, is subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior
notice if any investment is not honored by 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
Investor Services or upon written notice to Investor Services which is
received at least five (5) business days prior to the processing date
of any investment.
Reinvestment Privilege. A shareholder who has redeemed shares of the Fund
may, within 120 days after the date of redemption, reinvest any part of the
49
<PAGE>
redemption proceeds in shares of the same class of the Fund or in any of the
other John Hancock funds, subject to the minimum investment limit in any 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
any of the other John Hancock funds. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from such redemption at net asset value in
additional shares of the class from which the redemption was made. Such
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and such new shares will continue to be subject to the
CDSC. For purposes of determining the amount of any CDSC imposed upon a
subsequent redemption, the holding period of the shares acquired through
reinvestment will include the holding period of the redeemed shares. The Fund
may modify or terminate the reinvestment privilege at any time.
A redemption or exchange of 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
shares will be treated for tax purposes as described below.
TAX STATUS
Each series of the Company, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and has elected
to be treated as a "regulated investment company" under Subchapter M of the
Code. As such and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions and the
diversification of its assets, the Fund will not be subject to Federal income
tax on taxable income (including net realized capital gains) which is
distributed to shareholders in accordance with the timing requirements of the
Code.
The Fund will be subject to a four percent nondeductible Federal excise tax
on certain amounts not distributed (and not treated as having been distributed)
on a timely basis in accordance with annual minimum distribution requirements.
The Fund intends under normal circumstances to seek to avoid or minimize
liability for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
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and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
foreign currency forward contracts, certain foreign currency futures and
options, foreign currencies, or payables or receivables denominated in a foreign
currency are subject to Section 988 of the Code, which generally causes such
gains and losses to be treated as ordinary income and losses and may affect the
amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to the Fund's investment in stock or
securities, possibly including certain currency positions or derivatives not
used for hedging purposes, may increase the amount of gain it is deemed to
recognize from the sale of certain investments or derivatives held for less than
three months, which gain is limited under the Code to less than 30% of its gross
income for each taxable year and may under future Treasury regulations produce
income not among the types of "qualifying income" from which the Fund must
derive at least 90% of its gross income for each taxable year. If the net
foreign exchange loss for a year treated as ordinary loss under Section 988 were
to exceed the Fund's investment company taxable income computed without regard
to such loss the resulting overall ordinary loss for such year would not be
deductible by the Fund or its shareholders in future years.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
Because more than 50% of the Fund's assets at the close of any taxable year will
not consist of stocks or securities of foreign corporations, the Fund will be
unable to pass such taxes through to shareholders, who consequently will not
take such taxes into account on their own tax returns. However, the Fund will
deduct such taxes in determining the amount it has available for distribution to
shareholders.
If the Fund acquires stock in certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
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assets in investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to Federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. Certain elections may, if available, ameliorate there adverse tax
consequences, but any such election would require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. The Fund may limit and/or
manage its holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
The amount of net realized capital gains, if any, in any given year will
result from sales of securities or transactions in options or futures made with
a view to the maintenance of a portfolio believed by the Fund's management to be
most likely to attain the Fund's objective. Such sales, and any resulting gains
or losses, may therefore vary considerably from year to year. At the time of an
investor's purchase of shares of the Fund, a portion of the purchase price is
often attributable to realized or unrealized appreciation in the Fund's
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions on these shares from such appreciation or income may be taxable to
such investor even if the net asset value of the investor's shares is, as a
result of the distributions, reduced below the investor's cost for such shares
and the distributions in reality represent a return of a portion of the purchase
price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
90 days after their purchase to the extent Class A shares of the Fund or another
John Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. Such disregarded charge will
result in an increase in the shareholder's tax basis in the Class A shares
subsequently acquired. Also, any loss realized on a redemption or exchange may
be disallowed to the extent the shares disposed of are replaced with other
shares of the Fund within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of, such as pursuant to automatic
dividend reinvestments. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long- term capital gain with respect to such shares.
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Although the Fund's present intention is to distribute, at least annually,
all net capital gain, if any, the Fund reserves the right to retain and reinvest
all or any portion of the excess, as computed for Federal income tax purposes,
of net long-term capital gain over net short-term capital loss in any year. The
Fund will not in any event distribute net capital gain realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares by the
difference between his pro rata share of such excess and his pro rata share of
such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and as noted above would not be distributed as such to
shareholders. The Fund has $259,999 of a capital loss carryforward available, to
the extent provided by regulations, to offset future net realized capital gains.
The carryforward expires December 31, 2002.
For purposes of the dividends received deduction available to corporations,
dividends received by the Fund, if any, from U.S. domestic corporations in
respect of the stock of such corporations held by the Fund, for U.S. Federal
income tax purposes, for at least 46 days (91 days in the case of certain
preferred stock) and distributed and properly designated by the Fund may be
treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
shares of the Fund in order to qualify for the deduction and, if they have any
debt that is deemed under the Code directly attributable to such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability, if any. Additionally, any corporate
shareholder should consult its tax adviser regarding the possibility that its
basis in its shares may be reduced, for Federal income tax purposes, by reason
of "extraordinary dividends" received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of the
shares.
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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 minimis amount of original issue discount (or debt securities acquired
at a market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options, futures contracts, and forward
contracts may also require the Fund to recognize income or gain without a
concurrent receipt of cash. However, the Fund must distribute to shareholders
for each taxable year substantially all of its net income and net capital gains,
including such income or gain, to qualify as a regulated investment company and
avoid liability for any federal income or excise tax. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or may have to leverage itself by borrowing the cash, to
satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied. The Fund will not seek to satisfy any
threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the
"IRS") all taxable distributions to shareholders, as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Fund may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
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shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
Investments in debt obligations that are at risk of or in default present
special tax issues for the Fund. Tax rules are not entirely clear about issues
such as when the Fund may cease to accrue interest, original issue discount, or
market discount; when and to what extent deductions may be taken for bad debts
or worthless securities; how payments received on obligations in default should
be allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Fund, in the event it invests in such securities, in order to
reduce the risk of distributing insufficient income to preserve its status as a
regulated investment company and seek to avoid becoming subject to Federal
income or excise tax.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures, options, foreign
currency positions and foreign currency forward contracts. Certain of these
transactions undertaken by the Fund may cause the Fund to recognize gains or
losses from marking to market even though its positions have not been sold or
terminated and affect their character as long-term or short-term (or, in the
case of certain currency forwards, options, or futures, as ordinary income or
loss) and timing of some gains and losses realized by the Fund. Also, some of
the Fund's losses on its transactions involving options, futures and forward
contracts and/or offsetting or successor portfolio positions may be deferred
rather than being taken into account currently in calculating the Fund's taxable
income or gain. Certain of these transactions may also cause the Fund to dispose
of investments sooner than would otherwise have occurred. Some of the applicable
tax rules may be modified if the Fund is eligible and chooses to make one or
more of certain tax elections that may be available. 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 applicable
to options, futures and forward contracts (including consideration of any
available elections) 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 shares of the Fund may
also be subject to state and local taxes. Shareholders should consult their own
tax advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
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Non-U.S. investors not engaged in a U.S. trade or business with which their
Fund investment is effectively connected will be subject to U.S. Federal income
tax treatment that is different from that described above. These investors may
be subject to nonresident alien withholding tax at the rate of 30% (or a lower
rate under an applicable tax treaty) on amounts treated as ordinary dividends
from the Fund and, unless an effective IRS Form W-8 or authorized substitute for
Form W-8 is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund. The
Fund is not subject to Massachusetts corporate excise or franchise taxes.
Provided that the Fund qualifies as a regulated investment company under the
Code, it will not be required to pay any Massachusetts income tax.
DESCRIPTION OF FUND SHARES
The Directors of the Company are responsible for the management and
supervision of the Company. Under the Articles of Incorporation, the Directors
have the authority to classify unissued capital stock in separate series,
without further action by shareholders. The Company's authorized capitalization
is 345,000,000 fully paid and non-assessable shares of capital stock, $.01 par
value, of which 60,000,000 shares are allocated to the Fund. As of the date of
this Statement of Additional Information, the Directors have authorized two
series of the Company. Additional series may be added in the future. The
Articles of Incorporation also authorize the Directors to classify and
reclassify the shares of the Company, or any new series of the Company, into one
or more classes. As of the date of this Statement of Additional Information, the
Directors have authorized the issuance of two classes of shares of the Fund,
designated as Class A and Class B.
Each Class A share and Class B share of the Fund represents an equal
proportionate interest in the assets belonging to the Fund. The holders of Class
A and Class B shares each have certain exclusive voting rights on matters
relating to their respective Rule 12b-1 distribution plans. Shares of each class
may be exchanged only for shares of the same class in another fund sponsored by
the Adviser. 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 that (i) Class B shares will pay
higher distribution and service fees than Class A shares and (ii) each of Class
A shares and Class B shares will bear any other class expenses properly
attributable to such class of shares. Similarly, the net asset value per share
may vary depending on the class of shares purchased.
When issued, shares are fully paid and non-assessable except as provided in
the Prospectus under the caption "Organization and Management of the Fund." In
the event of liquidation, shareholders are entitled to share pro rata in the net
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assets of the Fund available for distribution to such shareholders. Shares
entitle their holders to one vote per share, are freely transferable and have no
preemptive, subscription or conversion rights.
Unless otherwise required by the Investment Company Act or the Articles of
Incorporation, the Company has no intention of holding annual meetings of
shareholders. Shareholders of the Company may remove a Director by the
affirmative vote of at least a majority of the Company's outstanding shares and
the Directors shall promptly call a meeting for such purpose when requested to
do so in writing by the record holders of not less than 25% of the outstanding
shares of the Company. 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
Directors holding office were elected by the shareholders, the Directors will
call a special meeting of shareholders for the purpose of electing Directors.
Shareholders have no preemptive or conversion rights.
CALCULATION OF PERFORMANCE
The average annual total return is determined separately for each class of
shares at December 31, 1995, with all distributions reinvested in shares. The
average annualized total returns for Class A shares for the 1-year period and
cumulative total return since the Fund's inception on October 5, 1992, were
18.01% and 8.38%, respectively, and reflect payment of the maximum sales charge
of 5.00%. The average annualized total returns for Class B shares for the 1-year
period and cumulative since the Fund's inception on October 5, 1992, were 18.30%
and 8.85%, respectively, and reflects applicable contingent deferred sales
charge (maximum contingent deferred sales charge of 5% declines to 0% over six
years).
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 year and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
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T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of the 1 year and life-of-fund periods.
This calculation assumes the maximum sales charge of 5.0% is included in
the initial investment or the CDSC is applied at the end of the period, and also
assumes that all dividends and distributions are reinvested at net asset value
on the reinvestment dates during the period.
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 5.0% sales charge
on Class A shares or the CDSC on Class B shares into account. Excluding the
Fund's sales charge on Class A and the CDSC on Class B shares from a total
return calculation produces a higher total return figure.
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 on the
last day of the period, according to the following standard formula:
YIELD = 2 ([(a - b) + 1] 6 - 1
----
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued during the period (net of fee reductions and
expense limitation payments, if any).
c = the average daily number of Class A 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.
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The Class A and Class B shares' yield at December 31, 1995 was 2.67% and
2.11%, respectively. Both total return and yield calculations for Class A shares
include the effect of paying the maximum sales charge of 5.00%. Investments at
lower sales charges would result in higher performance figures. Both total
return and yield for the Class B shares reflect deduction of the applicable CDSC
imposed on a redemption of shares held for the applicable period. All
calculations assume that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the periods. The total return and
yield of Class A and Class B shares will differ; the Fund will include the total
return and yield of both classes in any advertisement or promotional material
including Fund performance data. The value of Fund shares, when redeemed, may be
more or less than their original cost. Both total return and yield are
historical calculations and are not an indication of future performance.
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 -- Fund Performance
Analysis," a publication which tracks mutual fund net assets, total return, and
yield. Comparisons may also be made to bank certificates of deposit ("CDs"),
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, BARRON'S and IBBOTION ASSOCIATES
will also be utilized as well as the RUSSELL and WILSHIRE indices. The Fund may
also cite Morningstar Mutual Values, an independent mutual fund information
service which ranks mutual funds. 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; and changes in operating expenses
are all examples of items that can increase or decrease the Fund's performance.
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BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of the
Fund are made by the Adviser pursuant to recommendations made by its investment
committee, which consists of directors of the Adviser and officers and Directors
who are interested persons of the Company. 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
maker reflect a "spread." Debt securities are generally traded on a net basis
through dealers acting for their own account as principals and not as brokers;
no brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and such other policies as the Board of Directors 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 commitment to allocate portfolio
transactions upon any prescribed basis. While the Adviser will be primarily
responsible for the allocation of the Fund's brokerage business, the policies
and practices of the Adviser in this regard must be consistent with the
foregoing and will at all times be subject to review by the Board of Directors.
For the fiscal years ended December 31, 1995, 1994 and 1993, the Fund paid
brokerage commissions in the amount of $187,534, $106,785 and $163,746,
respectively.
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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 Board of Directors that such price
is reasonable in light of the services provided and to such policies as the
Board may adopt from time to time.
For the fiscal year ended December 31, 1995, the Fund paid commissions in
the amount of $40,621 to compensate brokers for research services evaluations of
securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Tucker Anthony Incorporated, John Hancock Distributors, and Sutro
& Company, Inc., which are broker-dealers ("Affiliated Brokers"). Pursuant to
procedures determined by the Board of Directors and consistent with the above
policy of obtaining best net results, the Fund may execute portfolio
transactions with or through Affiliated Brokers. During the period ending
December 31, 1995, 1994 and 1993, the Fund did not execute any portfolio
transactions with Affiliated Brokers.
Any of the Affiliated Brokers may act as broker for the Fund on securities
or commodities exchange transactions, subject, however, to the general policy of
the Fund set forth above and the procedures adopted by the Board of Trustees
pursuant to the Investment Company Act. Commissions paid to an Affiliated Broker
must be at least as favorable as those which the Board believes to be
contemporaneously charged by other brokers in connection with comparable
transactions involving similar securities being purchased or sold. A transaction
would not be placed with an Affiliated Broker if the Fund would have to pay a
commission rate less favorable than the Affiliated Broker's contemporaneous
charges for comparable transactions for its other most favored, but
unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Directors who are not interested persons (as defined in the Investment Company
Act) of the Company, the Adviser or the Affiliated Broker. Any such transactions
would be subject to a good faith determination by the Board of Directors that
the compensation paid to Affiliated Brokers is fair and reasonable. 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 Broker as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria. The Fund will not engage in principal transactions with
Affiliated Brokers. The Fund may, however, purchase securities from other
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members of underwriting syndicates of which Tucker Anthony and Sutro are members
but only in accordance with the policy set forth above and procedures adopted
and reviewed periodically by the Board of Directors.
TRANSFER AGENT SERVICES
John Hancock Investors Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly-owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
an annual fee for Class A shares of $16.00 per shareholder account and for Class
B shares of $18.50 per shareholder account, plus certain out-of-pocket expenses.
These expenses are aggregated and charged to the Fund and allocated to each
class on the basis of the related net asset values.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Company and Investors Bank & Company, 24 Federal Street, Boston,
Massachusetts 02110. Under the custodian agreement, Investors Bank & Company
performs custody, portfolio and fund accounting services. These expenses are
aggregated and charged to the Fund and allocated to each class on the basis of
their relative net asset values.
INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200 Clarendon
Street, Boston, Massachusetts 02116. The independent auditors audit and render
an opinion on the Fund's annual financial statements and prepare the Fund's
income tax returns.
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APPENDIX
Moody's describes its ratings for fixed income securities as follows:
Fixed income securities 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.
Fixed income securities which are rated "Aa" are judged to be of high quality by
all standards. Together with the Aaa group they are generally referred to as
"high grade" obligations. They are rated lower than the best fixed income
securities because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
Fixed income securities 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 some time in the
future.
Fixed income securities 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 fixed income securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Fixed income securities 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 fixed income securities in this class.
Fixed income securities 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.
Fixed income securities 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.
A-1
<PAGE>
Fixed income securities which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
Fixed income securities which are rated "C" are the lowest rated class of fixed
income securities and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
S&P describes its ratings for fixed income securities as follows:
Fixed income securities rated "AAA" have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
Fixed income securities rated "AA" have a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.
Fixed income securities rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than fixed income
securities in higher rated categories.
Fixed income securities rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas such securities normally exhibit
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 fixed income securities in this category than in higher
rated categories.
Fixed income securities rated "BB," "B," "CCC," "CC" and "C" are 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 "C" the highest
degree of speculation. While such fixed income securities 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
A-2
<PAGE>
moderate reliance on debt and ample asset protections; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated "P-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 alternative liquidity is maintained.
Issuers rated "P-3" (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P describes its three highest ratings for commercial paper as follows:
"A-1." This designation 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.
A-3
<PAGE>
Quality Distribution
The average quality distribution of the portfolio for the fiscal year ended
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Y-T-D Rating Rating
Security Average % of Assigned % of Assigned % of
Rating Value Portfolio by Adviser Portfolio by Service Portfolio
- ------ ----- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA $23,631,725 16.0% 0 0.0% $23,631,725 16.0%
AA 3,340,775 2.2% 0 0.0% 3,340,775 2.2%
A 9,990,026 6.8% 0 0.0% 9,990,026 6.8%
BAA 8,349,007 5.6% 0 0.0% 8,349,007 5.6%
BA 5,156,810 3.5% 0 0.0% 5,156,810 3.5%
B 7,779,377 5.3% 0 0.0% 7,779,377 5.3%
CAA 0 0.0% 0 0.0% 0 0.0%
CA 0 0.0% 0 0.0% 0 0.0%
C 0 0.0% 0 0.0% 0 0.0%
D 0 0.0% 0 0.0% 0 0.0%
=========== ===== = ==== =========== =====
0
Debt 58,247,720 39.4% 0 0.0% $58,247,720 39.4%
Securities
0
Equity 84,752,103 57.5%
Securities
0
Short- 4,512,692 3.1%
Term
Securities
0
Total 147,512,515 100.0%
Portfolio
0
Other 997,940
Assets-
Net
0
Net $148,510,455
Assets
</TABLE>
A-4
<PAGE>
JOHN HANCOCK
SOVEREIGN INVESTORS FUND
CLASS A, CLASS B and CLASS C SHARES
Statement of
Additional Information
August 30, 1996
This Statement of Additional Information provides information about
John Hancock Sovereign Investors Fund (the "Fund") in addition to the
information that is contained in the Fund's Prospectus for Class A and Class B
shares, dated August 30, 1996, and in the Fund's Prospectus for Class C shares,
dated May 1, 1996 (the "Prospectuses").
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Fund's Prospectuses, a copy of which can be
obtained free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-(800)-225-5291
TABLE OF CONTENTS
Statement of
Additional
Information
Page
Organization of the Fund 2
Investment Objective and Policies 2
Investment Restrictions 8
Those Responsible for Management 12
Investment Advisory and Other Services 21
Distribution Contracts 24
Net Asset Value 26
Initial Sales Charge on Class A Shares 27
Deferred Sales Charge on Class B Shares 30
Special Redemptions 33
Additional Services and Programs for Class A and
Class B Shares 34
Description of Fund Shares 35
<PAGE>
Tax Status 38
Calculation of Performance 43
Brokerage Allocation 46
Transfer Agent Services 48
Custody of Portfolio 48
Independent Auditors 48
Appendix A-1
Financial Statements F-1
ORGANIZATION OF THE FUND
John Hancock Sovereign Investors Fund (the "Fund") is a separate
diversified portfolio of John Hancock Sovereign Investors Fund, Inc. (the
"Company"), an open-end investment management company.
The Company was organized as a corporation in the State of Delaware in
1936 and reincorporated in Maryland in 1990. The Board of Directors of the
Company has authority under the Company's charter to create and classify shares
into separate series and reclassify any series or portfolio of shares into one
or more classes without further action by shareholders. Pursuant thereto, the
Board of Directors has created the Fund and one additional series of the Company
known as John Hancock Sovereign Balanced Fund ("Balanced Fund") and authorized
the issuance of three classes of shares of the Fund: Class A, Class B and Class
C. See "Description of Fund Shares." Additional series may be added in the
future from time to time.
The Fund is managed by John Hancock Advisers, Inc. (the "Adviser"). The
Adviser is an indirect wholly-owned subsidiary of the John Hancock Mutual Life
Insurance Company (the "Life Company"), chartered in 1862, with national
headquarters at John Hancock Place, Boston, Massachusetts.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide long-term growth of
capital and of income without assuming undue market risks. There is no assurance
that the Fund's objective will be attained. At times, however, because of market
conditions, the Fund may invest primarily for current income. The Fund will make
investments in different types and classes of securities in accordance with the
Board of Trustees' and the Adviser's appraisal of economic and market
conditions. The Fund's portfolio securities are selected mainly for their
investment character based upon generally accepted elements of intrinsic value,
including industry position, management, financial strength, earning power,
2
<PAGE>
marketability and prospects for future growth. The distribution or mix of
various types of investments is based on general market conditions, the level of
interest rates, business and economic conditions, and the availability of
investments in the equity and fixed income markets. The amount of the Fund's
assets that may be invested in either equity or fixed income securities is not
restricted and is based upon management's judgment of what might best achieve
the Fund's investment objectives. The securities held by the Fund are under
continuous study by the Adviser. They are selected because they are considered
by the management to contribute to the possible achievement of the Fund's
objective. They are held or disposed of in accordance with the results of a
continuing examination of their merit.
The Fund currently uses a strategy of investing only in those common
stocks which have a record of having increased their dividend payout in each of
the preceding ten or more years. This dividend performers strategy can be
changed at any time.
The Fund has adhered to this philosophy since 1979. By investing
primarily in these companies, the portfolio management team focuses on
investments with characteristics such as: a strong management team that has
demonstrated leadership through changing market cycles; financial soundness as
evidenced by consistently rising dividends and profits, strong cash flows, high
return on equity and a balance sheet showing little debt; and strong brand
recognition and market acceptance, backed by proven products and a
well-established, often global, distribution network.
The Fund may hold all common stocks or for more defensive purposes it
may hold high grade liquid preferred stocks and debt securities or cash. In
addition, temporary investments in short term debt securities may be made so as
to receive a return on excess cash.
The investment policy of the Fund is to purchase and hold securities
for capital appreciation and investment income, although there may be a limited
number of short- term transactions incidental to the pursuit of its investment
objective. The Fund may make portfolio purchases and sales to the extent that in
its Board's opinion, relying on the Adviser or independently, such transactions
are in the interest of shareholders.
Portfolio turnover rates for the past three fiscal years were: 1993,
46%, 1994, 45% and 1995, 46%.
The Fund endeavors to achieve its objective by utilizing experienced
management and generally investing in securities of seasoned companies in sound
financial condition. While there is considerable flexibility in the investment
grade and type of security in which the Fund may invest, a company or its
predecessors must have been in continuous business for at least five years and
must have total assets of at least $10,000,000 before its securities can be
3
<PAGE>
purchased by the Fund. The Fund has not purchased securities of real estate
investment trusts and has no present intention of doing so in the future.
Restricted Securities. Although the Fund has authority to purchase to a limited
extent "restricted securities" (i.e., securities that would be required to be
registered prior to distribution to the public), the Fund did not do so in its
past fiscal year and has no current intention of doing so, except that the Fund
may in the future invest in restricted securities eligible for resale to certain
institutional investors pursuant to Rule 144A under the Securities Act of 1933.
The Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, securities that are not readily marketable and restricted securities.
However, if the Board of Trustees determines, based upon a continuing review of
the trading markets for specific Rule 144A securities that they are liquid then
such securities may be purchased without regard to the 15% limit. The Board of
Trustees may adopt guidelines and delegate to the Adviser the daily function of
determining and monitoring the liquidity of restricted securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor the Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. The Fund does not intend to invest more
that 5% of its net assets in Rule 144A securities in the coming year.
Diversification. The Fund's investments are diversified in a broad list of
issues, representing many different industries. Although diversification does
not eliminate market risk, it may tend to reduce it. At the same time, holdings
of a large number of shares in any one company are avoided. Thus, during periods
when general economic and political conditions are subject to rapid changes, it
may be appropriate to effect rapid changes in the Fund's investments. This can
be more readily accomplished by limiting the amount of any one investment.
As is common to all securities investments, the stock of this managed
diversified Fund is subject to fluctuation in value; its portfolio will not
necessarily prove a defense in periods of declining prices or lead the advance
in rising markets. The Fund's management will endeavor to reduce the risks
encountered in the use of any single investment by investing the assets of the
Fund in a widely diversified group of securities. Diversification, however, will
not necessarily reduce inherent market risks. Securities are selected mainly for
their investment character, based upon generally accepted elements of intrinsic
value including industry position, management, financial strength, earning
power, ready marketability and prospects for future growth.
Concentration. The Fund's policy is not to concentrate its investments in any
one industry, but investments of up to 25% of its total assets at market value
may be made in a single industry. This limitation may not be changed without the
affirmative vote of a majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act").
Lower Rated Bonds. The Fund may invest in debt securities rated as low as C by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
4
<PAGE>
("S&P") and unrated securities deemed of equivalent quality by the Adviser.
These securities are speculative to a high degree and often have very poor
prospects of attaining real investment standing. Lower rated securities are
generally referred to as junk bonds. No more than 5% of the Fund's net assets,
however, will be invested in securities rated lower than BBB by S&P or Baa by
Moody's. In addition, no more than 5% of the Fund's net assets may be invested
in securities rated BBB or Baa and unrated securities deemed of equivalent
quality. See the Appendix attached to this Statement of Additional Information
which describes the characteristics of the securities in the various ratings
categories. The Fund may invest in comparable quality unrated securities which,
in the opinion of the Adviser, offer comparable yields and risks to those
securities which are rated.
Debt obligations rated in the lower ratings categories, or which are
unrated, involve greater volatility of price and risk of loss of principal and
income. In addition, lower ratings reflect a greater possibility of an adverse
change in financial condition affecting the ability of the issuer to make
payments of interest and principal. The high yield fixed income market is
relatively new and its growth occurred during a period of economic expansion.
The market has not yet been fully tested by an economic recession.
The market price and liquidity of lower rated fixed income securities
generally respond to short term corporate and market developments to a greater
extent than do the price and liquidity of higher rated securities because such
developments are perceived to have a more direct relationship to the ability of
an issuer of such lower rated securities to meet its ongoing debt obligations.
The market prices of zero coupon bonds are affected to a greater extent by
interest rate changes, and thereby tend to be more volatile than securities
which pay interest periodically. Increasing rate note securities are typically
refinanced by the issuers within a short period of time.
Reduced volume and liquidity in the high yield bond market or the
reduced availability of market quotations will make it more difficult to dispose
of the bonds and to value accurately the Fund's assets. The reduced availability
of reliable, objective data may increase the Fund's reliance on management's
judgment in valuing high yield bonds. In addition, the Fund's investments in
high yield securities may be susceptible to adverse publicity and investor
perceptions, whether or not justified by fundamental factors. The Fund's
investments, and consequently its net asset value, will be subject to the market
fluctuations and risks inherent in all securities.
5
<PAGE>
Options and Futures. The Fund may not invest in futures contracts or sell call
or put options. The Fund has authority to purchase put and call options,
although the Fund has no present intention of doing so in the coming fiscal
year.
Government Securities. The Fund may also invest in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Certain
U.S. Government securities, including U.S. Treasury bills, notes and bonds, and
Government National Mortgage Association certificates ("Ginnie Maes"), are
supported by the full faith and credit of the United States. Certain other U.S.
Government securities, issued or guaranteed by federal agencies or government
sponsored enterprises, are not supported by the full faith and credit of the
United States, but may be supported by the right of the issuer to borrow from
the U.S. Treasury. These securities include obligations of the Federal Home Loan
Mortgage Corporation ("Freddie Macs"), and obligations supported by the credit
of the instrumentality, such as Federal National Mortgage Association Bonds
("Fannie Maes") and the Student Loan Marketing Association Bonds ("Sallie
Maes"). Ginnie Maes, Freddie Macs, Fannie Maes and Sallie Maes are
mortgage-backed securities which provide monthly payments which are, in effect,
a "pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans.
Collateralized Mortgage Obligations ("CMOs") in which the Fund may invest are
securities issued by a U.S. Government instrumentality that are collateralized
by a portfolio of mortgages or mortgage-backed securities. Mortgage-backed
securities may be less effective than traditional debt obligations of similar
maturity at maintaining yields during periods of declining interest rates.
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 such payments are received
by the Fund 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.
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,
6
<PAGE>
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Repurchase Agreements. The Fund may invest in repurchase agreements. A
repurchase agreement is a contract under which the Fund acquires a security for
a relatively short period (usually not more than 7 days) subject to the
obligation of the seller to repurchase and the Fund to resell such security at a
fixed time and price (representing the Fund's cost plus interest). The Fund will
enter into repurchase agreements only with member banks of the Federal Reserve
System and with "primary dealers" in U.S. Government securities. The Adviser
will continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements.
The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income and lack of
access to income during this period and the expense of enforcing its rights.
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 1/3% 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 firms involved.
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
7
<PAGE>
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued
transactions, it relies on the seller to consummate the transaction. The failure
of the issuer or seller to consummate the transaction may result in the Fund's
losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when- issued or forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on
a when- issued or forward commitment basis, the Fund will segregate in a
separate account cash or liquid securities 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.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of a majority of the Fund's outstanding voting
securities which, as used in the Prospectuses and this Statement of Additional
Information, means approval by the lesser of (1) 67% or more of the Fund's
shares represented at a meeting if at least 50% of Fund's outstanding shares are
present in person or by proxy at the meeting or (2) 50% of the Fund's
outstanding shares.
(1) The Fund may not, with respect to 75% of its total assets, purchase
any security (other than securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and repurchase agreements collateralized by
such securities) if, as a result: (a) more than 5% of its total assets would be
invested in the securities of any one issuer, or (b) the Fund would own more
than 10% of the voting securities of any one issuer.
(2) The Fund may not issue senior securities, except as permitted by
paragraphs (3) and (7) below. For purposes of this restriction, the issuance of
shares of common stock in multiple classes, the purchase or sale of options,
futures contracts and options on futures contracts, forward commitments, and
repurchase agreements entered into in accordance with the Fund's investment
policies, and the pledge, mortgage or hypothecation of the Fund's assets are not
deemed to be senior securities.
8
<PAGE>
(3) The Fund may not borrow money except in connection with the sale or
resale of its capital stock.
(4) The Fund may not act as an underwriter, except to the extent that,
in connection with the disposition of portfolio investments, the Fund may be
deemed to be an underwriter for purposes of the Securities Act of 1933.
(5) The Fund may not purchase or sell real estate, or any interest
therein, including real estate mortgage loans, except that the Fund may: (i)
hold and sell real estate acquired as the result of its ownership of securities,
or (ii) invest in securities of corporate or governmental entities secured by
real estate or marketable interests therein or securities issued by companies
(other that real estate limited partnerships) that invest in real estate or
interests therein.
(6) The Fund may not make loans, except that the Fund (1) may lend
portfolio securities in accordance with the Fund's investment policies in an
amount up to 331/3% 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
debt securities, bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether or not
the purchase is made upon the original issuance of the securities.
(7) The Fund may not purchase or sell commodities or commodity
contracts; except that the Fund may purchase and sell options on securities,
securities indices, currency and other financial instruments, futures contracts
on securities, securities indices, currency and other financial instruments and
options on such futures contracts, forward commitments, interest rate swaps,
caps and floors, securities index put or call warrants and repurchase agreements
entered into in accordance with the Fund's investment policies.
(8) The Fund may not purchase securities of an issuer conducting its
principal activity in any particular industry if immediately after such purchase
the value of the Fund's investments in all issuers in this industry would exceed
25% of its total assets taken at market value.
Non Fundamental Investment Restrictions. The following restrictions may be
changed by the Fund's Board of Trustees and will not require shareholder
approval.
The Fund may not:
(a) Participate on a 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 any investment
adviser to the Fund in order to save commissions or to average prices among the
9
<PAGE>
accounts, and the participation of the Fund as a part of a group bidding for the
purchase of tax exempt bonds shall not be deemed to result in participation in a
securities trading account.
(b) Purchase securities on margin or make short sales 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 short and, if
the right is conditional, the sale is made upon the same conditions, except that
the Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities.
(c) Purchase a security if, as a result, (i) more than 10% of the
Fund's total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total outstanding voting
securities of any one investment company, or (iii) more than 5% of the Fund's
total assets would be invested in the securities of any one investment company.
These limitations do not apply to (a) the investment of cash collateral,
received by the Fund in connection with lending the Fund's portfolio securities,
in the securities of open-end investment companies or (b) the purchase of shares
of any investment company in connection with a merger, consolidation,
reorganization or purchase of substantially all of the assets of another
investment company. Subject to the above percentage limitations, the Fund may,
in connection with the John Hancock Group of Funds Deferred Compensation Plan
for Independent Trustees/Directors, purchase securities of other investment
companies within the John Hancock Group of Funds. The Fund may not purchase the
shares of any closed-end investment company except in the open market where no
commission or profit to a sponsor or dealer results from the purchase, other
than customary brokerage fees.
(d) Purchase a security of a company unless it or its predecessors have
been in continuous business for at least five years, and unless its most recent
balance sheet shows at least $10,000,000 total assets.
(e) Invest for the purpose of exercising control over or management of
any company.
(f) Purchase warrants of any issuer, if as a result, more than 2% of
the value of the Fund's total assets would be invested in warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange or more
than 5% of the value of the Fund's total assets would be invested in warrants,
whether or not so listed, such warrants in each case to be valued at the lesser
of cost or market, but assigning no value to warrants acquired by the Fund in
units with or attached to debt securities.
(g) Knowingly purchase or retain securities of an issuer if one or more
of the Trustees or officers of the Fund or directors or officers of the Adviser
or any investment management subsidiary of the Adviser individually owns
beneficially more than 1/2 of 1% and together own beneficially more than 5% of
the securities of such issuer.
10
<PAGE>
(h) Purchase interests in oil, gas or other mineral lease exploration
programs; however, this policy will not prohibit the acquisition of securities
of companies engaged in the production or transmission of oil, gas or other
minerals.
(i) Purchase any security, including any repurchase agreement maturing
in more than seven days, which is illiquid, if more than 15% of the net assets
of the Fund, taken at market value, would be invested in such securities. (The
staff of the Securities and Exchange Commission currently considers
over-the-counter options to be illiquid securities subject to the 15% limit.)
(j) Write put or call options.
(k) Purchase put and call options (other than protective put options)
if, as a result, the value of the Fund's aggregate investment in such options
would exceed 5% of its total assets.
(l) Purchase interests in real estate limited partnerships.
(m) No officer or trustee of the Fund may take a short position in the
shares of the Fund, withhold orders or buy shares in anticipation of orders.
(n) No security of a bank or trust company may be purchased unless it
is a domestic corporation, and has combined capital, surplus and undivided
profits of at least $20,000,000.
In order to permit the sale of shares of the Fund in certain states,
the Trustees may, in their sole discretion, adopt restrictions on investment
policy more restrictive than those described above. Should the Trustees
determine that any such more restrictive policy is no longer in the best
interest of the Fund and its shareholders, the Fund may cease offering shares in
the state involved and the Trustees may revoke such restrictive policy.
Moreover, if the states involved shall no longer require any such restrictive
policy, the Trustees may, at their sole discretion, revoke such policy. The Fund
has agreed with state securities administrators that it will not purchase the
following securities:
The Fund agrees that, in accordance with the Ohio Securities Division
and until such regulations are no longer required, it will comply with Rule
1301:6-3-09(E)(9) by not investing in the securities of other open-end and
closed-end investment companies except by purchase in the open market where no
commission or profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or except when the purchase is part of a plan
of merger, consolidation, reorganization or acquisition.
11
<PAGE>
If a percentage restriction on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the value of the Fund's assets will not
be considered a violation of the restriction.
Because investments in securities of other investment companies may
result in duplication of certain fees and expenses, the Fund will invest in such
securities only when, in the Adviser's opinion, the anticipated return on such
securities justifies any such additional expense.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Board of Trustees who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Fund are also officers or directors of the Adviser or officers
or directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds,").
The following table sets forth the principal occupation or employment
of the Trustees and principal officers of the Fund during the past five years:
12
<PAGE>
<TABLE>
<CAPTION>
Positions Held with Principal Occupation(s)
Name and Address the Registrant During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer(1)(2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("The
October 1944 Berkeley Group"); Chairman, NM
Capital Management, Inc. ("NM
Capital") and John Hancock Advisers
International Limited ("Advisers
International"); Chairman, Chief
Executive Officer and President,
John Hancock Funds, Inc. ("John
Hancock Funds"); John Hancock
Investor Services Corporation
("Investor Services"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp"); Director,
John Hancock Freedom Securities
Corporation, John Hancock Capital
Corporation and New England/ Canada
Business Council; Member,
Investment Company Institute Board
of Governors; Director, Asia
Strategic Growth Fund, Inc.;
Trustee, Museum of Science; Vice
Chairman and President, the Adviser
(until July 1992); Chairman, John
Hancock Distributors, Inc. (until
April, 1994).
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
13
<PAGE>
Positions Held with Principal Occupation(s)
Name and Address the Registrant During Past Five Years
- ---------------- -------------- ----------------------
James F. Carlin Trustee(3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Consolidated Group
Trust (insurance administration),
Carlin Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) and Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea
(until August 1992).
William H. Cunningham Trustee(3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair for Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
14
<PAGE>
Positions Held with Principal Occupation(s)
Name and Address the Registrant During Past Five Years
- ---------------- -------------- ----------------------
Harold R. Hiser, Jr. Trustee(3) Executive Vice President,
Schering-Plough Corporation Schering-Plough Corporation
One Giralda Farms (pharmaceuticals) (retired 1996);
Madison, NJ 07940-1000 Director, ReCapital Corporation
October 1931 (reinsurance) (until 1995).
Charles F. Fretz Trustee(3) Retired; self-employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Forster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Anne C. Hodsdon* President and President and Chief Operating
101 Huntington Avenue Trustee(1)(2) Officer, the Adviser; Executive
Boston, MA 02199 Vice President, the Adviser (until
April 1953 December 1994); Senior Vice
President, the Adviser (until
December 1993); Vice President, the
Adviser (until 1991).
Charles L. Ladner Trustee(3) Director, Energy North, Inc.
UGI Corporation (public utility holding
460 North Gulph Road company)(until 1992); Senior Vice
King of Prussia, PA 19406 President, Finance UGI Corp.
February 1938 (holding company, public utilities,
LPGAS).
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
15
<PAGE>
Positions Held with Principal Occupation(s)
Name and Address the Registrant During Past Five Years
- ---------------- -------------- ----------------------
Leo E. Linbeck, Jr. Trustee(3) Chairman, President, Chief
3810 W. Alabama Executive Officer and Director,
Houston, TX 77027 Linbeck Corporation (a holding
August 1934 company engaged in various phases
of the construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Eastern Corporation (a diversified
energy company), Daniel Industries,
Inc. (manufacturer of gas measuring
products and energy related
equipment), GeoQuest International,
Inc. (a geophysical consulting
firm) (1980-1993); Director,
Greater Houston Partnership.
Patricia P. McCarter Trustee(3) Director and Secretary, The
Swedesford Road McCarter Corp. (machine
RD #3, Box 121 manufacturer).
Malvern, PA 19355
May 1928
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
16
<PAGE>
Positions Held with Principal Occupation(s)
Name and Address the Registrant During Past Five Years
- ---------------- -------------- ----------------------
Steven R. Pruchansky Trustee(1)(3) Director and President, Mast
360 Horse Creek Drive, #208 Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust
(1982-1994); President, Maxwell
Building Corp. (until 1991).
Richard S. Scipione* Trustee General Counsel, John Hancock
John Hancock Place Mutual Life Insurance Company;
P.O. Box 111 Director, the Adviser, Advisers
Boston, MA 02199 International, John Hancock Funds,
August 1937 Investor Services, John Hancock
Distributors, Inc., John Hancock
Subsidiaries, Inc., John Hancock
Property and Casualty Insurance and
its affiliates (until November
1993), SAMCorp and NM Capital;
Trustee, The Berkeley Group;
Director, JH Networking Insurance
Agency, Inc.
Norman H. Smith Trustee(3) Lieutenant General, USMC, Deputy
Rt. 1, Box 249 E Chief of Staff for Manpower and
Linden, VA 22642 Reserve Affairs, Headquarters
March 1933 Marine Corps; Commanding General
III Marine Expeditionary Force/3rd
Marine Division (retired 1991).
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
17
<PAGE>
Positions Held with Principal Occupation(s)
Name and Address the Registrant During Past Five Years
- ---------------- -------------- ----------------------
John P. Toolan Trustee(3) Director, The Smith Barney Muni
13 Chadwell Place Bond Funds, The Smith Barney
Morristown, NJ 07960 Tax-Free Money Fund, Inc., Vantage
September 1930 Money Market Funds (mutual funds),
The Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired 1991);
Director, Smith Barney, Inc.,
Mutual Management Company and
Smith, Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman* Vice Chairman and Chief Vice Chairman and Chief Investment
101 Huntington Avenue Investment Officer(2) Officer, the Adviser; President,
Boston, MA 02199 the Adviser (until December 1994);
July 1938 Director, the Adviser, Advisers
International, John Hancock Funds
Investor Services, SAMCorp and NM
Capital; Senior Vice President, The
Berkeley Group.
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
18
<PAGE>
Positions Held with Principal Occupation(s)
Name and Address the Registrant During Past Five Years
- ---------------- -------------- ----------------------
James B. Little* Senior Vice President and Senior Vice President, the Adviser,
101 Huntington Avenue Chief Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds and Investor Services.
February 1935
James J. Stokowski* Vice President and Vice President, the Adviser.
101 Huntington Avenue Treasurer
Boston, MA 02199
November 1946
Susan S. Newton* Vice President and Vice President and Assistant
101 Huntington Avenue Secretary Secretary, the Adviser; Vice
Boston, MA 02199 President and Secretary, John
March 1950 Hancock Funds, Investor Services
and John Hancock Distributors, Inc.
(until 1994); Secretary, SAMCorp;
Vice President, The Berkeley Group.
John A. Morin* Vice President Vice President, the Adviser,
101 Huntington Avenue Investor Services and John Hancock
Boston, MA 02199 Funds; Counsel, John Hancock Mutual
July 1950 Life Insurance Company; Vice
President and Assistant Secretary,
The Berkeley Group.
</TABLE>
* An "interested person" of the Trust, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Trust's Declaration of Trust,
the Executive Committee may generally exercise most of the powers of the
Board of Trustees.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
19
<PAGE>
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 other funds for which the
Adviser serves as investment adviser.
The following table provides information regarding the compensation
paid by the Fund during its most recently completed fiscal year and the other
investment companies in the John Hancock Fund Complex to the Independent
Trustees for their services. Mr. Boudreau and each of the officers of the Fund
are interested persons of the Adviser, are compensated by the Adviser and
received no compensation from the Fund for their services. Messrs. Cunningham
and Linbeck were not Trustees of the Fund during its most recently completed
fiscal year and are therefore not included in the following table.
Total Compensation
Aggregate From the Fund and John
Compensation From Hancock Fund Complex
Independent Trustees the Fund(2) to Trustees(1)(2)
- -------------------- ----------- -----------------
James F. Carlin $ 15,878 $ 60,700
Charles F. Fretz 22,758 56,200
Harold R. Hiser, Jr.+ 25,266 60,200
Charles L. Ladner 13,422 60,700
Patricia P. McCarter 13,422 60,700
Steven R. Pruchansky 13,865 62,700
Norman H. Smith 13,865 62,700
John P. Toolan+ 13,422 60,700
-------- --------
$131,898 $484,600
(1) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1995.
(2) Compensation is for the fiscal year ended December 31, 1995.
+ As of December 31, 1995, the value of the aggregate accrued deferred
compensation from all funds in the John Hancock fund complex for Mr. Hiser
was $31,324 and for Mr. Toolan was $71,437 under the John Hancock Deferred
Compensation Plan for Independent Trustees.
20
<PAGE>
As of August 30, 1996, the officers and Trustees of the Fund as a group owned
less than 1% of the outstanding shares of each class of the Fund and as of the
same date the following shareholders beneficially owned 5% of or more of the
outstanding shares of the Fund:
<TABLE>
<CAPTION>
Percentage of
Number of Shares total outstanding
Name and Address of Class of of beneficial shares of the class
Shareholder Shares interest owned of the Fund
----------- ------ -------------- -----------
<S> <C> <C> <C>
Mellon Bank Trustee Class C 994,933 77.50%
California Savings Plus Program shares
457 Plan A/C CSPF0135002
Attn: Bob Stein
1 Cabot Rd.
Medford, MA 02155-5158
Mellon Bank Trustee Class C 288,602 22.48%
California Savings Plus Program shares
401(K) Thrift Plan A/C CSPF0035002
Attn: Bob Stein
1 Cabot Rd.
Medford, MA 02155-5158
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Fund receives its investment advice from the Adviser. Investors
should refer to the Prospectus for a description of certain information
concerning the investment management contract.
Each of the Trustees and principal officers affiliated with the Fund
who is also an affiliated person of the Adviser is named above, together with
the capacity in which such person is affiliated with the Fund or the Adviser.
As described in the Prospectuses under the caption "Organization and
Management of the Fund," the Fund has entered into an investment management
contract with the Adviser. Under the investment management contract, the Adviser
provides the Fund (i) with a continuous investment program, consistent with the
Fund's stated investment objective and policies; and (ii) supervision of all
21
<PAGE>
aspects of the Fund's operations except those delegated to a custodian, transfer
agent or other agent. The Adviser is responsible for the day to day management
of the Fund's portfolio assets.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made, insofar as feasible,
for the respective funds or clients in a manner deemed equitable to all of them.
To the extent that transactions on behalf of more than one client of the Adviser
or affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
No person other than the Adviser and its directors and employees and
SAMCorp Advisers, Inc. regularly furnish advice to the Fund with respect to the
desirability of the Fund's investing in, purchasing or selling securities. The
Adviser may from time to time receive statistical or other similar factual
information, and information regarding general economic factors and trends, from
the Life Company and its affiliates.
All expenses which are not specifically paid by the Adviser and which
are incurred in the operation of the Fund (including fees of Trustees of the
Fund who are not "interested persons," as such term is defined in the Investment
Company Act but excluding certain distribution-related activities required to be
paid by the Adviser or John Hancock Funds) and the continuous public offering of
the shares of the Fund are borne by the Fund.
As discussed in the Class A and Class B Prospectus and as provided by
the investment management contract, the Fund pays the Adviser quarterly an
investment management fee, which is accrued daily, based on a stated percentage
of the average of the daily net assets of the Fund.
Investment advisory fees paid to the Adviser in 1995, 1994 and 1993
amounted to $8,017,834, $7,452,980 and 6,750,790, respectively. The Adviser paid
SAMCorp the sum of $2,672,150 in 1993, $2,997,156 in 1994 and $3,232,490 in
1995.
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.
In the event normal operating expenses of the Fund, exclusive of
certain expenses prescribed by state law, are in excess of any state limit where
22
<PAGE>
the Fund is registered to sell shares of common stock, the fee payable to the
Adviser will be reduced to the extent of such excess and the Adviser will make
any additional arrangements necessary to eliminate any remaining excess expenses
to the extent required by law. Currently, the most restrictive limit applicable
to the Fund is 2.5% of the first $30,000,000 of the Fund's average daily net
assets, 2% of the next $70,000,000 of such assets and 1.5% of the remaining
average daily net assets.
Pursuant to the investment management contract, the Adviser is not
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the investment management
contract relates, except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its duties or
from reckless disregard of the obligations and duties under the investment
management contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199- 7603, was organized in 1968 and currently has more than $18 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 1,080,000 shareholders. The
Adviser is an affiliate of the Life Company, one of the most recognized and
respected financial institutions in the nation. With total assets under
management of more than $80 billion, the Life Company is one of the ten largest
life insurance companies in the United States, and carries highest ratings from
Standard & Poor's and A.M. Best. Founded in 1862, the Life Company has been
serving clients for over 130 years.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
The Adviser has entered into a service agreement with SAMCorp Advisers,
Inc. ("SAMCorp"), which is an indirect wholly-owned subsidiary of the Life
Company. The service agreement provides that SAMCorp will provide to the Adviser
certain portfolio management services with respect to the securities held in the
portfolio of the Fund. The service agreement further provides that the Adviser
will remain ultimately responsible for all of its obligations under the
investment management contract between the Adviser and the Fund. Subject to the
supervision of the Adviser, SAMCorp furnishes the Fund with recommendations with
respect to the purchase, holding and disposition of equity securities in the
23
<PAGE>
Fund's portfolio; furnishes the Fund with research, economic and statistical
data in connection with the Fund's equity investments; and places orders for
transactions in equity securities.
The Adviser pays to SAMCorp 40% of the quarterly investment management
fee received by the Adviser with respect to the Fund during such quarter. The
fees paid by the Fund to the Adviser under the investment management contract
are not affected by this arrangement.
The investment management contract and the distribution contract
continue in effect from year to year thereafter if approved annually by vote of
a majority of the Independent Trustees, cast in person at a meeting called for
the purpose of voting on such approval, and by either the Trustees or the
holders of a majority of the Fund's outstanding voting securities. The contract
automatically terminates upon assignment. The contract may be terminated without
penalty on 60 days' notice at the option of either party to the respective
contract or by vote of a majority of the outstanding voting securities of the
Fund.
DISTRIBUTION CONTRACTS
The Fund has entered into a distribution contract with John Hancock
Funds. Under the contract, John Hancock Funds is obligated to use its best
efforts to sell shares of each class of the Fund. Shares of the Fund are also
sold by selected broker-dealers (the "Selling Brokers") which have entered into
selling agency agreements with John Hancock Funds. John Hancock Funds accepts
orders for the purchase of the shares of the Fund which are continually offered
at net asset value next determined, plus any applicable sales charge. In
connection with the sale of Class A or Class B shares, John Hancock Funds and
Selling Brokers receive compensation in the form of a sales charge imposed, in
the case of Class A shares, at the time of sale or, in the case of Class B
shares, on a deferred basis. The sales charges are discussed further in the
Class A and Class B Prospectus.
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. Under the Plans, the Fund will pay distribution and service fees at
an aggregate annual rate of up to 0.30% and 1.00% for Class A and Class B,
respectively, of the Fund's daily net assets attributable to shares of that
class. However, the service fee will not exceed 0.25% of the Fund's average
daily net assets attributable to each class of shares. The distribution fees
will be used to reimburse the Distributor for its distribution expenses,
including but not limited to: (i) initial and ongoing sales compensation to
Selling Brokers and others (including affiliates of the Distributor) 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
24
<PAGE>
expenses. The service fees will be used to compensate Selling Brokers for
providing personal and account maintenance services to shareholders. In the
event that John Hancock Funds is not fully reimbursed for expenses incurred by
it under the Class B Plan in any fiscal year, John Hancock Funds may carry these
expenses forward, provided, however, that the Trustees may terminate the Class B
Plan and thus the Fund's obligation to make further payments at any time.
Accordingly, the Fund does not treat unreimbursed expenses relating to the Class
B shares as a liability of the Fund. The Plans were approved by a majority of
the voting securities of the Fund. The Plans and all amendments were approved by
the Trustees, including a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plans (the "Independent Trustees"), by votes cast in person at
meetings called for the purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides
the Fund with a written report of the amounts expended under the Plans and the
purpose for which the expenditures were made. The Trustees review these reports
on a quarterly basis.
During the fiscal year ended December 31, 1995, the Fund paid John
Hancock Funds the following amounts of expenses with respect to the Class A and
Class B shares of the Fund:
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of Interest Carrying
Prospectus to Compensation to Expenses of John or Other Finance
Advertising New Shareholders Selling Brokers Hancock Funds Charges
----------- ---------------- --------------- ------------- -------
<S> <C> <C> <C> <C>
Sovereign
Investors Fund
- --------------
Class A Shares $459,536 $28,722 $1,921,699 $1,135,643 None
Class B Shares $179,770 $13,303 $ 531,451 $ 438,931 $744,118
</TABLE>
Each of the Plans provides that it will continue in effect only so long
as its continuance is approved at least annually by the Board of Trustees and by
the Independent Trustees. Each of the Plans provides that it may be terminated
without penalty (a) by vote of a majority of the Independent Trustees (b) by a
majority of the Fund's outstanding shares of the applicable class having voting
rights with respect to the Plan upon 60 days' written notice to John Hancock
Funds, and (c) automatically in the event of assignment. Each of the Plans
further provides that it may not be amended to increase the maximum amount of
the fees for the services described therein without the approval of a majority
of the outstanding shares of the class of the Fund which has voting rights with
respect to the Plan. Each of the Plans also provides that no material amendment
25
<PAGE>
to the Plan will, in any event, be effective unless it is approved by a vote of
the Board of Trustees and the Independent Trustees of the Fund. The holders of
Class A shares and Class B shares have exclusive voting rights with respect to
the Plan applicable to their respective class of shares. In adopting the Plans,
the Trustees concluded that, in their judgment, there is a reasonable likelihood
that each Plan will benefit the holders of the applicable class of shares of the
Fund.
Class C shares of the Fund are not subject to any distribution plan.
Expenses associated with the obligation of John Hancock Funds to use its best
efforts to sell Class C shares will be paid by the Adviser or by John Hancock
Funds and will not be paid from the fees paid under Class A or Class B Plans.
When the Fund seeks an Independent Trustee to fill a vacancy or as a
nominee for election by shareholders, the selection or nomination of the
Independent Trustee is, under resolutions adopted by the Trustees
contemporaneously with their adoption of the Plans, committed to the discretion
of the Committee on Administration of the Trustees. The members of the Committee
on Administration are all Independent Trustees and are identified in this
Statement of Additional Information under the caption "Management of the Fund."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's
shares, the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations
furnished by a principal market maker or a pricing service, both of which
generally utilize electronic data processing techniques to determine valuations
for normal institutional size trading units of debt securities without exclusive
reliance upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National
Market Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars by the custodian bank based on London currency
26
<PAGE>
exchange quotations as of 5:00 p.m., London time (12:00 noon, New York time) on
the date of any determination of the Fund's NAV.
The Fund will not price its securities on the following national
holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day. On any day an
international market is closed and the New York Stock Exchange is open, any
foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are described in the Fund's Class A and Class B Prospectus. Methods of obtaining
reduced sales charges referred to generally in the Prospectus are described in
detail below. In calculating the sales charge applicable to current purchases of
Class A shares of the Fund, the investor is entitled to cumulate current
purchases with the greater of the current value (at offering price) of the Class
A shares of the Fund owned by the investor, or if Investor Services is notified
by the investor's dealer or the investor at the time of the purchase, the cost
of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases of
Class A shares made at one time, the purchases will be combined if made by (a)
an individual, his spouse and their children under the age of 21, purchasing
securities for his or their own account, (b) a Trustee or other fiduciary
purchasing for a single Fund, estate or fiduciary account, and (c) certain
groups of four or more individuals making use of salary deductions or similar
group methods of payment whose funds are combined for the purchase of mutual
fund shares. Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Investor Services or
a Selling Broker's representative.
Without Sales Charge. Class A shares may be offered without a front-end sales
charge or CDSC to various individuals and institutions as follows:
o Any state, county or any instrumentality, department, authority, or agency
of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any
registered investment management company.
27
<PAGE>
o A bank, trust company, credit union, savings institution or other
depository institution, its trust departments or common trust funds if it
is purchasing $1 million or more for non-discretionary customers or
accounts.
o A Trustee or officer of the Trust; a Director or officer of the Adviser and
its affiliates or Selling Brokers; employees or sales representatives of
any of the foregoing; retired officers, employees or Trustees of any of the
foregoing; a member of the immediate family (spouse, children, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharings or other benefit plan for
the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994, and participant-directed defined
contribution plans with at least 100 eligible employees at the inception of
the Fund account, may purchase Class A shares with no initial sales charge.
However, if the shares are 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 Date
--------------- ---------
$1 million to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
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.
28
<PAGE>
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of a reduced sales
charge by taking into account not only the amount then being invested but also
the purchase price or current value of the Class A shares already held by such
person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Class A and Class B Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in Class A
shares of the Fund and shares of all other John Hancock funds which carry a
sales charge.
Letter of Intention. The reduced sales loads are also applicable to investments
made over a specified period pursuant to a Letter of Intention (LOI), which
should be read carefully prior to its execution by an investor. The Fund offers
two options regarding the specified period for making investments under the LOI.
All investors have the option of making their investments over a period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty-eight (48) month period. These qualified
retirement plans include IRA, SEP, SARSEP, 401(k), 403(b) (including TSAs) and
Section 457 plans. Such an investment (including accumulations and combinations)
must aggregate $50,000 or more invested during the specified period from the
date of the LOI or from a date within ninety (90) days prior thereto, upon
written request to Investor Services. The sales charge applicable to all amounts
invested under the LOI is computed as if the aggregate amount intended to be
invested had been invested immediately. If such aggregate amount is not actually
invested, the difference in the sales charge actually paid and the sales charge
payable had the LOI not been in effect is due from the investor. However, for
the purchases actually made with 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 Investor Services to hold in escrow sufficient Class
A shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Investor 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.
29
<PAGE>
Because Class C shares are sold at net asset value without the
imposition of any sales charge, none of the privileges described under these
captions are available to Class C investors, with the following exception:
Combination Privilege. As explained in the Prospectus for Class C Shares, a
Class C investor may qualify for the minimum $1,000,000 investment (or such
other amount as may be determined by the Fund's officers) if the aggregate
amount of his current and prior investments in Class C shares of the Fund and
Class C shares of any other John Hancock Fund exceeds $1,000,000.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Class A and Class B Prospectus as a percentage of
the dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the current market value or the original purchase cost of
the Class B shares being redeemed. Accordingly, no CDSC will be imposed on
increases in account value above the initial purchase prices, including Class B
shares derived from reinvestment of dividends or capital gains distributions. No
CDSC will be imposed on shares derived from reinvestment of dividends or capital
gains distributions.
Class B shares are not available to full-service defined contribution
plans administered by Investor Services or the Life Company that had more than
100 eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
In determining whether a CDSC applies to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. It will be assumed that your redemption comes first from shares you
have held beyond the six- year CDSC redemption period or those you acquired
through dividend and capital gain reinvestment, and next from the shares you
have held the longest during the six-year period. For this purpose, the amount
of any increase in a share's value above its initial purchase price is not
regarded as a share exempt from CDSC. Thus, when a share that has appreciated in
30
<PAGE>
value is redeemed during the CDSC period, a CDSC is assessed only on its initial
purchase price. Upon redemption, appreciation is effective only on a per share
basis for those shares being redeemed. Appreciation of shares cannot be redeemed
CDSC free at the account level.
When requesting a redemption for a specific dollar amount please
indicate if you require the proceeds to equal the dollar amount requested. If
not indicated, only the specified dollar amount will be redeemed from your
account and the proceeds will be less any applicable CDSC.
Example:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $600
* Minus proceeds of 10 shares not subject to CDSC
(dividend reinvestment) -120
* Minus appreciation on remaining shares (40 shares X $2) -80
----
* Amount subject to CDSC $400
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by Investor Services to defray its expenses related to
providing distribution related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees enables the Fund to sell the Class B shares
without a sales charge being deducted at the time of the purchase. See the Class
A and Class B Prospectus for additional information regarding the CDSC.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to CDSC,
unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account if
you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
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<PAGE>
* Redemptions due to death or disability.
* Redemptions made under the Reinstatement Privilege, as described in "Sales
Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B shares made under a periodic withdrawal plan, as
long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Investor services.
(Please note that this waiver does not apply to periodic withdrawal plan
redemptions of Class A shares that are subject to a CDSC).
For Retirement Accounts (such as IRA, Rollover IRA, TSA, 457, 403(b), 401(k),
Money Purchase Pension Plan, Profit-Sharing Plan and other qualified plans as
described in the Internal Revenue Code of 1986, as amended (the "Code")) unless
otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions under
the Internal Revenue Code.
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or beneficiaries
from employer sponsored retirement plans under Section 401(a) of the Code
(401(k), Money Purchase Pension Plan, Profit-Sharing Plan).
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares prior
to May 15, 1995.
Please see matrix for reference.
32
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
401(a) Plan
Type of (401(k), MPP, IRA, IRA
Distribution PSP) 403(b) 457 Rollover Non-retirement
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Death or Waived Waived Waived Waived Waived
Disability
- ------------------------------------------------------------------------------------------------------------------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
mandatory value annually
distributions or in periodic
12% of account payments
value annually
in periodic
payments
- ------------------------------------------------------------------------------------------------------------------------
Between 59 1/2 Waived Waived Waived Waived for Life 12% of account
and 70 1/2 Expectancy or 12% value annually
of account value in periodic
annually in payments
periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Under 59 1/2 Waived Waived for annuity Waived for annuity Waived for annuity 12% of account
payments (72t)or payments (72t)or payments (72t)or value annually
12% of account 12% of account 12% of account in periodic
value annually in value annually in value annually in payments
periodic payments periodic payments periodic payments
- ------------------------------------------------------------------------------------------------------------------------
Loans Waived Waived N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Termination of Not Waived Not Waived Not Waived Not Waived N/A
Plan
- ------------------------------------------------------------------------------------------------------------------------
Hardships Waived Waived Waived N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
Return of
Excess Waived Waived Waived Waived N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services at the time you make your redemption. The waiver will be
granted once Investor Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
33
<PAGE>
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, he would incur a brokerage charge. Any such
securities would be valued for the purposes of making such payment at the same
value as used in determining net asset value. The Fund has, however, elected to
be governed by Rule 18f-1 under the Investment Company Act. Under that rule, the
Fund must redeem its shares for cash except to the extent that the redemption
payments to any shareholder during any 90-day period would exceed the lesser of
$250,000 or 1% of the Fund's net asset value at the beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS FOR CLASS A AND CLASS B SHARES
Exchange Privilege. As described more fully in the Prospectuses, the Fund
permits exchanges of shares of any class of the Fund for shares of the same
class in any other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Fund's Class A and Class
B Prospectus, the Fund permits the establishment of a Systematic Withdrawal
Plan. Payments under this plan represent proceeds arising from the redemption of
shares. Since the redemption price of the shares of the Fund may be more or less
than the shareholder's cost, depending upon the market value of the securities
owned by the Fund at the time of redemption, the distribution of cash pursuant
to this plan may result in realization of gain or loss for purposes of Federal,
state and local income taxes. The recognition 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 as a
Systematic Withdrawal Plan is in effect. The Fund reserves the right to modify
or discontinue the Systematic Withdrawal Plan of any shareholder on 30 days'
prior written notice to such shareholder, or to discontinue the availability of
such plan in the future. The shareholder may terminate the plan at any time by
giving proper notice to Investor Services.
Monthly Automatic Accumulation Program (MAAP). This program is explained fully
in the Class A and Class B Prospectus. The program, as it relates to automatic
investment drafts, is subject to the following conditions:
The investment drafts will be drawn on or about the day of the month indicated.
The privilege of making investments through the Monthly Automatic Accumulation
Program may be revoked by Investor Services without prior notice if any
34
<PAGE>
investment is not honored by the Shareholder's bank. The bank shall be under no
obligation to notify the shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Investor
Services or upon written notice to Investor Services which is received at least
five (5) business days prior to the processing date of any investment.
Reinvestment Privilege. A shareholder who has redeemed shares of the Fund may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or another John Hancock fund, subject to the minimum investment limit
in any 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 other John Hancock fund. If a CDSC was paid
upon a redemption, a shareholder may reinvest the proceeds from such redemption
at net asset value in additional shares of the class from which the redemption
was made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of 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
shares will be treated for tax purposes as described below.
DESCRIPTION OF FUND SHARES
As of December 1993, the Company's authorized capitalization is
345,000,000 fully paid and non-assessable shares of capital stock, $.01 par
value with 285,000,000 shares allocated to this Fund and 60,000,000 shares
allocated to the John Hancock Sovereign Balanced Fund. When issued, each share
is fully transferable, has one vote and has equal rights with respect to
earnings, dividends and liquidation. Shareholders have no preemptive or
conversion rights. On April 20, 1987, shareholders voted to increase the
authorized shares and to split the capital stock 2-for-1 thereby restating the
par value from $1 to $.50 per share. On May 1, 1990 the Company reincorporated
in Maryland with authority to issue 100,000,000 shares of $.01 par value.
Presently outstanding stock certificates of $1 and $.50 par should be retained
and will have the same value as the new $.01 par stock.
The Directors of the Company are responsible for the management and
supervision of the Company. Under the Articles of Incorporation, the Directors
35
<PAGE>
have the authority to classify unissued capital stock in separate series,
without further action by shareholders. As of the date of this Statement of
Additional Information, the Directors have authorized two series of the Company.
Additional series may be added in the future. The Articles of Incorporation also
authorize the Directors to classify and reclassify the shares of the Fund, or
any new series of the Company, into one or more classes. As of the date of this
Statement of Additional Information, the Directors have authorized the issuance
of three classes of shares: Class A, Class B and Class C shares.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets belonging to the Fund. Class A shares and
Class B shares of the Fund will be sold exclusively to members of the public
(other than the institutional investors described in the Class A and Class B
Prospectus) at net asset value and a sales charge that will vary inversely with
the dollar amount of shares purchased. For Class A shares, no sales charge is
payable at the time of purchase on investments of $1 million or more, but for
such investments a contingent deferred sales charge may be imposed in the event
of certain redemption transactions within one year of purchase.
Holders of Class A and Class B shares have certain exclusive voting
rights on matters relating to their respective Rule 12b-1 distribution plans.
Holders of Class C shares have no voting rights with respect to the Class A or
Class B 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. Class A and Class B shares
pay transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses. Class C shares pay a monthly transfer agent fee
equivalent, on an annual basis, to 0.10% of the average daily net asset value of
Class C shares of the Fund.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except for differences resulting from the
facts that (i) the distribution and service fees relating to Class A and Class B
shares will be borne exclusively by such class, (ii) Class B shares will pay
higher distribution and service fees than Class A shares and (iii) each class of
shares will bear any other class expenses properly attributable to that class of
shares, subject to certain conditions imposed by the Internal Revenue Service in
issuing rulings to funds with a multiple-class structure. Similarly, the net
asset value per share may vary depending on the class of shares purchased.
In the event of liquidation, shareholders are entitled to share pro
rata in the net assets of the Fund available for distribution to the
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.
Unless otherwise required by the Investment Company Act or the Articles
of Incorporation, the Fund has no intention of holding annual meetings of
36
<PAGE>
shareholders. Fund shareholders may remove a Director by the affirmative vote of
at least a majority of the Fund's outstanding shares and the Directors 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 Fund.
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 Directors holding office
were elected by the shareholders, the Directors will call a special meeting of
shareholders for the purpose of electing Directors.
Notwithstanding the fact that the Prospectus is a combined prospectus
for the Fund and other John Hancock mutual funds, the Fund shall not be liable
for the liabilities of any other John Hancock mutual fund.
In order to avoid conflicts with portfolio trades for the Fund, the
Adviser and the Fund have adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. Some of these
restrictions are: pre-clearance for all personal trades and a ban on the
purchase of initial public offerings, as well as contributions to specified
charities of profits on securities held for less than 91 days. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come first.
TAX STATUS
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and has elected
to be treated as a "regulated investment company" under Subchapter M of the
Code, and intends to continue to so qualify in the future. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions and the diversification of its
assets, the Fund will not be subject to Federal income tax on taxable income
(including net realized capital gains) distributed to shareholders in accordance
with the timing requirements of the Code.
The Fund will be subject to a four percent nondeductible Federal excise
tax on certain amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to seek to avoid or
minimize liability for such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P") will be taxable under the Code for investors who are subject to
tax. If these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
37
<PAGE>
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than net capital gain, after reduction by
deductible expenses.) Some distributions from investment company taxable income
and/or net capital gain may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of
capital under the Code, which will first reduce an investor's federal tax basis
in Fund shares and then, to the extent such basis is exceeded, will generally
give rise to capital gains. Shareholders who have chosen automatic reinvestment
of their distributions will have a federal tax basis in each share received
pursuant to such a reinvestment equal to the amount of cash they would have
received had they elected to receive the distribution in cash, divided by the
number of shares received in the reinvestment.
The amount of net realized capital gains, if any, in any given year
will result from sales of securities made with a view to the maintenance of a
portfolio believed by the Fund's management to be most likely to attain the
Fund's objective. Such sales, and any resulting gains or losses, may therefore
vary considerably from year to year. At the time of an investor's purchase of
shares of the Fund, a portion of the purchase price is often attributable to
realized or unrealized appreciation in the Fund's portfolio. Consequently,
subsequent distributions on these shares from such appreciation or income may be
taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares and the distributions in reality represent a return of a portion of the
purchase price.
If the Fund acquires stock of certain foreign corporations that receive
at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may, if available, ameliorate these
adverse tax consequences, but any such election would require the Fund to
recognize taxable income or gain without the concurrent receipt of cash. The
Fund may limit and/or manage its holdings in passive foreign investment
companies to minimize its tax liability or maximize its return from these
investments.
The Fund may be subject to foreign taxes on its income from investments
in certain foreign securities, if any. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in some cases. Because more than
38
<PAGE>
50% of the Fund's assets at the close of any taxable year will generally not
consist of stocks or securities of foreign corporations, the Fund will generally
be unable to pass such taxes through to shareholders, who will therefore
generally not be entitled to any foreign tax credit or deduction with respect to
their investment in the Fund. The Fund will deduct the foreign taxes it pays in
determining the amount it has available for distribution to shareholders.
Foreign exchange gains and losses realized by the Fund in connection
with certain transactions involving foreign currency-denominated debt
securities, foreign currencies, or payable or receivables denominated in foreign
currency are subject to Section 988 of the Code, which generally causes such
gains and losses to be treated as ordinary income and losses and may affect the
amount, timing and character of distributions to shareholders.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into options transactions.
Certain of these transactions may cause the Fund to recognize gains or losses
from marking to market even though its positions have not been sold or
terminated and may affect the character as long-term or short-term and timing of
some capital gains and losses realized by the Fund. Additionally, certain of the
Fund's losses on transactions involving options and any offsetting or successor
positions in its portfolio may be deferred rather than being taking into account
currently in calculating the Fund's taxable income or gain. 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. Some of the
applicable tax rules may be modified if the Fund is eligible and chooses to make
one or more of certain tax elections that may be available. The Fund will take
into account the special tax rules applicable to options including consideration
of available elections, in order to seek to minimize any potential adverse tax
consequences.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's tax holding period for the shares
and subject to the special rules described below. A sales charge paid in
purchasing Class A shares of the Fund cannot be taken into account for purposes
of determining gain or loss on the redemption or exchange of such shares within
90 days after their purchase to the extent Class A shares of the Fund or another
John Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. Such disregarded 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
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<PAGE>
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 reinvestment. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long- term capital gain
with respect to such shares.
Although the Fund's 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 gain over net short- term capital loss in any year. The
Fund will not in any event distribute net capital gain realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares in the Fund by
the difference between his pro rata share of such excess and his pro rata share
of these taxes.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and as noted above would not be distributed as such to
shareholders. Presently, there are no realized capital loss carryforwards to
offset against future net realized capital gains.
For purposes of the dividends received deduction available to
corporations, dividends received by the Fund, if any, from U.S. domestic
corporations in respect of the stock of such corporations held by the Fund, for
U.S. Federal income tax purposes, for at least 46 days (91 days in the case of
certain preferred stock) and distributed and properly designated by the Fund may
be treated a qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement stated above (46 or 91 days) with respect to their
shares of the Fund in order to qualify for the deduction and, if they have any
debt that is deemed under the Code directly attributable to such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
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<PAGE>
alternative minimum tax liability, if any. Additionally, any corporate
shareholder should consult its tax adviser regarding the possibility that its
tax basis in its shares may be reduced, for Federal income tax purposes, by
reason of "extraordinary dividends" received with respect to the shares, for the
purpose of computing its gain or loss on redemption or other disposition of the
shares.
The Fund is required to accrue income on any debt securities that have
more than a de minimus amount of original issue discount (or debt securities
acquired at a market discount, if the Fund elects to include market discount in
income currently) prior to the receipt of the corresponding cash payments. The
mark to market rules applicable to certain options and futures contracts may
also require the Fund to recognize gain within 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 liability for any federal income or excise tax. Therefore, the Fund may have
to dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to satisfy
these distribution requirements.
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent (if any) the Fund's
distributions are derived from interest on (or, in the case of intangible 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 the 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
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<PAGE>
should consult their tax advisers about the applicability of the backup
withholding provisions.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
Investments in debt obligations that are at risk of or in default may
present special tax issues for the Fund. Tax rules are not entirely clear about
issues such as when the Fund may cease to accrue interest, original issue
discount, or market discount; when and to what extent deductions may be taken
for bad debts or worthless securities; how payments received on obligations in
default should be allocated between principal and income; and whether exchanges
of debt obligations in a workout context are taxable. These and other issues
will be addressed by the Fund, in the event it invests in such securities, in
order to reduce the risk of distributing insufficient income to preserve its
status as a regulated investment company and seek to avoid becoming subject to
Federal income or excise tax.
The foregoing discussion relates solely to U.S. Federal income tax laws
applicable to the U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of shares of the
Fund may also be subject to state and local taxes. The foregoing discussion
related to U.S. investors that are not exempt from U.S. Federal income tax.
Different tax consequences will apply to plan participants, tax-exempt investors
and investors that are subject to tax deferral. You should consult your tax
adviser for specific advice. Under the Code, a tax-exempt investor in the Fund
will not generally recognize unrelated business taxable income from its
investment in the Fund unless the tax-exempt investor incurred indebtedness to
acquire or continue to hold Fund shares and such indebtedness remains unpaid.
Shareholders should consult their own tax advisers as to the Federal, state or
local tax consequences of ownership of shares of, and receipt of distributions
from, the Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their Fund investment is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute for Form W-8 is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
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<PAGE>
in the Fund. Provided that the Fund qualifies as a regulated investment company
under the Code, it will not be required to pay Massachusetts corporate excise,
franchise or income taxes.
CALCULATION OF PERFORMANCE
For the 30-day period ended June 30, 1996, the annualized yield on
Class A, Class B and Class C shares of the Fund was 1.76%, 1.06%, and 2.22%,
respectively. The average annual total return of the Class A shares of the Fund
for the 1, 5, 10 year periods ended June 30, 1996 was 16.18%, 11.58% and 10.40%,
respectively. The average annual total return of the Class B shares of the Fund
for the 1 year period ended June 30, 1996 and for the period from the
commencement of operations, January 3, 1994 to June 30, 1996 was 16.29% and
12.22%, respectively. The average annual total return of the Class C shares of
the Fund for the 1 year period ended June 30, 1996 and for the period from
commencement of operation, May 7, 1993 to June 30, 1996 was 22.69% and 12.87%,
respectively.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 year and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made
at the beginning of the 1, 5 and 10 year periods.
This calculation assumes the maximum sales charge of 5.0% is included
in the initial investment or the CDSC is applied at the end of the period, and
also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period. Performance calculations for
Class C shares do not include any sales charge or distribution plan fees.
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In addition to average annual total returns, the Fund may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's 5.0% sales charge
on Class A shares or the CDSC on Class B shares into account. 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 on Class A
shares and the CDSC on Class B shares from a total return calculation produces a
higher total return figure.
The Fund's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price per share
(which includes the full sales charge) on the last day of the period, according
to the following standard formula:
Yield = 2 ([(a-b) + 1] 6 - 1
---
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued during the period (net of fee reductions
and expense limitation payments, if any).
c = the average daily number of 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.
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 -- Growth
and Income Fund Performance Analysis," a monthly publication which tracks mutual
fund net assets, total return, and yield. Comparisons may also be made to bank
certificates of deposit ("CDs"), which differ from mutual funds, such as the
Fund, in several ways. The interest rate established by the sponsoring bank is
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<PAGE>
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, BARRON'S and IBBOTSON ASSOCIATES
will also be utilized as well as the Russell and Wilshire indices. The Fund may
also cite Morningstar Mutual Values, an independent mutual fund information
service which ranks mutual funds. 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. Beta is a widely accepted measurement of risk. By definition, the beta
of the market is 1.00. A fund with a higher beta is more volatile than the
market and a fund with a lower beta can be expected to rise and fall more slowly
that the market . The Standard & Poor's 500 Stock Index ( S&P 500) is an
unmanaged index that includes 500 widely traded common stocks and is an often
used measure of the stock market performance.
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; 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 broker commissions are made by the Advisers pursuant to
recommendations made by its investment committee, which consists of officers and
Trustees of the Adviser and officers and Trustees who are interested persons of
the Fund, and by SAMCorp. 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 maker reflect
a "spread." Debt securities are generally traded on a net basis through dealers
acting for their own account as principals and not as brokers; no brokerage
commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
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<PAGE>
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 broker and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser and
SAMCorp, 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 and SAMCorp. 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
SAMCorp, and, conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser or SAMCorp may result in research information
and statistical assistance beneficial to the Fund. The Fund will make no
commitment to allocate portfolio transactions upon any prescribed basis. While
the Adviser and SAMCorp 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 December 31, 1995, 1994 and 1993, the Fund paid
negotiated brokerage commissions in the amount of $1,652,520, $1,197,837 and
$1,517,163, 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 December 31,
1995, the Fund directed commissions in the amount of $216,694 to compensate
brokers for research services such as industry, economic and company reviews and
evaluation of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of John Hancock Distributors and an indirect shareholder of John
Hancock Freedom Securities Corporation and its subsidiaries, Tucker Anthony
Incorporated and Sutro & Company, Inc., all of which are broker-dealers
("Affiliated Brokers"). 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 ended December 31, 1995, 1994 and 1993, the Fund did not execute any
portfolio transactions with Affiliated Brokers.
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Any of the Affiliated Brokers may act as broker for the Fund on
securities or commodities exchange transactions, subject, however, to the
general policy of the Fund set forth above and the procedures adopted by the
Trustees pursuant to the Investment Company Act. Commissions paid to an
Affiliated Broker must be at least as favorable as those which the Trustees
believe to be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or sold. A
transaction would not be placed with an Affiliated Broker if the Fund would have
to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Fund, the Adviser, SAMCorp or the Affiliated Broker. Any such
transactions would be subject to a good faith determination by the Trustees that
the compensation paid to Affiliated Brokers is fair and reasonable. Because the
Adviser and SAMCorp, which are affiliated with the Affiliated Brokers, have, as
investment advisers to the Fund, the obligation to provide investment management
services, which includes elements of research and related investment skills,
such research and related skills will not be used by the Affiliated Broker as a
basis for negotiating commissions at a rate higher than that determined in
accordance with the above criteria. The Fund will not engage in principal
transactions with Affiliated Brokers. The Fund may, however, purchase securities
from other members of underwriting syndicates of which Tucker Anthony and Sutro
are members but only in accordance with the policy set forth above and
procedures adopted and reviewed periodically by the Trustees.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, 101
Huntington Avenue, Boston, MA 02205-9116, a wholly-owned indirect subsidiary of
the Life Company, is the transfer and dividend paying agent for the Fund. The
Fund pays an annual fee of $19.00 for each Class A shareholder and $21.50 for
each Class B shareholder account and 0.10% of the average daily net assets
attributable to the Class C shares, plus certain out-of-pocket expenses.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and Investors Bank & Trust Company, 24 Federal
Street, Boston, Massachusetts 02110. Under the custodian agreement, Investors
Bank & Trust Company performs custody, portfolio and fund accounting services.
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INDEPENDENT AUDITORS
The independent auditors of the Fund are Ernst & Young LLP, 200
Clarendon Street, Boston, Massachusetts 02116. The independent auditors audit
and render an opinion on the Fund's annual financial statements and prepare the
Fund's annual income tax returns.
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APPENDIX
Moody's describes its lower ratings for corporate bonds as follows:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterized
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represented obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Standard & Poor's describes its lower ratings for corporate bonds as follows:
Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Debt rated 'BB,' 'B,' 'CCC,' or 'CC' is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. 'BB' indicates the
lowest degree of speculation and 'CC' the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
A-1
<PAGE>
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 protections; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated P-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.
Standard & Poor's describes its lower ratings for corporate bonds as follows:
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C Debt rated 'BB', 'B', 'CCC', 'CC" and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' 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.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
A-2
<PAGE>
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Standard & Poor's describes its three highest ratings for commercial paper as
follows:
A-1. This designation indicated that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
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.
A-3
<PAGE>
FINANCIAL STATEMENTS
F-1
