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 34
Description of Fund Shares 35
<PAGE>
Tax Status 37
Calculation of Performance 43
Brokerage Allocation 45
Transfer Agent Services 47
Custody of Portfolio 47
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 Directors' 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,
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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
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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 Directors 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
Directors 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 Directors 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
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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
("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.
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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,
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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 Directors.
Under procedures established by the Board of Directors, 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
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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.
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(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 Directors 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
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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 Directors 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.
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(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 director 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 Directors may, in their sole discretion, adopt restrictions on investment
policy more restrictive than those described above. Should the 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 Directors may revoke such restrictive policy.
Moreover, if the states involved shall no longer require any such restrictive
policy, the Directors 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.
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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 Directors who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Directors. Several of the officers and
Directors 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 Directors and principal officers of the Fund during the past five years:
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<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address with the Company During Past Five Years
- ---------------- ---------------- ----------------------
<S> <C> <C>
Edward J. Boudreau, Jr.* Director, Chairman Chairman and Chief Executive
101 Huntington Avenue and Chief Executive Officer, the Adviser and The
Boston, MA 02199 Officer(1)(2) 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 Company, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
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Positions Held Principal Occupation(s)
Name and Address with the Company During Past Five Years
- ---------------- ---------------- ----------------------
James F. Carlin Director(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 Director(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 Company, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
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Positions Held Principal Occupation(s)
Name and Address with the Company During Past Five Years
- ---------------- ---------------- ----------------------
Harold R. Hiser, Jr. Director(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 Director(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 Director(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 Director(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 Company, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
15
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Company During Past Five Years
- ---------------- ---------------- ----------------------
Leo E. Linbeck, Jr. Director(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 Director(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 Company, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
16
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Company During Past Five Years
- ---------------- ---------------- ----------------------
Steven R. Pruchansky Director(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* Director 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 Director(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 Company, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
17
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Company During Past Five Years
- ---------------- ---------------- ----------------------
John P. Toolan Director(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 Vice Chairman and Chief Investment
101 Huntington Avenue Chief Investment Officer, the Adviser; President,
Boston, MA 02199 Officer(2) 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 Company, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(2) A Member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
18
<PAGE>
Positions Held Principal Occupation(s)
Name and Address with the Company During Past Five Years
- ---------------- ---------------- ----------------------
James B. Little* Senior Vice Senior Vice President, the Adviser,
101 Huntington Avenue President and Chief The Berkeley Group, John Hancock
Boston, MA 02199 Financial Officer 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 Company, as such term is defined in the
Investment Company Act.
(1) Member of the Executive Committee. Under the Company's charter, the
Executive Committee may generally exercise most of the powers of the Board
of Directors.
(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 Directors 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
Directors 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 Directors 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 Directors the Fund(2) to Directors(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 Directors 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 Directors.
20
<PAGE>
As of May 17, 1996, the officers and Directors 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 Funds listed below:
<TABLE>
<CAPTION>
Percentage of
Number of Shares total outstanding
Name and Address of of beneficial shares of the class
Shareholder Class of Shares interest owned of the Fund
----------- --------------- -------------- -----------
<S> <C> <C> <C>
Mellon Bank Trustee Class C shares 934,863 77.67%
California Savings Plus Program
457 Plan A/C CSPF0135002
Attn: Bob Stein
1 Cabot Rd.
Medford, MA 02155-5158
Mellon Bank Trustee Class C shares 268,698 22.33%
California Savings Plus Program
401(K) Thrift Plan A/C CSPF0035002
Attn: Bob Stein
1 Cabot Rd.
Medford, MA 02155-5158
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectuses, 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 Directors 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 Directors 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 Directors, cast in person at a meeting called for
the purpose of voting on such approval, and by either the Directors 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 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% 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
24
<PAGE>
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 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 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.
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 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> <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 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
25
<PAGE>
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.
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 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."
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 Directors.
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 Director 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 Directors of any of
the foregoing; a member of the immediate family (spouse, children, mother,
father, sister, brother, mother-in-law, father-in-law) of any of the
foregoing; or any fund, pension, profit sharings or other benefit plan for
the individuals described above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into an agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of an approved affinity group financial services plan.
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 Directors. 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 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, 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
39
<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
40
<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
41
<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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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 December 31, 1995, the annualized yield on
Class A, Class B and Class C shares of the Fund was 1.51%, 0.76%, and 2.02%,
respectively. The average annual total return of the Class A shares of the Fund
for the 1, 5, 10 year periods ended December 31, 1995 was 22.69%, 12.28% and
12.08%, respectively. The average annual total return of the Class B shares of
the Fund for the 1 year period ended December 31, 1995 and for the period from
the commencement of operations, January 3, 1994 to December 31, 1995 was 23.16%
and 9.84%, respectively. The average annual total return of the Class C shares
of the Fund for the 1 year period ended December 31, 1995 and for the period
from commencement of operation, May 7, 1993 to December 31, 1995 was 29.68% and
11.74%, 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
44
<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
directors of the Adviser and officers and Directors 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
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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 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 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
Directors. 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 Directors that such price is
reasonable in light of the services provided and to such policies as the
Directors 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 Freedom Securities Corporation and its subsidiaries,
three of which, Tucker Anthony Incorporated, John Hancock Distributors, and
Sutro & Company, Inc., are broker-dealers ("Affiliated Brokers"). Pursuant to
procedures determined by the 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 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
Directors pursuant to the Investment Company Act. Commissions paid to an
Affiliated Broker must be at least as favorable as those which the Directors
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
Directors 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 Directors
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 Directors.
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
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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
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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
A-3
<PAGE>
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
A-4
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FINANCIAL STATEMENTS
F-1
