SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/
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Pre-Effective Amendment No. __ /____/
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Post-Effective Amendment No. ___ /____/
(Check appropriate box or boxes)
JOHN HANCOCK INVESTMENT TRUST
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(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199-7603
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(Address of principal executive office) Zip Code
(617) 375-1702
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(Registrant's Telephone Number, including Area Code)
Susan S. Newton, Esq.
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, MA 02199
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(Name and address of agent for service)
Title of Securities Being Registered: shares of beneficial interest of John
Hancock Investment Trust.
Approximate Date of Proposed Public Offering: As soon as practicable after the
effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares has previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. This Registration Statement relates to shares previously registered
on Form N-1A (File Nos. 2-10156 and 811-0560).
It is proposed that this filing will become effective on April 8, 2002
pursuant to Rule 488 under the Securities Act of 1933.
JHF LOGO
April 15, 2002
Dear Shareholder:
I am writing to ask for your vote on important matters concerning your
investment in certain funds within the John Hancock Institutional Series Trust.
You may be aware that in addition to the institutional series of mutual funds
John Hancock offers a series of retail mutual funds that have the same
investment process and style as the institutional funds. Your fund's trustees
are proposing the merger of certain funds within the John Hancock Institutional
Series Trust into similar retail John Hancock Funds. As a result of the merger
of your fund(s), you will receive Class I shares of the similar retail fund(s).
(Class I shares have the same institutional expense structure as your current
fund(s), and are not subject to sales charges or 12b-1 distribution fees.) The
fund merger proposals have been unanimously approved by each fund's board of
trustees, who believe the mergers will benefit you through increased
diversification and economics of scale. These merges will allow your
investments(s) to be part of a larger investment pool while maintaining its low
institutional expense structure.
The proposed mergers are detailed in the enclosed proxy statement and summarized
in the questions and answers on the following page. I suggest you read both
thoroughly before voting.
Your Vote Makes a Difference!
No matter what the size your investment may be, your vote is critical. I urge
you to review the enclosed materials and to complete, sign and return the
enclosed proxy ballot to us immediately. Your prompt response will help avoid
the need for additional mailings at your fund's expense. For your convenience
you may vote:
|_| By mail - a postage paid envelope in enclosed
|_| By Phone - 1-800-755-4371
|_| By email - www.
|_| By Internet - www.jhfunds.com
|_| Select shareholder entryway and click on the proxy-voting link
If you have any questions or need additional information, please contact your
investment professional or call your Customer Service Representative at
1-800-755-4371, Monday through Friday between 8:00 a.m. and 5:30 p.m. Eastern
time. I thank you for your prompt vote on this matter.
Sincerely,
Maureen R. Ford
Chairman and Chief Executive Officer
Q: What are the changes being proposed?
A: Generally, these proposals focus on merging the institutional funds into
Class I shares of similar John Hancock funds. Since the Class I shares are part
of a larger mutual fund portfolio, each Aquiring Fund has significantly larger
assets and may offer a greater opportunity for future growth.
Specifically, the trustees of your fund(s) are proposing the following mergers:
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Acquired Fund Acquiring Fund
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Proposal 1 Active Bond Fund Bond Fund
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Proposal 2 Independence Balanced Fund Balanced Fund
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Proposal 3 International Equity International Fund
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Proposal 4 Medium Capitalization Growth Fund Mid Cap Growth Fund
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Proposal 5 Small Cap Equity Fund Y Small Cap Equity Fund
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Q: What are the benefits of merging the institutional funds into a Class I share
?
A: Your trustees firmly believe these mergers will eliminate the duplication of
the legal, administration and portfolio management responsibilities associated
with managing different mutual funds with the same investment style and process.
In addition your investments will benefit from being part of a larger pool of
assets, providing increased diversification and economics of scale.
Q: Will this change affect the number of shares I currently have? Will there be
any tax implications?
A: While the market value of your shares will remain the same, the number of
shares you own in the Acquiring Fund will differ from those in the Acquired
Fund. There are no tax implications (no Form 1099R will be generated).
Q: Will my contact information and service team change?
A: No. You will still be serviced through a dedicated Institutional Service team
within John Hancock Signature Services, the fund's transfer agent. You Client
Relationship Contact at John Hancock Funds will also remain the same.
Q: How do I vote?
A: In order to facilitate the proxy voting process you may vote using one of
four methods.
|_| By mail - a postage paid envelope in enclosed
|_| By Phone - 1-800-755-4371
|_| By email - www.
|_| By Internet - www.jhancock.com/funds/NEED MORE INFORMATION
Q: Does my vote make a difference?
A: Whether you are a large or small investor, your vote is important, and we
urge you to participate in this process. The board of trustees of your fund(s)
voted unanimously to recommend these changes, and your approval is needed to
implement the changes.
2
DRAFT 2/27/02
JOHN HANCOCK ACTIVE BOND FUND
JOHN HANCOCK INDEPENDENCE BALANCED FUND
JOHN HANCOCK INTERNATIONAL EQUITY FUND
JOHN HANCOCK MEDIUM CAPITALIZATION GROWTH FUND
JOHN HANCOCK SMALL CAP EQUITY FUND Y
(each a "fund," and each a series of John Hancock Institutional Series Trust)
101 Huntington Avenue
Boston, MA 02199
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
SCHEDULED FOR MAY 29, 2002
This is the formal agenda for each fund's shareholder meeting. It tells you what
matters will be voted on and the time and place of the meeting, in case you want
to attend in person.
To the shareholders of each fund:
A joint shareholder meeting for your fund(s) will be held at 101 Huntington
Avenue, Boston, Massachusetts on Wednesday, May 29, 2002 at 9:00 a.m., Eastern
Time, to consider the following:
1. A proposal to approve an Agreement and Plan of Reorganization between John
Hancock Active Bond Fund ("Active Bond Fund") and John Hancock Bond Fund
("Bond Fund"). Under this Agreement, your fund would transfer all of its
assets to Bond Fund in exchange for Class I shares of Bond Fund. These
shares would be distributed proportionately to you and the other
shareholders of Active Bond Fund. Bond Fund would also assume Active Bond
Fund's liabilities. Active Bond Fund's board of trustees recommends that
you vote FOR this proposal.
2. A proposal to approve an Agreement and Plan of Reorganization between John
Hancock Independence Balanced Fund ("Independence Balanced Fund") and John
Hancock Balanced Fund ("Balanced Fund"). Under this Agreement, your fund
would transfer all of its assets to Balanced Fund in exchange for Class I
shares of Balanced Fund. These shares would be distributed proportionately
to you and the other shareholders of Independence Balanced Fund. Balanced
Fund would also assume Independence Balanced Fund's liabilities.
Independence Balanced Fund's board of trustees recommends that you vote
FOR this proposal.
3. A proposal to approve an Agreement and Plan of Reorganization between John
Hancock International Equity Fund ("International Equity Fund") and John
Hancock International Fund ("International Fund"). Under this Agreement,
your fund would transfer all of its assets to International Fund in
exchange for Class I shares of International Fund. These shares would be
distributed proportionately to you and the other shareholders of
International Equity Fund. International Fund would also assume
International Equity Fund's liabilities. International Equity Fund's board
of trustees recommends that you vote FOR this proposal.
4. A proposal to approve an Agreement and Plan of Reorganization between John
Hancock Medium Capitalization Growth Fund ("Medium Capitalization Growth
Fund") and John Hancock Mid Cap Growth Fund ("Mid Cap Growth Fund"). Under
this Agreement, your fund would transfer all of its assets to Mid Cap
Growth Fund in exchange for Class I shares of Mid Cap Growth Fund. These
shares would be distributed proportionately to you and the other
shareholders of Medium Capitalization Growth Fund. Mid Cap Growth Fund
would also assume Medium Capitalization Growth Fund's liabilities. Medium
Capitalization Growth Fund's board of trustees recommends that you vote
FOR this proposal.
5. A proposal to approve an Agreement and Plan of Reorganization between John
Hancock Small Cap Equity Fund Y ("Small Cap Equity Fund Y") and John
Hancock Small Cap Equity Fund ("Small Cap Equity Fund"). Under this
Agreement, your fund would transfer all of its assets to Small Cap Equity
Fund in exchange for Class I shares of Small Cap Equity Fund. These shares
would be distributed proportionately to you and the other shareholders of
Small Cap Equity Fund Y. Small Cap Equity Fund would also assume Small Cap
Equity Fund Y's liabilities. Small Cap Equity Fund Y's board of trustees
recommends that you vote FOR this proposal.
3
7. Any other business that may properly come before the meeting.
Shareholders of record as of the close of business on March 15, 2002 are
entitled to vote at the meeting and any related follow-up meetings.
Whether or not you expect to attend the meeting, please complete and return the
enclosed proxy card. If shareholders do not return their proxies in sufficient
numbers, your fund will incur the cost of extra solicitations, which is
indirectly borne by shareholders.
By order of the board of trustees,
Susan S. Newton
Secretary
April 15, 2002
420PX 11/01
4
PROXY STATEMENT OF
JOHN HANCOCK ACTIVE BOND FUND
JOHN HANCOCK INDEPENDENCE BALANCED FUND
JOHN HANCOCK INTERNATIONAL EQUITY FUND
JOHN HANCOCK MEDIUM CAPITALIZATION GROWTH FUND
JOHN HANCOCK SMALL CAP EQUITY FUND Y
(each an "Acquired Fund" or "your fund" and each a series of John Hancock
Institutional Series Trust)
101 Huntington Avenue
Boston, MA 02199
PROSPECTUS FOR
JOHN HANCOCK BOND FUND (a series of John Hancock Sovereign Bond Fund) JOHN
HANCOCK BALANCED FUND (a series of John Hancock Investment Trust) JOHN HANCOCK
INTERNATIONAL FUND (a series of John Hancock Investment Trust III) JOHN HANCOCK
MID CAP GROWTH FUND (a series of John Hancock Investment Trust III) JOHN HANCOCK
SMALL CAP EQUITY FUND (a series of John Hancock Investment Trust II) (each an
"Acquiring Fund" and together the "Acquiring Funds") 101 Huntington Avenue
Boston, MA 02199
This proxy statement and prospectus contains the information shareholders should
know before voting on the proposed reorganizations. Please read it carefully and
retain it for future reference.
How Each Reorganization Will Work
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Acquired Fund Acquiring Fund Shareholders Entitled to Vote
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Proposal 1 Active Bond Fund Bond Fund Active Bond Fund shareholders
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Proposal 2 Independence Balanced Fund Balanced Fund Independence Balanced Fund shareholders
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Proposal 3 International Equity Fund International Fund International Equity Fund shareholders
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Proposal 4 Medium Capitalization Growth Fund Mid Cap Growth Fund Medium Capitalization Growth Fund
shareholders
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Proposal 5 Small Cap Equity Fund Y Small Cap Equity Fund Small Cap Equity Fund Y shareholders
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o Each Acquired Fund will transfer all of its assets to the corresponding
Acquiring Fund. Each Acquiring Fund will assume the corresponding Acquired
Fund's liabilities.
o Each Acquiring Fund will issue Class I shares to the corresponding
Acquired Fund in an amount equal to the value of the Acquired Fund's
shares. These shares will be distributed to Acquired Fund shareholders in
proportion to their holdings on the reorganization date.
o Each Acquired Fund will be liquidated and fund shareholders will become
shareholders of the corresponding Acquiring Fund.
o The reorganization will be tax-free to shareholders.
Shares of the Acquiring Funds are not deposits or obligations of, or guaranteed
or endorsed by, any bank or other depository institution. These shares are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
Shares of the Acquiring Funds have not been approved or disapproved by the
Securities and Exchange Commission. The Securities and Exchange Commission has
not passed upon the accuracy or adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
5
Why Each Acquired Fund's Trustees are Recommending the Reorganizations
The Acquired Funds' trustees believe that reorganizing each fund into a larger
fund with similar investment policies will enable the shareholders of the funds
to benefit from increased diversification, the ability to achieve better net
prices on securities trades and economies of scale that may contribute to a
lower expense ratio. Therefore, the trustees recommend that Acquired Fund
shareholders vote FOR the reorganization.
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Where to Get More Information
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Prospectuses for the Acquiring In the same envelope as this proxy
Funds dated March 1, 2002. statement and prospectus.
Incorporated by reference into
this proxy statement and prospectus.
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Acquiring Fund annual report and
Bond Fund's semi-annual report to
shareholders.
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Prospectuses for the Acquired On file with the Securities and
Funds dated July 2, 2001. The Exchange Commission ("SEC") and
Acquired Funds' annual and available at no charge by calling
semiannual reports to 1-888-972-8696. Incorporated by
shareholders. reference into this proxy
statement and prospectus.
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A statement of additional
information dated April 15, 2002.
It contains additional information
about the Acquired Funds and the
Acquiring Fund.
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The date of this proxy statement and prospectus is April 15, 2002.
6
TABLE OF CONTENTS
Page
INTRODUCTION
PROPOSAL 1 - ACTIVE BOND FUND
Summary
Investment risks
Proposal To Approve The Agreement And Plan Of Reorganization
PROPOSAL 2 - INDEPENDENCE BALANCED FUND
Summary
Investment risks
Proposal To Approve The Agreement And Plan Of Reorganization
PROPOSAL 3 - INTERNATIONAL FUND
Summary
Investment risks
Proposal To Approve The Agreement And Plan Of Reorganization
PROPOSAL 4 - MEDIUM CAPITALIZATION GROWTH FUND
Summary
Investment risks
Proposal To Approve The Agreement And Plan Of Reorganization
PROPOSAL 5 - SMALL CAP EQUITY FUND Y
Summary
Investment risks
Proposal To Approve The Agreement And Plan Of Reorganization
FURTHER INFORMATION ON EACH REORGANIZATION
CAPITALIZATION
ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES
BOARDS' EVALUATION AND RECOMMENDATION
VOTING RIGHTS AND REQUIRED VOTE
INFORMATION CONCERNING THE MEETING
OWNERSHIP OF SHARES OF THE FUNDS
EXPERTS
AVAILABLE INFORMATION
EXHIBIT A - FORM OF AGREEMENT AND PLAN OF REORGANIZATION
INTRODUCTION
This proxy statement and prospectus is being used by the Acquired Funds' board
of trustees to solicit proxies to be voted at a special meeting of each Acquired
Fund's shareholders. This meeting will be held at 101 Huntington Avenue, Boston,
Massachusetts on Wednesday, May 29, 2002 at 9:00 a.m., Eastern Time. The purpose
of the meeting is to consider proposals to approve Agreements and Plans of
Reorganization providing for the reorganization of the Acquired Funds into the
Acquiring Funds. This proxy statement and prospectus is being mailed to your
fund's shareholders on or about April 15, 2002.
For each proposal, this proxy statement and prospectus includes information that
is specific to that proposal, including a summary of more complete information
appearing later in the proxy statement. The information beginning on page ___ is
relevant to all proposals. Please read the sections of the proxy statement
related specifically to your fund(s), as well as the information relevant to all
proposals, carefully, as well as Exhibit A and the enclosed documents.
Who is Eligible to Vote?
Shareholders of record on March 15, 2002 are entitled to attend and vote at the
meeting or any adjourned meeting. Each share is entitled to one vote. Shares
represented by properly executed proxies, unless revoked before or at the
meeting, will be voted according to shareholders' instructions. If you sign a
proxy but do not fill in a vote, your shares will be voted to approve the
Agreement and Plan of Reorganization. If any other business comes before the
meeting, your shares will be voted at the discretion of the persons named as
proxies.
7
PROPOSAL 1
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN ACTIVE BOND FUND AND
BOND FUND
A proposal to approve an Agreement and Plan of Reorganization between Active
Bond Fund and Bond Fund. Under this Agreement, Active Bond Fund would transfer
all of its assets to Bond Fund in exchange for Class I shares of Bond Fund.
These shares would be distributed proportionately to the shareholders of Active
Bond Fund. Bond Fund would also assume Active Bond Fund's liabilities. Active
Bond Fund's Board of Trustees recommends that shareholders vote FOR this
proposal.
SUMMARY
Comparison of Active Bond Fund to Bond Fund
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Active Bond Fund Bond Fund
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Business The fund is a diversified series of John The fund is a diversified series of John
Hancock Institutional Series Trust. The trust Hancock Sovereign Bond Fund (the "Trust"). The
is an open-end investment company organized as trust is an open-end investment company
a Massachusetts business trust. organized as a Massachusetts business trust.
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Net assets as of $9.1 million $1,433.5 million
December 31, 2001
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Investment adviser Investment Adviser: Investment Adviser:
and portfolio John Hancock Advisers, LLC John Hancock Advisers, LLC
managers
Portfolio managers: Portfolio managers:
James K. Ho, CFA James K. Ho, CFA
-Executive Vice President of adviser -Executive Vice President of adviser
-Joined fund team in 1995 -Joined fund team in 1988
-Joined adviser in 1985 -Joined adviser in 1985
-Began business career in 1977 -Began business career in 1977
Benjamin A. Matthews Benjamin A. Matthews
-Vice President of adviser -Vice President of adviser
-Joined fund team in 1995 -Joined fund team in 1995
-Joined adviser in 1995 -Joined adviser in 1995
-Began business career in 1970 -Began business career in 1970
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Investment objective The fund seeks a high rate of total return The fund seeks to generate a high level of
consistent with prudent investment risk. This current income consistent with prudent
objective can be changed without shareholder investment risk.
approval.
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Primary investments The fund normally invests at least 80% of The fund normally invests at least 80% of its
assets in a diversified portfolio of assets in a diversified portfolio of bonds and
investment-grade debt securities. These other debt securities. These include corporate
include corporate bonds and debentures as well bonds and debentures as well as U.S.
as U.S. government and agency securities. government and agency securities. Most of
these securities are investment grade.
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Junk bonds The fund may invest up to 20% of assets in The fund may invest up to 25% of assets in
junk bonds rated as low as CC/Ca and their junk bonds rated as low as CC/Ca and their
unrated equivalents. unrated equivalents.
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Foreign securities The fund may invest up to 25% of total assets The fund may invest up to 25% of total assets
in U.S. dollar (excluding U.S. in U.S. dollar-denominated foreign securities
dollar-denominated Canadian securities) and (excluding U.S. dollar-denominated Canadian
foreign currency denominated securities of securities).
foreign issuers.
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Mortgage-backed Each fund invests in mortgage-backed and asset-backed securities.
and asset-backed
securities
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Cash and cash Under normal conditions, each fund does not invest more than 10% of assets in cash or cash equivalents.
equivalents
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8
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Average maturity There is no limit on either fund's average maturity.
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Diversification The fund is diversified and, with respect to The fund is diversified and cannot invest more
75% of total assets, cannot invest more than than 5% of total assets in securities of a
5% of total assets in securities of a single single issuer.
issuer.
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Derivatives The funds may invest in certain derivatives (investments whose value is based on indexes, securities or
currencies).
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Temporary defensive In abnormal market conditions, the fund may In abnormal circumstances, the fund may invest
positions temporarily invest in investment-grade short-term extensively in investment-grade short-term
securities. In these and other cases, the fund securities. In these and other cases, the fund
might not achieve its goal. might not achieve its investment goal.
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SHARES
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Active Bond Fund Bond Fund - Class I
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Sales charge Shares are offered with no sales charge.
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Distribution and Shares are not subject to a 12b-1 distribution fee.
Service (12b-1) fee
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BUYING, SELLING AND EXCHANGING SHARES
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Both Active Bond Fund and Bond Fund - Class I
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Buying shares Investors may buy shares at their public offering price through a financial representative or the funds'
transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed to
open new accounts in Active Bond Fund but can add to existing accounts.
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Minimum initial $10,000. No minimum investment for retirement plans with at least 350 eligible employees.
investment
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Exchanging Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of any John
shares Hancock Institutional Fund.
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Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock Signature
Services, Inc.
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Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per share
(NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York Stock
Exchange, which is normally 4:00 p.m. Eastern Time.
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The Funds' Expenses
Shareholders of both funds pay various expenses, either directly or indirectly.
The expense table appearing below shows the expenses for the twelve-month period
ended November 30, 2001, adjusted to reflect any changes. Bond Fund's Class I
shares began on September 4, 2001 and expenses were projected as if Class I had
been in existence for the entire year. Future expenses may be greater or less.
The examples contained in the expense table show what you would pay if you
invested $10,000 over the various time periods indicated. Each example assumes
that you reinvested all dividends and that the average annual return was 5%. The
examples are for comparison purposes only and are not a representation of either
fund's actual expenses or returns, either past or future.
Pro Forma Expenses
The following expense table shows the pro forma expenses of Bond Fund for the
year ended November 30, 2001 assuming that a reorganization with Active Bond
Fund had occurred December 1, 2000. The expenses shown in the table are based on
fees and expenses incurred during the twelve months ended November 30, 2001,
adjusted to reflect any changes. Bond Fund's Class I shares began on September
4, 2001 and expenses were projected as if Class I had been in existence for the
entire year. Bond Fund's actual expenses after the reorganization may be greater
or less than those shown.
9
The example contained in the pro forma expense table shows what you would have
paid on a $10,000 investment if the reorganization had occurred on December 1,
2000. The example assumes that you had reinvested all dividends and that the
average annual return was 5%. The pro forma example is for comparison purposes
only and is not a representation of Bond Fund's actual expenses or returns,
either past or future.
Bond Fund
Class I
(PRO FORMA
for the year
ended 11/30/01)
(Assuming
Active reorganization
Bond Bond Fund with
Fund Class I Active Bond Fund)
Shareholder
transaction expenses
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Maximum sales charge (load) imposed on purchases (as a % of purchase price) none none none
Maximum sales charge imposed on reinvested dividends none none none
Maximum deferred sales charge (load) as a % of purchase or sale price, none none none
whichever is less
Redemption fee none none none
Exchange fee none none none
Annual fund operating expenses
(as a % of average net assets)
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Management fee 0.50% 0.50% 0.50%
Distribution and service (12b-1) fee none none none
Other expenses 1.05% 0.11% 0.11%
Total fund operating expenses 1.55% 0.61% 0.61%
Expense reduction(1) 0.95% none none
Net fund operating expenses 0.60% 0.61% 0.61%
Expenses
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Year 1 $ 61 $ 62 $ 62
Year 3 $ 502 $195 $195
Year 5 $ 970 $340 $340
Year 10 $2,264 $762 $762
(1) The Adviser has agreed to limit Active Bond Fund's total operating expenses
to 0.60% of the fund's average daily net assets at least until June 30, 2002.
The Reorganization
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002, but may occur on any later date before December 31, 2002.
Active Bond Fund will transfer all of its assets to Bond Fund. Bond Fund
will assume Active Bond Fund's liabilities. The net asset value of both
funds will be computed as of 5:00 p.m., Eastern Time, on the
reorganization date.
o Bond Fund will issue to Active Bond Fund Class I shares in an amount equal
to the net assets attributable to Active Bond Fund's shares. These shares
will immediately be distributed to Active Bond Fund's shareholders in
proportion to their holdings on the reorganization date. As a result,
shareholders of Active Bond Fund will end up as Class I shareholders of
Bond Fund.
o After the shares are issued, Active Bond Fund will be terminated.
o The reorganization will be tax-free and will not take place unless both
funds receive a satisfactory opinion concerning the tax consequences of
the reorganization from Hale and Dorr LLP, counsel to the funds.
10
The following diagram shows how the reorganization would be carried out.
---------------- ------------------
Active Bond Fund Bond Fund receives
transfers assets Active Bond Fund assets & assumes
& liabilities assets and liabilities of
To Bond Fund liabilities Active Bond Fund
---------------- ------------------
---------------- --------------
Active Bond Fund Issues Class I
shareholders Shares
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Active Bond Fund receives Bond Fund
Class I shares and distributes
them to Active Bond Fund
shareholders
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets:
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Fund Asset Breakpoints Active Bond Fund
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First $1.5 Billion 0.50%
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Amount over $1.5 Billion 0.45%
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Fund Asset Breakpoints Bond Fund
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First $1.5 Billion 0.50%
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Next $500 Million 0.45%
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Next $500 Million 0.40%
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Amount over $2.5 Billion 0.35%
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Bond Fund's management fee rate of 0.50% and its pro forma management fee rate
of 0.50% are the same as Active Bond Fund's management fee rate of 0.50%. Bond
Fund's other expenses of 0.11% and its pro forma other expenses of 0.11% are
lower than your fund's other expenses of 1.05%. Bond Fund's current annual
expense ratio (equal to 0.61% of average net assets) and its pro forma expense
ratio (equal to 0.61% of average net assets) are both slightly higher than
Active Bond Fund's expense ratio (equal to 0.60% of average net assets) after
the expense reduction. However, Active Bond Fund's expense ratio before the
expense reduction is 1.55% and there is no guarantee that the expense reduction
will be extended beyond June 30, 2002.
INVESTMENT RISKS
The funds are exposed to various risks that could cause shareholders to lose
money on their investments in the funds. The following table compares the risks
affecting each fund.
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Active Bond Fund Bond Fund
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Interest rate risk When interest rates rise, bond prices usually fall. Generally, an increase in the fund's average maturity
will make it more sensitive to interest rate risk.
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Prepayment (call) If interest rate movements cause the fund's mortgage-related and callable securities to be paid off
and extension risks earlier or later than expected, the fund's share price or yield could be hurt.
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Credit risk The fund could lose money if the credit rating of any bond in its portfolio is downgraded or if the issuer
of the bond defaults on its obligations. In general, lower-rated bonds involve more credit risk. The
prices of lower-rated bonds may also be more volatile and more sensitive to adverse economic developments.
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Sector If the fund concentrates in certain sectors of the bond market, its performance could be worse than that
concentration risk of the overall bond market.
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11
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Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its
peers or lose money if the manager's investment strategy does not perform as expected.
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Foreign Foreign investments involve additional risks, including potentially inaccurate financial information and
securities risk social or political instability. The prices of foreign bonds may also be more volatile and more sensitive
to adverse economic developments occuring outside the U.S.
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Foreign currency risk Unfavorable foreign currency exchange rates could Not applicable because the fund invests only
reduce the value of bonds denominated in foreign in U.S. dollar-denominated bonds.
currencies.
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Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct
investments. Also, in a down market derivatives could become harder to value or sell at a fair price.
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Liquidity and In a down or unstable market, the fund's investments could become harder to value accurately or to sell at
valuation risks a fair price.
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Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"),
the greater the impact that transaction costs will have on the fund's performance. The fund's turnover
rate may exceed 100%, which is considered relatively high.
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PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
Description of Reorganization
You are being asked to approve an Agreement and Plan of Reorganization, a form
of which is attached as Exhibit A. The Agreement provides for a reorganization
on the following terms:
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002 but may occur on any later date before December 31, 2002.
Active Bond Fund will transfer all of its assets to Bond Fund and Bond
Fund will assume all of Active Bond Fund's liabilities. This will result
in the addition of Active Bond Fund's assets to Bond Fund's portfolio. The
net asset value of both funds will be computed as of 5:00 p.m., Eastern
Time, on the reorganization date.
o Bond Fund will issue to Active Bond Fund Class I shares in an amount equal
to the net assets attributable to Active Bond Fund's shares. As part of
the liquidation of Active Bond Fund, these shares will immediately be
distributed to shareholders of record of Active Bond Fund in proportion to
their holdings on the reorganization date. As a result, shareholders of
Active Bond Fund will end up as Class I shareholders of Bond Fund.
o After the shares are issued, the existence of Active Bond Fund will be
terminated.
Reasons for the Proposed Reorganization
The board of trustees of Active Bond Fund believes that the proposed
reorganization will be advantageous to the shareholders of Active Bond Fund for
several reasons. The board of trustees considered the following matters, among
others, in approving the proposal.
First, that Active Bond Fund does not have sufficient assets to justify
maintaining this fund as a separate investment portfolio (i.e. this fund had
$9.1 million in assets as of December 31, 2001). Active Bond Fund, which as been
in existence for approximately seven years, has not grown in asset size and in
light of the history of the fund, there is no foreseeable potential for future
growth. The investment adviser has subsidized Active Bond Fund by absorbing
expenses since the inception of the fund. Without these subsidies, Active Bond
Fund would have had a substantially higher expense ratio and lower performance.
Second, that shareholders may be better served by a fund offering greater
diversification. Bond Fund has a larger asset size than your fund and invests in
the same types of securities. Combining the funds' assets into a single
investment portfolio will afford greater diversification, making investors less
vulnerable to weakness in any single sector of the bond market.
Thrid, that a combined fund offers economies of scale that may lead to lower per
share expenses. Both funds incur costs for accounting, legal, transfer agency
services, insurance, and custodial and administrative services. Many of these
expenses are duplicative and there may be an opportunity to reduce Bond Fund's
expense ratio over time because of economies of scale if the funds are combined.
12
The board of trustees of Bond Fund considered that the reorganization presents
an excellent opportunity for Bond Fund to acquire investment assets without the
obligation to pay commissions or other transaction costs that a fund normally
incurs when purchasing securities. This opportunity provides an economic benefit
to Bond Fund and its shareholders.
The boards of both funds also considered that the adviser and the funds'
distributor will benefit from the reorganization. For example, the adviser might
realize time savings from a consolidated portfolio management effort and from
the need to prepare fewer reports and regulatory filings as well as prospectus
disclosure for one fund instead of two. The boards believe, however, that these
savings will not amount to a significant economic benefit to the adviser or
distributor.
Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates
paid by Active Bond Fund are the same as the rates paid by Bond Fund.
Bond Fund's management fee rate of 0.50% and pro forma management fee rate of
0.50% are the same as Active Bond Fund's management fee rate of 0.50%. Bond
Fund's other expenses of 0.11% and its pro forma other expenses of 0.11%, are
lower than Active Bond Fund's other expenses of 1.05%. Bond Fund's current
annual expense ratio (0.61% of average net assets) and pro forma expense ratio
(0.61% of average net assets) are both slightly higher than Active Bond Fund's
current expense ratio (0.60% of average net assets) after the expense reduction.
However, Active Bond Fund's expense ratio before the expense reduction is 1.55%
and there is no guarantee that the expense reduction will be extended beyond
June 30, 2002.
Comparative Performance. The trustees also took into consideration the relative
performance of Active Bond Fund and Bond Fund as of November 30, 2001.
13
PROPOSAL 2
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN INDEPENDENCE BALANCED
FUND AND BALANCED FUND
A proposal to approve an Agreement and Plan of Reorganization between
Independence Balanced Fund and Balanced Fund. Under this Agreement, Independence
Balanced Fund would transfer all of its assets to Balanced Fund in exchange for
Class I shares of Balanced Fund. These shares would be distributed
proportionately to the shareholders of Independence Balanced Fund. Balanced Fund
would also assume Independence Balanced Fund's liabilities. Independence
Balanced Fund's Board of Trustees recommends that shareholders vote FOR this
proposal.
SUMMARY
Comparison of Independence Balanced Fund to Balanced Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Independence Balanced Fund Balanced Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Business A diversified series of John Hancock A diversified series of John Hancock Investment
Institutional Series Trust. The Trust is an Trust. The Trust is an open-end investment
open-end investment management company organized management company organized as a Massachusetts
as a Massachusetts Business Trust. Business Trust.
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets as of $16.9 million $184.4 million
December 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Investment adviser, Investment Adviser: Investment Adviser:
subadviser and John Hancock Advisers, LLC John Hancock Advisers, LLC
portfolio managers
Subadviser: Portfolio Managers:
Independence Investment LLC John F. Snyder, III
-A subsidiary of John Hancock Financial -Executive Vice President of adviser
Services, Inc. -Joined fund team in 1994
-Founded in 1982 -Joined adviser in 1991
-Supervised by the adviser -Began business career in 1971
Portfolio Managers: Barry H. Evans, CFA
Team responsible for day-to-day investment -Senior Vice President of adviser
management -Joined fund team in 1996
-Joined adviser in 1986
-Began business career in 1986
Peter M. Schofield, CFA
-Vice President of adviser
-Joined fund team in 1996
-Joined adviser in 1996
-Portfolio manager at Geewax, Terker & Co.
(1984-1996)
Began business career in 1984
- -----------------------------------------------------------------------------------------------------------------------------------
Investment objective The fund seeks above-average total return through The fund seeks current income, long-term growth of
capital appreciation and income. This objective capital and income and preservation of capital.
can be changed without shareholder approval. This objective can be changed without shareholder
approval.
- -----------------------------------------------------------------------------------------------------------------------------------
14
- -----------------------------------------------------------------------------------------------------------------------------------
Primary Investments The fund invests in a diversified portfolio of The fund allocates its investments among a
investment-grade bonds and primarily diversified mix of debt and equity securities.
large-capitalization stocks. The bond The fund normally invests at least 25% of assets
portfolio's risk profile is substantially similar in equity securities and at least 25% of assets
to that of the Lehman Brothers Aggregate Bond in senior debt securities.
Index and the stock portfolio's risk profile is
substantially similar to that of the Standard & At least 80% of the fund's common stock investments
Poor's 500 Index. are "dividend performers." These are companies
that have typically increased their dividend
The fund invests at least 25% of assets in senior payments over time, or which the managers believe
debt securities and, in normal market conditions, demonstrate the potential for above-average
at least 25% of assets in stocks. The managers stability of growth of earnings and dividends.
adjust the fund's asset mix according to changing Historically, these companies have tended to have
market and economic conditions. In normal market large or medium market capitalizations.
conditions, the fund is almost entirely invested
in stocks and bonds.
The fund's investments in bonds
of any maturity are primarily investment grade
(rated BBB/Baa or above and their unrated
equivalents).
- -----------------------------------------------------------------------------------------------------------------------------------
Junk bonds The fund does not invest in junk bonds (bonds The fund may invest up to 20% of assets in junk
rated as low as C and their unrated equivalents). bonds rated below BBB/Baa and their unrated
equivalents.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities The fund may invest in U.S. dollar-denominated The fund may invest up to 35% of assets in U.S.
foreign securities. dollar and foreign currency denominated securities
of foreign issuers.
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed and Each fund may invest in mortgage-backed and asset-backed securities.
asset-backed
securities
- -----------------------------------------------------------------------------------------------------------------------------------
Diversification Each fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total
assets in securities of a single issuer.
- -----------------------------------------------------------------------------------------------------------------------------------
Derivatives The fund does not normally use derivatives. The fund may make limited use of certain
derivatives (investments whose value is based on
indexes, securities or currencies).
- -----------------------------------------------------------------------------------------------------------------------------------
Temporary defensive In abnormal market conditions, the fund may In abnormal market conditions, the fund may
positions temporarily invest more than 75% of assets in temporarily invest extensively in investment-grade
investment-grade short-term securities. In these short-term securities. In these and other cases,
and other cases, the fund might not achieve its the fund might not achieve its goal.
goal.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
Independence Balanced Fund Balanced Fund - Class I
- -----------------------------------------------------------------------------------------------------------------------------------
Sales charge Shares are offered with no sales charge.
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution and Shares are not subject to a 12b-1 distribution fee.
Service (12b-1) fee
- -----------------------------------------------------------------------------------------------------------------------------------
15
- --------------------------------------------------------------------------------
BUYING, SELLING AND EXCHANGING SHARES
- --------------------------------------------------------------------------------
Both Independence Balanced Fund and Balanced Fund - Class I
- --------------------------------------------------------------------------------
Buying shares Investors may buy shares at their public offering price
through a financial representative or the funds' transfer
agent, John Hancock Signature Services, Inc. After March
15, 2002, investors will not be allowed to open new
accounts in Independence Balanced Fund but can add to
existing accounts.
- --------------------------------------------------------------------------------
Minimum initial $10,000. No minimum investment for retirement plans with
investment at least 350 eligible employees.
- --------------------------------------------------------------------------------
Exchanging shares Shareholders may exchange their shares for Class I shares
of other John Hancock funds, or for shares of any John
Hancock Institutional Fund.
- --------------------------------------------------------------------------------
Selling shares Shareholders may sell their shares by submitting a proper
written or telephone request to John Hancock Signature
Services, Inc.
- --------------------------------------------------------------------------------
Net asset value All purchases, exchanges and sales are made at a price
based on the next determined net asset value per share
(NAV) of the fund. Both funds' NAVs are determined at the
close of regular trading on the New York Stock Exchange,
which is normally 4:00 p.m. Eastern Time.
- --------------------------------------------------------------------------------
The Funds' Expenses
Shareholders of both funds pay various expenses, either directly or indirectly.
The expense table appearing below shows the expenses for the twelve-month period
ended December 31, 2001, adjusted to reflect any changes. Balanced Fund's Class
I shares have no operational history. As a result, expenses were projected based
on expenses incurred by other classes of the Fund. Future expenses may be
greater or less. The examples contained in the expense table show what you would
pay if you invested $10,000 over the various time periods indicated. Each
example assumes that you reinvested all dividends and that the average annual
return was 5%. The examples are for comparison purposes only and are not a
representation of either fund's actual expenses or returns, either past or
future.
Pro Forma Expenses
The following expense table shows the pro forma expenses of Balanced Fund for
the year ended December 31, 2001 assuming that a reorganization with
Independence Balanced Fund had occurred January 1, 2001. The expenses shown in
the table are based on fees and expenses incurred during the twelve months ended
December 31, 2001, adjusted to reflect any changes. Balanced Fund's Class I
shares have no operational history. As a result, expenses were projected based
on expenses incurred by other classes of the Fund. Balanced Fund's actual
expenses after the reorganization may be greater or less than those shown.
The example contained in the pro forma expense table shows what you would have
paid on a $10,000 investment if the reorganization had occurred on January 1,
2001. The example assumes that you had reinvested all dividends and that the
average annual return was 5%. The pro forma example is for comparison purposes
only and is not a representation of Balanced Fund's actual expenses or returns,
either past or future.
16
Balanced Fund
Class I
(PRO FORMA
for the year
ended 12/31/01)
(Assuming
reorganization
with
Independence Balanced Independence
Balanced Fund Fund Class I Balanced Fund)
Shareholder
transaction expenses
- -------------------------------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a % of purchase none none none
price)
Maximum sales charge imposed on reinvested dividends none none none
Maximum deferred sales charge (load) as a % of purchase or sale price, none none none
whichever is less
Redemption fee none none none
Exchange fee none none none
Annual fund operating expenses
(as a % of average net assets)
- -------------------------------------------------------------------------------------------------------------------------------
Management fee 0.70% 0.60% 0.60%
Distribution and service (12b-1) fee none none none
Other expenses 0.39% 0.15% 0.15%
Total fund operating expenses 1.09% 0.75% 0.75%
Expense reduction(1) 0.19% none none
Net fund operating expenses 0.90% 0.75% 0.75%
Expenses
- -------------------------------------------------------------------------------------------------------------------------------
Year 1 $ 102 $ 77 $ 77
Year 3 $ 338 $ 240 $ 240
Year 5 $ 592 $ 417 $ 417
Year 10 $1,321 $ 930 $ 930
(1) The Adviser has agreed to limit Independence Balanced Fund's total operating
expenses to 0.90% of the fund's average daily net assets at least until June 30,
2002.
The Reorganization
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002, but may occur on any later date before December 31, 2002.
Independence Balanced Fund will transfer all of its assets to Balanced
Fund. Balanced Fund will assume Independence Balanced Fund's liabilities.
The net asset value of both funds will be computed as of 5:00 p.m.,
Eastern Time, on the reorganization date.
o Balanced Fund will issue to Independence Balanced Fund Class I shares in
an amount equal to the net assets attributable to Independence Balanced
Fund's shares. These shares will immediately be distributed to
Independence Balanced Fund's shareholders in proportion to their holdings
on the reorganization date. As a result, shareholders of Independence
Balanced Fund will end up as Class I shareholders of Balanced Fund.
o After the shares are issued, Independence Balanced Fund will be
terminated.
o The reorganization will be tax-free and will not take place unless both
funds receive a satisfactory opinion concerning the tax consequences of
the reorganization from Hale and Dorr LLP, counsel to the funds.
17
The following diagram shows how the reorganization would be carried out.
---------------- -------------------
Independence Balanced Fund
Balanced Fund Independence receives assets &
transfers assets Balanced Fund assumes liabilities
& liabilities to assets and of Independence
Balanced Fund liabilities Balanced Fund
---------------- -------------------
------------- -------------
Independence Issue
Balanced Fund Class I
shareholders Shares
------------- -------------
Independence Balanced Fund receives Balanced
Fund Class I shares and distributes
them to Independence Balanced Fund
shareholders
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets:
- -----------------------------------------------------------------
Fund Asset Breakpoints Independence Balanced Fund
- -----------------------------------------------------------------
First $500 Million 0.70%
- -----------------------------------------------------------------
Amount over $500 Million 0.65%
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Balanced Fund
- -----------------------------------------------------------------
Fund Assets 0.60%
- -----------------------------------------------------------------
Independence Investment, LLC ("Independence"), a wholly-owned subsidiary of John
Hancock Financial Services, Inc., serves as subadviser to Independence Balanced
Fund. In this capacity, Independence has primary responsibility for making
investment decisions for Independence Balanced Fund's investment portfolio and
placing orders with brokers and dealers to implement those decisions.
Independence receives its compensation from the Adviser, and Independence
Balanced Fund pays no subadvisory fees over and above the management fee it pays
to the Adviser. Independence receives subadvisory fees from the Adviser at the
following rate: 60% of the advisory fee received by the Adviser.
Balanced Fund's management fee rate of 0.60% and its pro forma management fee
rate of 0.60% are lower than Independence Balanced Fund's management fee rate of
0.70%. Balanced Fund's other expenses of 0.15% and its pro forma other expenses
of 0.15% are lower than Independence Balanced Fund's other expenses of 0.39%.
Balanced Fund's current annual expense ratio (equal to 0.75% of average net
assets) and its pro forma expense ratio (equal to 0.75% of average net assets)
are both lower than Independence Balanced Fund's expense ratio (equal to 0.90%
of average net assets) after the expense reduction. Independence Balanced Fund's
expense ratio before the expense reduction is 1.09% and there is no guarantee
that the expense limitation will be extended beyond June 30, 2002.
18
INVESTMENT RISKS
The funds are exposed to various risks that could cause shareholders to lose
money on their investments in the funds. The following table compares the risks
affecting each fund.
- -----------------------------------------------------------------------------------------------------------------------------------
Independence Balanced Fund Balanced Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Stock market risk The value of securities in the fund may go down in response to overall stock market movements. Markets
tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the fund concentrates in certain sectors, its performance could be
worse than that of the overall stock market.
- -----------------------------------------------------------------------------------------------------------------------------------
Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its
peers or lose money if the manager's investment strategy does not perform as expected.
- -----------------------------------------------------------------------------------------------------------------------------------
Investment The large capitalization stocks in which the fund The large and medium capitalization stocks in which
category risk primarily invests could fall out of favor with the the fund primarily invests could fall out of favor
market, causing the fund to underperform funds that with the market, causing the fund to underperform
focus on small or medium capitalization stocks. funds that focus on small capitalization stocks.
- -----------------------------------------------------------------------------------------------------------------------------------
Medium Not applicable because the fund's stock investments The fund's investments in medium capitalization
capitalization are primarily large capitalization companies. companies may be subject to larger and more
company risk erratic price movements than investments in large
capitalization companies.
- -----------------------------------------------------------------------------------------------------------------------------------
Interest When interest rates rise, bond prices usually fall. Generally, an increase in the fund's average maturity
rate risk will make it more sensitive to interest rate risk.
- -----------------------------------------------------------------------------------------------------------------------------------
Prepayment (call) If interest rate movements cause the fund's mortgage-related and callable securities to be paid off earlier
and extension or later than expected, the fund's share price or yield could be hurt.
risks
- -----------------------------------------------------------------------------------------------------------------------------------
Credit risk The fund could lose money if the credit rating of The fund could lose money if the credit rating
any bond in its portfolio is downgraded or if the of any bond in its portfolio is downgraded or if
issuer of the bond defaults on its obligations. the issuer of the bond defaults on its
obligations. In general, lower-rated bonds
involve more credit risk. The prices of
lower-rated bonds may also be more volatile and
more sensitive to adverse economic developments.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Foreign investments involve additional risks, including potentially inadequate or inaccurate financial
securities risk information and social or political instability.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Not applicable because the fund invests only in Unfavorable foreign currency exchange rates could
currency risk U.S. dollar-denominated securities. reduce the value of securities denominated in
foreign currencies.
- -----------------------------------------------------------------------------------------------------------------------------------
Derivatives risk Not applicable because the fund does not use Certain derivative instruments can produce
derivatives. disproportionate gains or losses and are riskier
than direct investments. Also, in a down market
derivatives could become harder to value or sell
at a fair price.
- -----------------------------------------------------------------------------------------------------------------------------------
Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"),
the greater the impact that transaction costs will have on the fund's performance. The fund's turnover
rate may exceed 100%, which is considered relatively high.
- -----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
Description of Reorganization
You are being asked to approve an Agreement and Plan of Reorganization, a form
of which is attached as Exhibit A. The Agreement provides for a reorganization
on the following terms:
19
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002 but may occur on any later date before December 31, 2002.
Independence Balanced Fund will transfer all of its assets to Balanced
Fund and Balanced Fund will assume all of Independence Balanced Fund's
liabilities. This will result in the addition of Independence Balanced
Fund's assets to Balanced Fund's portfolio. The net asset value of both
funds will be computed as of 5:00 p.m., Eastern Time, on the
reorganization date.
o Balanced Fund will issue to Independence Balanced Fund Class I shares in
an amount equal to the net assets attributable to Independence Balanced
Fund's shares. As part of the liquidation of Independence Balanced Fund,
these shares will immediately be distributed to shareholders of record of
Independence Balanced Fund in proportion to their holdings on the
reorganization date. As a result, shareholders of Independence Balanced
Fund will end up as Class I shareholders of Balanced Fund.
o After the shares are issued, the existence of Independence Balanced Fund
will be terminated.
Reasons for the Proposed Reorganization
The board of trustees of Independence Balanced Fund believes that the proposed
reorganization will be advantageous to the shareholders of Independence Balanced
Fund for several reasons. The board of trustees considered the following
matters, among others, in approving the proposal.
First, that Independence Balanced Fund does not have sufficient assets to
justify maintaining this fund as a separate investment portfolio (i.e. the fund
had $16.9 million in assets as of December 31, 2001). Independence Balanced
Fund, which as been in existence for approximately six years, has not grown in
asset size and in light of the history of the fund, there is no foreseeable
potential for future growth. The investment adviser has subsidized Independence
Balanced Fund by absorbing expenses since the inception of the fund. Without
these subsidies, Independence Balanced Fund would have had a higher expense
ratio and lower performance.
Second, that Balanced Fund's total expenses are lower than Independence Balanced
Fund's total expenses. As a result of the reorganization, shareholders of
Independence Balanced Fund will experience a reduction in the total amount of
fees, as a percentage of average net assets, that they indirectly pay.
Third, that the reorganization would permit Independence Balanced Fund's
shareholders to pursue similar investment goals in a larger fund. A larger fund
should give the investment adviser greater flexibility and the ability to select
a larger number of portfolio securities, resulting in increased diversification.
Fourth, that a combined fund offers economies of scale that may lead to lower
per share expenses. Both funds incur costs for accounting, legal, transfer
agency services, insurance, and custodial and administrative services. Many of
these expenses are duplicative and there may be an opportunity to reduce
Balanced Fund's expense ratio over time because of economies of scale if the
funds are combined.
The board of trustees of Balanced Fund considered that the reorganization
presents an excellent opportunity for Balanced Fund to acquire investment assets
without the obligation to pay commissions or other transaction costs that a fund
normally incurs when purchasing securities. This opportunity provides an
economic benefit to Balanced Fund and its shareholders.
The boards of both funds also considered that the adviser and the funds'
distributor will benefit from the reorganization. For example, the adviser might
realize time savings from a consolidated portfolio management effort and from
the need to prepare fewer reports and regulatory filings as well as prospectus
disclosure for one fund instead of two. The boards believe, however, that these
savings will not amount to a significant economic benefit to the adviser or
distributor.
Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates
paid by your fund are higher than the rates paid by Balanced Fund.
Balanced Fund's management fee rate of 0.60% and pro forma management fee rate
of 0.60%, are lower than Independence Balanced Fund's management fee rate of
0.70%. Balanced Fund's other expenses of 0.15% and its pro forma other expenses
of 0.15% are lower than Independence Balanced Fund's other expenses of 0.39%.
Balanced Fund's current annual expense ratio (0.75% of average net assets) and
pro forma expense ratio (0.75% of average net assets) are both lower than
Independence Balanced Fund's current expense ratio (0.90% of average net assets)
after the expense reduction. Independence Balanced Fund's expense ratio before
the expense reduction is 1.09% and there is no guarantee that the expense
limitation will be extended beyond June 30, 2002.
20
Comparative Performance. The trustees also took into consideration the relative
performance of Independence Balanced Fund and Balanced Fund as of December 31,
2001.
PROPOSAL 3
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN INTERNATIONAL EQUITY
FUND AND INTERNATIONAL FUND
A proposal to approve an Agreement and Plan of Reorganization between
International Equity Fund and International Fund. Under this Agreement,
International Equity Fund would transfer all of its assets to International Fund
in exchange for Class I shares of International Fund. These shares would be
distributed proportionately to the shareholders of International Equity Fund.
International Fund would also assume International Equity Fund's liabilities.
International Equity Fund's Board of Trustees recommends that shareholders vote
FOR this proposal.
SUMMARY
Comparison of International Equity Fund to International Fund
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund International Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Business A diversified series of John Institutional Series A diversified series of John Hancock Investment Trust
Trust. The trust is an open-end investment company III. The trust is an open-end investment company
organized as a Massachusetts business trust. organized as a Massachusetts business trust.
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets as of $1.8 million $15.4 million
December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Investment adviser Investment Adviser: Investment Adviser:
and subadviser John Hancock Advisers, LLC John Hancock Advisers, LLC
Subadviser: Subadviser:
Nicholas-Applegate Capital Management Nicholas-Applegate Capital Management
-U.S. based team responsible for day-to-day -U.S. based team responsible for day-to-day
investment management investment management
-Managed fund since December 2000 -Managed fund since December 2000
-Founded in 1984 -Founded in 1984
-Supervised by the adviser -Supervised by the adviser
- ------------------------------------------------------------------------------------------------------------------------------------
Investment The fund seeks long-term growth of capital. This The fund seeks long-term growth of capital. This
objective objective can be changed without shareholder objective can be changed without shareholder approval.
approval.
- ------------------------------------------------------------------------------------------------------------------------------------
Primary investments The fund invests at least 80% of assets in stocks of The fund invests at least 80% of assets in stocks of
foreign companies. The fund does not maintain a foreign companies. The fund does not maintain a fixed
fixed allocation of assets, either with respect to allocation of assets, either with respect to
securities type or geography. The managers allocate securities type or geography. The managers allocate
the fund's assets among securities of countries that the fund's assets among securities of countries that
are expected to provide the best opportunities for are expected to provide the best opportunities for
meeting the fund's investment objective. meeting the fund's investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Other investments Each fund may invest in American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs").
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging market Each fund may invest up to 30% of assets in emerging markets.
securities
- ------------------------------------------------------------------------------------------------------------------------------------
Diversification Each fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total
assets in securities of a single issuer. In addition, each fund cannot invest more than 5% of total assets
in any one security.
- ------------------------------------------------------------------------------------------------------------------------------------
Derivatives Each fund may use of certain derivatives (investments whose value is based on indexes, securities, or
currencies).
- ------------------------------------------------------------------------------------------------------------------------------------
Temporary In abnormal market conditions, each fund may temporarily invest more than 20% of assets in investment-grade
defensive positions short-term securities. In these and other cases, the fund might not achieve its goal.
- ------------------------------------------------------------------------------------------------------------------------------------
21
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund International Fund -- Class I
- ------------------------------------------------------------------------------------------------------------------------------------
Sales charge Shares are offered with no sales charge.
- ------------------------------------------------------------------------------------------------------------------------------------
Distribution and Shares are not subject to a 12b-1 distribution fee.
Service (12b-1) fee
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
BUYING, SELLING AND EXCHANGING SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
Both International Equity Fund and International Fund -- Class I
- -----------------------------------------------------------------------------------------------------------------------------------
Buying shares Investors may buy shares at their public offering price through a financial representative or the funds'
transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed
to open new accounts in International Equity Fund but can add to existing accounts.
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum initial $10,000. No minimum investment for retirement plans with at least 350 eligible employees.
investment
- -----------------------------------------------------------------------------------------------------------------------------------
Exchanging shares Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of any
John Hancock Institutional Fund.
- -----------------------------------------------------------------------------------------------------------------------------------
Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock
Signature Services, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per
share (NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York
Stock Exchange, which is normally 4:00 p.m. Eastern Time.
- -----------------------------------------------------------------------------------------------------------------------------------
The Funds' Expenses
Shareholders of both funds pay various expenses, either directly or indirectly.
The expense table appearing below shows the expenses for the twelve-month period
ended October 31, 2001, adjusted to reflect any changes. International Fund's
Class I shares have no operational history. As a result, expenses were projected
based on expenses incurred by other classes of the Fund. Future expenses may be
greater or less. The examples contained in the expense table show what you would
pay if you invested $10,000 over the various time periods indicated. Each
example assumes that you reinvested all dividends and that the average annual
return was 5%. The examples are for comparison purposes only and are not a
representation of either fund's actual expenses or returns, either past or
future.
Pro Forma Expenses
The following expense table shows the pro forma expenses of International Fund
for the year ended October 31, 2001 assuming that a reorganization with
International Equity Fund had occurred November 1, 2000. The expenses shown in
the table are based on fees and expenses incurred during the twelve months ended
October 31, 2001, adjusted to reflect any changes. International Fund's Class I
shares have no operational history. As a result, expenses were projected based
on expenses incurred by other classes of the Fund. International Fund's actual
expenses after the reorganization may be greater or less than those shown.
The example contained in the pro forma expense table shows what you would have
paid on a $10,000 investment if the reorganization had occurred on November 1,
2000. The example assumes that you had reinvested all dividends and that the
average annual return was 5%. The pro forma example is for comparison purposes
only and is not a representation of International Fund's actual expenses or
returns, either past or future.
22
International
Fund
Class I
(PRO FORMA
for the year
ended 10/31/01)
(Assuming
reorganization
with
International International International
Equity Fund Fund Class I Equity Fund)
Shareholder
transaction expenses
- -------------------------------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a % of purchase none none none
price)
Maximum sales charge imposed on reinvested dividends none none none
Maximum deferred sales charge (load) as a % of purchase or sale none none none
price, whichever is less
Redemption fee none none none
Exchange fee none none none
Annual fund operating expenses
(as a % of average net assets)
- -------------------------------------------------------------------------------------------------------------------------------
Management fee 0.90% 1.00% 1.00%
Distribution and service (12b-1) fee none none none
Other expenses 3.28% 1.55% 1.42%
Total fund operating expenses 4.18% 2.55% 2.42%
Expense reduction 3.18%(1) 1.60%(2) 1.47%(2)
Net fund operating expenses 1.00% 0.95% 0.95%
Expenses
- -------------------------------------------------------------------------------------------------------------------------------
Year 1 $ 102 $ 97 $ 97
Year 3 $ 979 $ 641 $ 614
Year 5 $1,870 $1,211 $1,157
Year 10 $4,162 $2,765 $2,644
(1) The Adviser has agreed to limit International Equity Fund's
operating expenses to 1.00% of the fund's average daily net assets at least
until June 30, 2002.
(2) The adviser has agreed to limit International Fund's operating
expenses, excluding 12b-1 and transfer agent fees, to 0.90% of the fund's
average daily net assets at least until February 28, 2003.
The Reorganization
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002, but may occur on any later date before December 31, 2002.
International Equity Fund will transfer all of its assets to International
Fund. International Fund will assume International Equity Fund's
liabilities. The net asset value of both funds will be computed as of 5:00
p.m., Eastern Time, on the reorganization date.
o International Fund will issue to International Equity Fund Class I shares
in an amount equal to the net assets attributable to International Equity
Fund's shares. These shares will immediately be distributed to
International Equity Fund's shareholders in proportion to their holdings
on the reorganization date. As a result, shareholders of International
Equity Fund will end up as Class I shareholders of International Fund.
o After the shares are issued, International Equity Fund will be terminated.
o The reorganization will be tax-free and will not take place unless both
funds receive a satisfactory opinion concerning the tax consequences of
the reorganization from Hale and Dorr LLP, counsel to the funds.
23
The following diagram shows how the reorganization would be carried out.
-------------------- -------------------
International Equity International Fund
Fund transfers International receives assets &
assets & liabilities Equity Fund assumes liabilities
to International assets and of International
Fund liabilities Equity Fund
-------------------- -------------------
------------- --------------
International Issues
Equity Fund Class I
shareholders Shares
------------- --------------
International Equity Fund receives Inernational
Fund Class I shares and distributes
them to International Equity Fund
shareholders
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets:
- -------------------------------------------------------------------------
Fund Asset Breakpoints International Equity Fund
- -------------------------------------------------------------------------
First $500 Million 0.900%
- -------------------------------------------------------------------------
Amount over $500 Million 0.650%
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Fund Asset Breakpoints International Fund
- -------------------------------------------------------------------------
First $250 Million 1.000%
- -------------------------------------------------------------------------
Next $250 Million 0.800%
- -------------------------------------------------------------------------
Next $250 Million 0.750%
- -------------------------------------------------------------------------
Amount over $750 Million 0.625%
- -------------------------------------------------------------------------
Nicholas-Applegate Capital Management ("Nicholas-Applegate") serves as
subadviser to both the Acquired Fund and the Acquiring Fund. In this capacity,
Nicholas-Applegate has primary responsibility for making investment decisions
for each Fund's investment portfolio and placing orders with brokers and dealers
to implement those decisions. Nicholas-Applegate receives its compensation from
the Adviser, and the Funds pay no subadvisory fees over and above the management
fee they pay to the Adviser. Nicholas-Applegate receives subadvisory fees from
the Adviser at the same rate for the Acquired Fund and the Acquiring Fund: (i)
0.50% of the first $500 Million of the average daily net asset value of the
Fund; and (ii) 0.45% of the average daily net asset value of the Fund in excess
of $500 Million.
International Fund's management fee rate of 1.00% and its pro forma management
fee rate of 1.00% are higher than International Equity Fund's management fee
rate of 0.90%. International Fund's other expenses of 1.55% and its pro forma
other expenses of 1.42% are lower than International Equity Fund's other
expenses of 3.28%. International Fund's current annual expense ratio (equal to
0.95% of average net assets) and its pro forma expense ratio (equal to 0.95% of
average net assets) are both lower than International Equity Fund's expense
ratio (equal to 1.00% of average net assets) after the expense reduction. Your
fund's expense ratio before the expense reduction is 4.18%. International Fund's
expense ratio before the expense reduction is 2.55%.
24
INVESTMENT RISKS
The funds are exposed to various risks that could cause shareholders to lose
money on their investments in the funds. The following table compares the risks
affecting each fund.
- -----------------------------------------------------------------------------------------------------------------------------------
International Equity Fund International Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Stock The value of securities in the fund may go down in response to overall stock market movements. Markets
market risk tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the fund concentrates in certain sectors or geographic regions, its
performance could be worse than that of the overall stock market.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Foreign investments are riskier than investments in U.S. companies. The special risks of foreign
investment risk investments include:
o Economic, political and social instability
o Lack of reliable, publicly available information
o Limited or excessive government regulation
o Adverse governmental actions ranging from tax law changes to the collapse of governments
o Lack of liquidity
o Foreign currency exchange rate fluctuations
o Restrictions on currency transfers
o Foreign ownership limits
These risks are more severe in emerging market countries.
- -----------------------------------------------------------------------------------------------------------------------------------
Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its
peers or lose money if the manager's investment strategy does not perform as expected.
- -----------------------------------------------------------------------------------------------------------------------------------
Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct
investments. Also, in a down market derivatives could become harder to value or sell at a fair price.
- -----------------------------------------------------------------------------------------------------------------------------------
Liquidity and In a down or unstable market, the fund's investments could become harder to value accurately or to sell at
valuation risks a fair price.
- -----------------------------------------------------------------------------------------------------------------------------------
Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"),
the greater the impact that transaction costs will have on the fund's performance. The fund's turnover
rate may exceed 100%, which is considered relatively high.
- -----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
Description of Reorganization
You are being asked to approve an Agreement and Plan of Reorganization, a form
of which is attached as Exhibit A. The Agreement provides for a reorganization
on the following terms:
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002 but may occur on any later date before December 31, 2002.
International Equity Fund will transfer all of its assets to International
Fund and International Fund will assume all of International Equity Fund's
liabilities. This will result in the addition of International Equity
Fund's assets to International Fund's portfolio. The net asset value of
both funds will be computed as of 5:00 p.m., Eastern Time, on the
reorganization date.
o International Fund will issue to International Equity Fund Class I shares
in an amount equal to the net assets attributable to International Equity
Fund's shares. As part of the liquidation of International Equity Fund,
these shares will immediately be distributed to shareholders of record of
International Equity Fund in proportion to their holdings on the
reorganization date. As a result, shareholders of International Equity
Fund will end up as shareholders of International Fund.
o After the shares are issued, the existence of International Equity Fund
will be terminated.
Reasons for the Proposed Reorganization
The board of trustees of International Equity Fund believes that the proposed
reorganization will be advantageous to the shareholders of International Equity
Fund for several reasons. The board of trustees considered the following
matters, among others, in approving the proposal.
25
First, that International Equity Fund does not have sufficient assets to justify
maintaining this fund as a separate investment portfolio (i.e. the fund had $1.8
million in assets as of December 31, 2001). International Equity Fund, which as
been in existence for approximately seven years, has not grown in asset size and
in light of the history of the fund, there is no foreseeable potential for
future growth. The investment adviser has subsidized International Equity Fund
by absorbing expenses since the inception of the fund. Without these subsidies,
International Equity Fund would have had a substantially higher expense ratio
and lower performance.
Second, that International Fund's total expenses are lower than International
Equity Fund's total expenses. As a result of the reorganization, shareholders of
International Equity Fund will experience a reduction in the total amount of
fees, as a percentage of average net assets, that they indirectly pay.
Third, that the reorganization would permit International Equity Fund's
shareholders to pursue substantially similar investment goals in a larger fund.
A larger fund should give the investment adviser greater flexibility and the
ability to select a larger number of portfolio securities, resulting in
increased diversification.
The board of trustees of International Fund considered that the reorganization
presents an excellent opportunity for International Fund to acquire substantial
investment assets without the obligation to pay commissions or other transaction
costs that a fund normally incurs when purchasing securities. This opportunity
provides an economic benefit to International Fund and its shareholders.
The boards of both funds also considered that the adviser and the funds'
distributor will benefit from the reorganization. For example, the adviser might
realize time savings from a consolidated portfolio management effort and from
the need to prepare fewer reports and regulatory filings as well as prospectus
disclosure for one fund instead of two. The boards believe, however, that these
savings will not amount to a significant economic benefit to the adviser or
distributor.
Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates
paid by International Equity Fund are higher than the rates paid by
International Fund.
International Fund's management fee rate of 1.00% and pro forma management fee
rate of 1.00% are higher than your fund's management fee rate of 0.90%.
International Fund's other expenses of 1.55% and its pro forma other expenses of
1.42% are lower than your fund's other expenses of 3.28%. International Fund's
current annual expense ratio (0.95% of average net assets) and pro forma expense
ratio (0.95% of average net assets) are both lower than your fund's current
expense ratio (1.00% of average net assets) after the expense reductions. Your
fund's expense ratio before the expense reduction is 4.18%. International Fund's
expense ratio before the expense reduction is 2.55%.
Comparative Performance. The trustees also took into consideration the relative
performance of International Equity Fund and International Fund as of December
31, 2001.
PROPOSAL 4
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN MEDIUM CAPITALIZATION
GROWTH FUND AND MID CAP GROWTH FUND
A proposal to approve an Agreement and Plan of Reorganization between Medium
Capitalization Growth Fund and Mid Cap Growth Fund. Under this Agreement, Medium
Capitalization Growth Fund would transfer all of its assets to Mid Cap Growth
Fund in exchange for Class I shares of Mid Cap Growth Fund. These shares would
be distributed proportionately to the shareholders of Medium Capitalization
Growth Fund. Mid Cap Growth Fund would also assume Medium Capitalization Growth
Fund's liabilities. Medium Capitalization Growth Fund's Board of Trustees
recommends that shareholders vote FOR this proposal.
26
SUMMARY
Comparison of Medium Capitalization Growth Fund to Mid Cap Growth Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Medium Capitalization Growth Fund Mid Cap Growth Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Business A diversified series of John Hancock Institutional A diversified series of John Hancock Investment Trust
Series Trust. The trust is an open-end investment III. The trust is an open-end investment company
company organized as a Massachusetts business trust. organized as a Massachusetts business trust.
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets as of $5.6 million $208.2 million
December 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Investment adviser Investment adviser: Investment adviser:
and portfolio John Hancock Advisers, LLC John Hancock Advisers, LLC
managers
Portfolio Managers: Portfolio Managers:
Paul J. Berlinguet Paul J. Berlinguet
-Vice president of adviser -Vice president of adviser
-Joined fund team in 2001 -Joined fund team in 2001
-Joined adviser in 2001 -Joined adviser in 2001
-U.S. equity investment manager -U.S. equity investment manager
at Baring America Asset at Baring America Asset
Management (1989-2001) Management (1989-2001)
-Began business career in 1986 -Began business career in 1986
Robert J. Uek, CFA Robert J. Uek, CFA
-Vice president of adviser -Vice president of adviser
-Joined fund team in 2001 -Joined fund team in 2001
-Joined adviser in 1997 -Joined adviser in 1997
-Corporate finance manager -Corporate finance manager
at Ernst & Young (1994-1997) at Ernst & Young (1994-1997)
-Began business career in 1990 -Began business career in 1990
Timothy N. Manning Timothy N. Manning
-Joined fund team in 2000 -Joined fund team in 2000
-Joined adviser in 2000 -Joined adviser in 2000
-Analyst at State Street Research -Analyst at State Street Research
(1999-2000) (1999-2000)
-Equity research associate at -Equity research associate at
State Street Research (1996-1999) State Street Research (1996-1999)
-Began business career in 1993 -Began business career in 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Investment objective The fund seeks long-term capital appreciation. This The fund seeks long-term capital appreciation. This
objective can be changed without shareholder objective can be changed without shareholder
approval. approval.
- -----------------------------------------------------------------------------------------------------------------------------------
Primary investments The fund invests at least 80% of assets in stocks The fund invests at least 80% of assets in stocks of
of medium-capitalization companies (companies in medium-capitalization companies (companies in the
the capitalization range of the Russell Midcap capitalization range of the Russell Midcap Growth
Growth Index, which was $_____ million to $_____ Index, which was $_____ million to $_____ billion on
billion on February 28, 2002). In managing the February 28, 2002). In managing the portfolio, the
portfolio, the managers use quantitative screens to managers seek to identify companies with
identify companies with at least 15% annual above-average earnings growth.
earnings growth, expanding profit margins, and
projected price/earnings ratios below their
earnings growth rate.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign securities Each fund may invest up to 10% of assets in foreign securities.
- -----------------------------------------------------------------------------------------------------------------------------------
27
- -----------------------------------------------------------------------------------------------------------------------------------
Diversification Each fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total
assets in securities of a single issuer. In addition, each fund cannot invest more than 5% of total assets
in any one security.
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash Each fund normally has less than 10% of assets in cash and cash equivalents.
equivalents
- -----------------------------------------------------------------------------------------------------------------------------------
Derivatives Each fund may make limited use of certain derivatives (investments whose value is based on indexes or
currencies).
- -----------------------------------------------------------------------------------------------------------------------------------
Temporary In abnormal market conditions, each fund may temporarily invest in U.S. government securities with
defensive maturities of up to three years, and may also invest more than 10% of assets in cash and/or cash
positions equivalents. In these and other cases, a fund might not achieve its goal.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
Medium Capitalization Growth Fund Mid Cap Growth Fund -- Class I
- -----------------------------------------------------------------------------------------------------------------------------------
Sales charge Shares are offered with no sales charge.
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution and Shares are not subject to a 12b-1 distribution fee.
Service (12b-1)
fee
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
BUYING, SELLING AND EXCHANGING SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
Both Medium Capitalization Growth Fund and Mid Cap Growth Fund - Class I
- -----------------------------------------------------------------------------------------------------------------------------------
Buying shares Investors may buy shares at their public offering price through a financial representative or the funds'
transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed
to open new accounts in Medium Capitalization Growth Fund but can add to existing accounts.
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum initial $10,000. No minimum investment for retirement plans with at least 350 eligible employees.
investment
- -----------------------------------------------------------------------------------------------------------------------------------
Exchanging Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of
shares any shares John Hancock Institutional Fund.
- -----------------------------------------------------------------------------------------------------------------------------------
Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock
Signature Services, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per
share (NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York
Stock Exchange, which is normally 4:00 p.m. Eastern Time.
- -----------------------------------------------------------------------------------------------------------------------------------
The Funds' Expenses
Shareholders of both funds pay various expenses, either directly or indirectly.
The expense table appearing below shows the expenses for the twelve-month period
ended October 31, 2001, adjusted to reflect any changes. Mid Cap Growth Fund's
Class I shares have no operational history. As a result, expenses were projected
based on expenses incurred by other classes of the Fund. Future expenses may be
greater or less. The examples contained in the expense table show what you would
pay if you invested $10,000 over the various time periods indicated. Each
example assumes that you reinvested all dividends and that the average annual
return was 5%. The examples are for comparison purposes only and are not a
representation of either fund's actual expenses or returns, either past or
future.
Pro Forma Expenses
The following expense table shows the pro forma expenses of Mid Cap Growth Fund
for the year ended October 31, 2001 assuming that a reorganization with Medium
Capitalization Growth Fund had occurred November 1, 2000. The expenses shown in
the table are based on fees and expenses incurred during the twelve months ended
October 31, 2001, adjusted to reflect any changes. Mid Cap Growth Fund's Class I
shares have no operational history. As a result, expenses were projected based
on expenses incurred by other classes of the Fund. Mid Cap Growth Fund's actual
expenses after the reorganization may be greater or less than those shown.
The example contained in the pro forma expense table shows what you would have
paid on a $10,000 investment if the reorganization had occurred on November 1,
2000. The example assumes that you had reinvested all dividends and that the
average annual return was 5%. The pro forma example is for comparison purposes
only and is not a representation of Mid Cap Growth Fund's actual expenses or
returns, either past or future.
28
Mid Cap Growth
Fund
Class I
(PRO FORMA
for the year
ended 10/31/01)
(Assuming
reorganization
with
Medium Mid Cap Medium
Capitalization Growth Fund Capitalization
Growth Fund Class I Growth Fund)
Shareholder
transaction expenses
- -------------------------------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a % of purchase none none none
price)
Maximum sales charge imposed on reinvested dividends none none none
Maximum deferred sales charge (load) as a % of purchase or sale price, none none none
whichever is less
Redemption fee none none none
Exchange fee none none none
Annual fund operating expenses
(as a % of average net assets)
- -------------------------------------------------------------------------------------------------------------------------------
Management fee 0.80% 0.80% 0.80%
Distribution and service (12b-1) fee none none none
Other expenses 0.93% 0.14% 0.14%
Total fund operating expenses 1.73% 0.94% 0.94%
Expense reduction(1) 0.83% none none
Net fund operating expenses 0.90% 0.94% 0.94%
Expenses
- -------------------------------------------------------------------------------------------------------------------------------
Year 1 $ 119 $ 96 $ 96
Year 3 $ 490 $ 300 $ 300
Year 5 $ 886 $ 520 $ 520
Year 10 $1,994 $1,155 $1,155
(1) The Adviser has agreed to limit Medium Capitalization Growth Fund's expenses
to 0.90% of the fund's average daily net assets at least until June 30, 2002.
The Reorganization
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002, but may occur on any later date before December 31, 2002.
Medium Capitalization Growth Fund will transfer all of its assets to Mid
Cap Growth Fund. Mid Cap Growth Fund will assume Medium Capitalization
Growth Fund's liabilities. The net asset value of both funds will be
computed as of 5:00 p.m., Eastern Time, on the reorganization date.
o Mid Cap Growth Fund will issue to Medium Capitalization Growth Fund Class
I shares in an amount equal to the net assets attributable to Medium
Capitalization Growth Fund's shares. These shares will immediately be
distributed to Medium Capitalization Growth Fund's shareholders in
proportion to their holdings on the reorganization date. As a result,
shareholders of Medium Capitalization Growth Fund will end up as Class I
shareholders of Mid Cap Growth Fund.
o After the shares are issued, Medium Capitalization Growth Fund will be
terminated.
o The reorganization will be tax-free and will not take place unless both
funds receive a satisfactory opinion concerning the tax consequences of
the reorganization from Hale and Dorr LLP, counsel to the funds.
29
The following diagram shows how the reorganization would be carried out.
--------------------- ----------------------
Medium Capitalization Medium Mid Cap Growth Fund
Growth Fund transfers Capitalization receives assets &
assets & liabilities Growth Fund assumes liabilities of
to Mid Cap Growth Fund assets and Medium Capitalization
liabilities Growth Fund
---------------------- ----------------------
-------------- --------------
Medium Issues
Capitalization Class I
Growth Fund Shares
shareholders
-------------- --------------
Medium Capitalization Growth Fund receives Mid Cap Growth
Fund Class I shares and distributes
them to Medium Capitalization Growth Fund
shareholders
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets:
- ------------------------------------------------------------------------------
Fund Asset Breakpoints Medium Capitalization Growth Fund
- ------------------------------------------------------------------------------
First $500 Million 0.80%
- ------------------------------------------------------------------------------
Amount over $500 Million 0.75%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Fund Asset Breakpoints Mid Cap Growth Fund
- ------------------------------------------------------------------------------
First $500 Million 0.80%
- ------------------------------------------------------------------------------
Next $500 Million 0.75%
- ------------------------------------------------------------------------------
Amount over $1 Billion 0.70%
- ------------------------------------------------------------------------------
Mid Cap Growth Fund's management fee rate of 0.80% and its pro forma management
fee rate of 0.80% are the same as Medium Capitalization Growth Fund's management
fee rate of 0.80%. Mid Cap Growth Fund's other expenses of 0.14% and its pro
forma other expenses of 0.14% are lower than Medium Capitalization Growth Fund's
other expenses of 0.93%. Mid Cap Growth Fund's current annual expense ratio
(equal to 0.94% of average net assets) and its pro forma expense ratio (equal to
0.94% of average net assets) are both slightly higher than Medium Capitalization
Growth Fund's expense ratio (equal to 0.90% of average net assets) after the
expense reduction. Medium Capitalization Growth Fund's expense ratio before the
expense reduction is 1.73% and there is no guarantee that the expense reduction
will be extended beyond June 30, 2002.
30
INVESTMENT RISKS
The funds are exposed to various risks that could cause shareholders to lose
money on their investments in the funds. The following table compares the risks
affecting each fund.
- -----------------------------------------------------------------------------------------------------------------------------------
Medium Capitalization Growth Fund Mid Cap Growth Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Stock market risk The value of securities in the fund may go down in response to overall stock market movements. Markets
tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go up
and down in value more than bonds. If the fund concentrates in certain sectors, its performance could be
worse than that of the overall stock market.
- -----------------------------------------------------------------------------------------------------------------------------------
Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its
peers or lose money if the manager's investment strategy does not perform as expected.
- -----------------------------------------------------------------------------------------------------------------------------------
Investment The medium capitalization growth stocks in which the fund primarily invests could fall out of favor with
category risk the market. This could cause the fund to underperform funds that focus on large or small capitalization
stocks or on value stocks.
- -----------------------------------------------------------------------------------------------------------------------------------
Medium The fund's investments in small or medium capitalization companies may be subject to larger and more
capitalization erratic price movements than investments in large capitalization companies.
company risk
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Foreign investments involve additional risks, including potentially unfavorable currency exchange rates,
securities risk inadequate or inaccurate financial information and social or political instability.
- -----------------------------------------------------------------------------------------------------------------------------------
Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct
investments. Also, in a down market derivatives could become harder to value or sell at a fair price.
- -----------------------------------------------------------------------------------------------------------------------------------
Liquidity and In a down or unstable market, the fund's investments could become harder to value accurately or to sell at
valuation risks a fair price.
- -----------------------------------------------------------------------------------------------------------------------------------
Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover rate"),
the greater the impact that transaction costs will have on the fund's performance. The fund's turnover
rate may exceed 100%, which is considered relatively high.
- -----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
Description of Reorganization
You are being asked to approve an Agreement and Plan of Reorganization, a form
of which is attached as Exhibit A. The Agreement provides for a reorganization
on the following terms:
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002 but may occur on any later date before December 31, 2002.
Medium Capitalization Growth Fund will transfer all of its assets to Mid
Cap Growth Fund and Mid Cap Growth Fund will assume all of Medium
Capitalization Growth Fund's liabilities. This will result in the addition
of Medium Capitalization Growth Fund's assets to Mid Cap Growth Fund's
portfolio. The net asset value of both funds will be computed as of 5:00
p.m., Eastern Time, on the reorganization date.
o Mid Cap Growth Fund will issue to Medium Capitalization Growth Fund Class
I shares in an amount equal to the net assets attributable to Medium
Capitalization Growth Fund's shares. As part of the liquidation of Medium
Capitalization Growth Fund, these shares will immediately be distributed
to shareholders of record of Medium Capitalization Growth Fund in
proportion to their holdings on the reorganization date. As a result,
shareholders of Medium Capitalization Growth Fund will end up as
shareholders of Mid Cap Growth Fund.
o After the shares are issued, the existence of Medium Capitalization Growth
Fund will be terminated.
Reasons for the Proposed Reorganization
The board of trustees of Medium Capitalization Growth Fund believes that the
proposed reorganization will be advantageous to the shareholders of Medium
Capitalization Growth Fund for several reasons. The board of trustees considered
the following matters, among others, in approving the proposal.
31
First, that Medium Capitalization Growth Fund does not have sufficient assets to
justify maintaining this fund as a separate investment portfolio (i.e. the fund
had $5.6 million in assets as of December 31, 2001). Medium Capitalization
Growth Fund, which as been in existence for approximately seven years, has not
grown to an acceptable asset size and in light of the history of the fund, there
is no foreseeable potential for future growth. The investment adviser has
subsidized Medium Capitalization Growth Fund by absorbing expenses since the
inception of the fund. Without these subsidies, Medium Capitalization Growth
Fund would have had a substantially higher expense ratio and lower performance.
Second, that Mid Cap Growth Fund's total expenses are lower than Medium
Capitalization Growth Fund's total expenses before taking into account the
Adviser's agreement to limit Medium Capitalization Growth Fund's expenses. As a
result of the reorganization, shareholders of Medium Capitalization Growth Fund
will experience a reduction in the total amount of fees, as a percentage of
average net assets, that they indirectly pay if the expense reduction is not
extended beyond June 30, 2002.
Third, that the reorganization would permit Medium Capitalization Growth Fund's
shareholders to pursue substantially similar investment goals in a larger fund.
A larger fund should give the investment adviser greater flexibility and the
ability to select a larger number of portfolio securities, resulting in
increased diversification.
Fourth, that a combined fund offers economies of scale that may lead to lower
per share expenses. Both funds incur costs for accounting, legal, transfer
agency services, insurance, and custodial and administrative services. Many of
these expenses are duplicative and there may be an opportunity to reduce Mid Cap
Growth Fund's expense ratio over time because of economies of scale if the funds
are combined.
The board of trustees of Mid Cap Growth Fund considered that the reorganization
presents an excellent opportunity for Mid Cap Growth Fund to acquire investment
assets without the obligation to pay commissions or other transaction costs that
a fund normally incurs when purchasing securities. This opportunity provides an
economic benefit to Mid Cap Growth Fund and its shareholders.
The boards of both funds also considered that the adviser and the funds'
distributor will benefit from the reorganization. For example, the adviser might
realize time savings from a consolidated portfolio management effort and from
the need to prepare fewer reports and regulatory filings as well as prospectus
disclosure for one fund instead of two. The boards believe, however, that these
savings will not amount to a significant economic benefit to the adviser or
distributor.
Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates
paid by Medium Capitalization Growth Fund are the same as the rates paid by Mid
Cap Growth Fund.
Mid Cap Growth Fund's management fee rate of 0.80%% and pro forma management fee
rate of 0.80%, are the same as Medium Capitalization Growth Fund's management
fee rate of 0.80%. Mid Cap Growth Fund's other expenses of 0.14% and its pro
forma other expenses of 0.14% are lower than Medium Capitalization Growth Fund's
other expenses of 0.93%. Mid Cap Growth Fund's current annual expense ratio
(0.94% of average net assets) and pro forma expense ratio (0.94% of average net
assets) are both slightly higher than Medium Capitalization Growth Fund's
current expense ratio (0.90% of average net assets) after the expense reduction.
Medium Capitalization Growth Fund's expense ratio before the expense reduction
is 1.73% and there is no guarantee that the expense reduction will be extended
beyond June 30, 2002.
Comparative Performance. The trustees also took into consideration the relative
performance of Medium Capitalization Growth Fund and Mid Cap Growth Fund as of
December 31, 2001.
PROPOSAL 5
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION BETWEEN SMALL CAP EQUITY FUND Y
AND SMALL CAP EQUITY FUND
A proposal to approve an Agreement and Plan of Reorganization between Small Cap
Equity Fund Y and Small Cap Equity Fund. Under this Agreement, Small Cap Equity
Fund Y would transfer all of its assets to Small Cap Equity Fund in exchange for
Class I shares of Small Cap Equity Fund. These shares would be distributed
proportionately to the shareholders of Small Cap Equity Fund Y. Small Cap Equity
Fund would also assume Small Cap Equity Fund Y's liabilities. Small Cap Equity
Fund Y's Board of Trustees recommends that shareholders vote FOR this proposal.
32
SUMMARY
Comparison of Small Cap Equity Fund Y to Small Cap Equity Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Fund Y Small Cap Equity Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Business A diversified series of John Hancock A diversified series of John Hancock Investment
Institutional Series Trust. The Trust is an Trust II. The Trust is an open-end investment
open-end investment management company organized management company organized as a Massachusetts
as a Massachusetts Business Trust. Business Trust.
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets as of $35.1 million $980.7 million
December 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Investment adviser and Investment Adviser: Investment Adviser:
portfolio managers John Hancock Advisers, LLC John Hancock Advisers, LLC
Portfolio Managers: Portfolio Managers:
James S. Yu, CFA James S. Yu, CFA
-Vice President of adviser -Vice President of adviser
-Joined fund team in 2000 -Joined fund team in 2000
-Joined adviser in 2000 -Joined adviser in 2000
-Analyst at Merrill Lynch Asset Management -Analyst at Merrill Lynch Asset Management
(1998-2000) (1998-2000)
-Analyst at Gabelli & Company (1995-1998) -Analyst at Gabelli & Company (1995-1998)
-Began business career in 1990 -Began business career in 1990
Roger C. Hamilton Roger C. Hamilton
-Vice President of adviser -Vice President of adviser
-Joined fund team in 1999 -Joined fund team in 1999
-Joined adviser in 1994 -Joined adviser in 1994
-Began business career in 1980 -Began business career in 1980
- -----------------------------------------------------------------------------------------------------------------------------------
Investment objective The fund seeks capital appreciation. This The fund seeks capital appreciation.
objective can be changed without shareholder
approval.
- -----------------------------------------------------------------------------------------------------------------------------------
Primary Investments The fund normally invests at least 80% of assets The fund normally invests at least 80% of assets in
in stocks of small-capitalization companies stocks of small-capitalization companies (companies
(companies in the capitalization range of the in the capitalization range of the Russell 2000
Russell 2000 Index, which was $___ million to Index, which was $___ million to $___ billion as of
$___ billion as of February 28, 2002). February 28, 2002).
In managing the portfolio, the managers emphasize In managing the portfolio, the managers emphasize a
a value-oriented approach to individual stock value-oriented approach to individual stock
selection. With the aid of proprietary financial selection. With the aid of proprietary financial
models, the management team looks for companies models, the management team looks for U.S. and
that are selling at what appear to be substantial foreign companies that are selling at what appear
discounts to their long-term value. These to be substantial discounts to their long-term
companies often have identifiable catalysts for value. These companies often have identifiable
growth, such as new products, business catalysts for growth, such as new products,
reorganizations, or mergers. business reorganizations, or mergers.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Securities Each fund invests primarily in stocks of U.S. companies, but may invest up to 15% of assets in a basket
and bonds of foreign securities and bonds rated as low as CC/Ca and their unrated equivalents. (Bonds rated
below BBB/Baa are considered junk bonds.)
- -----------------------------------------------------------------------------------------------------------------------------------
Diversification Each fund is diversified and, with respect to 75% of total assets, cannot invest more than 5% of total
assets in securities of a single issuer. In addition, each fund cannot invest more than 5% of total
assets in any one security.
- -----------------------------------------------------------------------------------------------------------------------------------
33
- -----------------------------------------------------------------------------------------------------------------------------------
Derivatives Each fund may make limited use of certain derivatives (investments whose value is based on indexes or
currencies).
- -----------------------------------------------------------------------------------------------------------------------------------
Temporary defensive In abnormal market conditions, each fund may temporarily invest extensively in investment-grade
positions short-term securities. In these and other cases, a fund might not achieve its goal.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Fund Y Small Cap Equity Fund - Class I
- -----------------------------------------------------------------------------------------------------------------------------------
Sales charge Shares are offered with no sales charge.
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution and Shares are not subject to a 12b-1 distribution fee.
Service (12b-1) fee
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
BUYING, SELLING AND EXCHANGING SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Fund Y Small Cap Equity Fund - Class I
- -----------------------------------------------------------------------------------------------------------------------------------
Buying shares Investors may buy shares at their public offering price through a financial representative or the funds'
transfer agent, John Hancock Signature Services, Inc. After March 15, 2002, investors will not be allowed
to open new accounts in Small Cap Equity Fund Y but can add to existing accounts.
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum initial $10,000. No minimum investment for retirement plans with at least 350 eligible employees.
investment
- -----------------------------------------------------------------------------------------------------------------------------------
Exchanging shares Shareholders may exchange their shares for Class I shares of other John Hancock funds, or for shares of
any John Hancock Institutional Fund.
- -----------------------------------------------------------------------------------------------------------------------------------
Selling shares Shareholders may sell their shares by submitting a proper written or telephone request to John Hancock
Signature Services, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value All purchases, exchanges and sales are made at a price based on the next determined net asset value per
share (NAV) of the fund. Both funds' NAVs are determined at the close of regular trading on the New York
Stock Exchange, which is normally 4:00 p.m. Eastern Time.
- -----------------------------------------------------------------------------------------------------------------------------------
The Funds' Expenses
Shareholders of both funds pay various expenses, either directly or indirectly.
The expense table appearing below shows the expenses for the twelve-month period
ended October 31, 2001, adjusted to reflect any changes. Small Cap Equity Fund's
Class I shares began operations on August 15, 2001. As a result, expenses were
projected as if Class I had been in existence for the entire year. Future
expenses may be greater or less. The examples contained in the expense table
show what you would pay if you invested $10,000 over the various time periods
indicated. Each example assumes that you reinvested all dividends and that the
average annual return was 5%. The examples are for comparison purposes only and
are not a representation of either fund's actual expenses or returns, either
past or future.
Pro Forma Expenses
The following expense table shows the pro forma expenses of Small Cap Equity
Fund for the year ended October 31, 2001 assuming that a reorganization with
Small Cap Equity Fund Y had occurred November 1, 2000. The expenses shown in the
table are based on fees and expenses incurred during the twelve months ended
October 31, 2001, adjusted to reflect any changes. Small Cap Equity Fund's Class
I shares began operations on August 15, 2001. As a result, expenses were
projected as if Class I had been in existence for the entire year. Small Cap
Equity Fund's actual expenses after the reorganization may be greater or less
than those shown.
The example contained in the pro forma expense table shows what you would have
paid on a $10,000 investment if the reorganization had occurred on November 1,
2000. The example assumes that you had reinvested all dividends and that the
average annual return was 5%. The pro forma example is for comparison purposes
only and is not a representation of Small Cap Equity Fund's actual expenses or
returns, either past or future.
34
Small Cap Equity
Fund Class I
(PRO FORMA
for the year
ended 10/31/01)
(Assuming
reorganization
Small Cap with
Small Cap Equity Fund Small Cap Equity
Equity Fund Y Class I Fund Y)
Shareholder
transaction expenses
- -------------------------------------------------------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases (as a % of purchase none none none
price)
Maximum sales charge imposed on reinvested dividends none none none
Maximum deferred sales charge (load) as a % of purchase or sale price, none none none
whichever is less
Redemption fee none none none
Exchange fee none none none
Annual fund operating expenses
(as a % of average net assets)
- -------------------------------------------------------------------------------------------------------------------------------
Management fee 0.70% 0.70% 0.70%
Distribution and service (12b-1) fee none none none
Other expenses 0.34% 0.13% 0.13%
Total fund operating expenses 1.04% 0.83% 0.83%
Expense reduction(1) 0.24% none none
Net fund operating expenses 0.80% 0.83% 0.83%
Expenses
- -------------------------------------------------------------------------------------------------------------------------------
Year 1 $ 90 $ 85 $ 85
Year 3 $ 315 $ 265 $ 265
Year 5 $ 558 $ 460 $ 460
Year 10 $1,257 $1,025 $1,025
(1) The Adviser has agreed to limit Small Cap Equity Fund Y's operating expenses
to 0.80% of the fund's average daily net assets at least until June 30, 2002.
The Reorganization
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002, but may occur on any later date before December 31, 2002.
Small Cap Equity Fund Y will transfer all of its assets to Small Cap
Equity Fund. Small Cap Equity Fund will assume Small Cap Equity Fund Y's
liabilities. The net asset value of both funds will be computed as of 5:00
p.m., Eastern Time, on the reorganization date.
o Small Cap Equity Fund will issue to Small Cap Equity Fund Y Class I shares
in an amount equal to the net assets attributable to Small Cap Equity Fund
Y's shares. These shares will immediately be distributed to Small Cap
Equity Fund Y's shareholders in proportion to their holdings on the
reorganization date. As a result, shareholders of Small Cap Equity Fund Y
will end up as Class I shareholders of Small Cap Equity Fund.
o After the shares are issued, Small Cap Equity Fund Y will be terminated.
o The reorganization will be tax-free and will not take place unless both
funds receive a satisfactory opinion concerning the tax consequences of
the reorganization from Hale and Dorr LLP, counsel to the funds.
35
The following diagram shows how the reorganization would be carried out.
-------------------- --------------------
Small Cap Equity Small Cap Equiaty
Fund Y transfers Small Cap Fund receives
assets & liabilities Equity Fund Y assets & assumes
to Small Cap Equity assets and liabilities of Small
Fund liabilities Cap Equity Fund Y
-------------------- --------------------
-------------- --------------
Small Cap Issues
Equiaty Fund Y Class I
shareholders Shares
-------------- --------------
Small Cap Equity Fund Y receives Small Cap Equity
Fund Class I shares and distributes
them to Small Cap Equity Fund Y
shareholders
Other Consequences of the Reorganization. Each fund pays monthly advisory fees
equal to the following annual percentage of its average daily net assets:
- --------------------------------------------------------------------------------
Fund Asset Breakpoints Small Cap Equity Fund Y
- --------------------------------------------------------------------------------
First $500 Million 0.70%
- --------------------------------------------------------------------------------
Amount over $500 Million 0.65%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Small Cap Equity Fund
- --------------------------------------------------------------------------------
Fund Assets 0.70%
- --------------------------------------------------------------------------------
Small Cap Equity Fund's management fee rate of 0.70% and its pro forma
management fee rate of 0.70% are the same as your fund's management fee rate of
0.70%. Small Cap Equity Fund's other expenses of 0.13% and its pro forma other
expenses of 0.13% are lower than your fund's other expenses of 0.34%. Small Cap
Equity Fund's current annual expense ratio (equal to 0.83% of average net
assets) and its pro forma expense ratio (equal to 0.83% of average net assets)
are both slightly higher than your fund's expense ratio (equal to 0.80% of
average net assets) after the expense reduction. Your fund's expense ratio
before the expense reduction is 1.04% and there is no guarantee that the expense
reduction will be extended beyond June 30, 2002.
36
INVESTMENT RISKS
The funds are exposed to various risks that could cause shareholders to lose
money on their investments in the funds. The following table compares the risks
affecting each fund.
- -----------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Fund Y Small Cap Equity Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Stock market risk The value of securities in the fund may go down in response to overall stock market movements. Markets
tend to move in cycles, with periods of rising prices and periods of falling prices. Stocks tend to go
up and down in value more than bonds. If the fund concentrates in certain sectors, its performance
could be worse than that of the overall stock market.
- -----------------------------------------------------------------------------------------------------------------------------------
Manager risk The manager and its strategy may fail to produce the intended results. The fund could underperform its
peers or lose money if the manager's investment strategy does not perform as expected.
- -----------------------------------------------------------------------------------------------------------------------------------
Investment category risk The small capitalization value stocks in which the fund primarily invests could fall out of favor with
the market. This could cause the fund to underperform funds that focus on large or medium
capitalization stocks or on growth stocks.
- -----------------------------------------------------------------------------------------------------------------------------------
Small and medium The fund's investments in small or medium capitalization companies may be subject to larger and more
capitalization company erratic price movements than investments in established large capitalization companies. Many smaller
risk companies have short track records, narrow product lines or niche markets, making them highly
vulnerable to isolated business setbacks.
- -----------------------------------------------------------------------------------------------------------------------------------
Initial public offering A significant part of the fund's return may at times be attributable to investments in IPOs. Many IPO
(IPO) risk stocks are issued by, and involve the risks associated with, small and medium capitalization companies.
- -----------------------------------------------------------------------------------------------------------------------------------
Bond Risk The credit rating of any bond in the fund's portfolio could be downgraded or the issuer of a bond could
default on its obligations. Bond prices generally fall when interest rates rise. This risk is greater
for longer maturity bonds. Junk bond prices can fall on bad news about the economy, an industry or a
company.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign securities risk Foreign investments involve additional risks, including potentially unfavorable currency exchange
rates, inadequate or inaccurate financial information and social or political instability.
- -----------------------------------------------------------------------------------------------------------------------------------
Derivatives risk Certain derivative instruments can produce disproportionate gains or losses and are riskier than direct
investments. Also, in a down market derivatives could become harder to value or sell at a fair price.
- -----------------------------------------------------------------------------------------------------------------------------------
Liquidity and valuation In a down or unstable market, the fund's investments could become harder to value accurately or to sell
risks at a fair price.
- -----------------------------------------------------------------------------------------------------------------------------------
Turnover risk In general, the greater the volume of buying and selling by a fund (and the higher its "turnover
rate"), the greater the impact that transaction costs will have on the fund's performance. The fund's
turnover rate may exceed 100%, which is considered relatively high.
- -----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
Description of Reorganization
You are being asked to approve an Agreement and Plan of Reorganization, a copy
of which is attached as Exhibit A. The Agreement provides for a reorganization
on the following terms:
o The reorganization is scheduled to occur at 5:00 p.m., Eastern Time, on
June 7, 2002 but may occur on any later date before December 31, 2002.
Small Cap Equity Fund Y will transfer all of its assets to Small Cap
Equity Fund and Small Cap Equity Fund will assume all of Small Cap Equity
Fund Y's liabilities. This will result in the addition of Small Cap Equity
Fund Y's assets to Small Cap Equity Fund's portfolio. The net asset value
of both funds will be computed as of 5:00 p.m., Eastern Time, on the
reorganization date.
o Small Cap Equity Fund will issue to Small Cap Equity Fund Y Class I shares
in an amount equal to the net assets attributable to Small Cap Equity Fund
Y's shares. As part of the liquidation of Small Cap Equity Fund Y, these
shares will immediately be distributed to shareholders of record of Small
Cap Equity Fund Y in proportion to their holdings on the reorganization
date. As a result, shareholders of Small Cap Equity Fund Y will end up as
shareholders of Small Cap Equity Fund.
o After the shares are issued, the existence of Small Cap Equity Fund Y will
be terminated.
37
Reasons for the Proposed Reorganization
The board of trustees of Small Cap Equity Fund Y believes that the proposed
reorganization will be advantageous to the shareholders of Small Cap Equity Fund
Y for several reasons. The board of trustees considered the following matters,
among others, in approving the proposal.
First, that Small Cap Equity Fund Y does not have sufficient assets to justify
maintaining this fund as a separate investment portfolio (i.e. the fund had
$35.1 million in assets as of December 31, 2001). Small Cap Equity Fund Y, which
as been in existence for approximately seven years, has not grown in asset size
and in light of the history of the fund, there is no foreseeable potential for
future growth. The investment adviser has subsidized Small Cap Equity Fund Y by
absorbing expenses since the inception of the fund. Without these subsidies,
Small Cap Equity Fund Y would have had a substantially higher expense ratio and
lower performance.
Second, that Small Cap Equity Fund's total expenses are lower than Small Cap
Equity Fund Y's total expenses before taking into account the Adviser's
agreement to limit Small Cap Equity Fund Y's expenses. As a result of the
reorganization, shareholders of Small Cap Equity Fund Y will experience a
reduction in the total amount of fees, as a percentage of average net assets,
that they indirectly pay if the expense reduction is not extended beyond June
30, 2002.
Third, that the reorganization would permit Small Cap Equity Fund Y's
shareholders to pursue substantially similar investment goals in a larger fund.
A larger fund should give the investment adviser greater flexibility and the
ability to select a larger number of portfolio securities, resulting in
increased diversification.
Fourth, that a combined fund offers economies of scale that may lead to lower
per share expenses. Both funds incur costs for accounting, legal, transfer
agency services, insurance, and custodial and administrative services. Many of
these expenses are duplicative and there may be an opportunity to reduce Small
Cap Equity Fund's expense ratio over time because of economies of scale if the
funds are combined.
The board of trustees of Small Cap Equity Fund considered that the
reorganization presents an excellent opportunity for Small Cap Equity Fund to
acquire investment assets without the obligation to pay commissions or other
transaction costs that a fund normally incurs when purchasing securities. This
opportunity provides an economic benefit to Small Cap Equity Fund and its
shareholders.
The boards of both funds also considered that the adviser and the funds'
distributor will benefit from the reorganization. For example, the adviser might
realize time savings from a consolidated portfolio management effort and from
the need to prepare fewer reports and regulatory filings as well as prospectus
disclosure for one fund instead of two. The boards believe, however, that these
savings will not amount to a significant economic benefit to the adviser or
distributor.
Comparative Fees and Expense Ratios. As discussed above, the advisory fee rates
paid by your fund are the same as the rates paid by Small Cap Equity Fund.
Small Cap Equity Fund's management fee rate of 0.70% and pro forma management
fee rate of 0.70% are the same as your fund's management fee rate of 0.70%.
Small Cap Equity Fund's other expenses of 0.13% and its pro forma other expenses
of 0.13% are lower than your fund's other expenses of 0.34%. Small Cap Equity
Fund's current annual expense ratio (0.83% of average net assets) and pro forma
expense ratio (0.83% of average net assets) are both slightly higher than your
fund's current expense ratio (0.80% of average net assets) after the expense
reduction. Your fund's expense ratio before the expense reduction is 1.04% and
there is no guarantee that the expense reduction will be extended beyond June
30, 2002.
Comparative Performance. The trustees also took into consideration the relative
performance of your fund and Small Cap Equity Fund as of December 31, 2001.
38
FURTHER INFORMATION ON EACH REORGANIZATION
Tax Status of the Reorganization
Each reorganization will not result in income, gain or loss for federal income
tax purposes and will not take place unless both funds in each respective
reorganization receive a satisfactory opinion from Hale and Dorr LLP, counsel to
the Acquired Funds, substantially to the effect that the reorganization
described above will be a "reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code of 1986 (the "Code").
As a result, for federal income tax purposes:
o No gain or loss will be recognized by each Acquired Fund upon (1) the
transfer of all of its assets to the respective Acquiring Fund as
described above or (2) the distribution by each Acquired Fund of Acquiring
Fund shares to Acquired Fund shareholders;
o No gain or loss will be recognized by each Acquiring Fund upon the receipt
of each respective Acquired Fund's assets solely in exchange for the
issuance of Acquiring Fund shares and the assumption of all of Acquired
Fund liabilities by each respective Acquiring Fund;
o The basis of the assets of each Acquired Fund acquired by each respective
Acquiring Fund will be the same as the basis of those assets in the hands
of each respective Acquired Fund immediately before the transfer;
o The tax holding period of the assets of each Acquired Fund in the hands of
each respective Acquiring Fund will include the Acquired Fund's tax
holding period for those assets;
o The shareholders of each Acquired Fund will not recognize gain or loss
upon the exchange of all their shares of the Acquired Funds solely for
Acquiring Fund shares as part of the reorganization;
o The basis of Acquiring Fund shares received by Acquired Fund shareholders
in the reorganization will be the same as the basis of the shares of each
Acquired Fund surrendered in exchange; and
o The tax holding period of the Acquiring Fund shares that Acquired Fund
shareholders receive will include the tax holding period of the shares of
the Acquired Fund surrendered in the exchange, provided that the shares of
the Acquired Fund were held as capital assets on the reorganization date.
You should consult your tax adviser for the particular tax consequences to you
of the transaction, including the applicability of any state, local or foreign
tax laws.
Additional Terms of each Agreement and Plan of Reorganization
Surrender of Share Certificates. If your shares are represented by one or more
share certificates before the reorganization date, you must either surrender the
certificates to your fund(s) or deliver to your fund(s) a lost certificate
affidavit, in the form and accompanied by the surety bonds that your fund(s) may
require (collectively, an "Affidavit"). On the reorganization date, all
certificates that have not been surrendered will be canceled, will no longer
evidence ownership of your fund's shares and will evidence ownership of shares
of the respective Acquiring Fund. Shareholders may not redeem or transfer
Acquiring Fund shares received in the reorganization until they have surrendered
their Acquired Fund share certificates or delivered an Affidavit. The Acquiring
Funds will not issue share certificates in the reorganization.
Conditions to Closing each Reorganization. The obligation of each Acquired Fund
to consummate the reorganization is subject to the satisfaction of certain
conditions, including the performance by the corresponding Acquiring Fund of all
its obligations under the Agreement and the receipt of all consents, orders and
permits necessary to consummate the reorganization (see Agreement, paragraph 6).
The obligation of each Acquiring Fund to consummate the reorganization is
subject to the satisfaction of certain conditions, including each corresponding
Acquired Fund's performance of all of its obligations under the Agreement, the
receipt of certain documents and financial statements from each respective
Acquired Fund and the receipt of all consents, orders and permits necessary to
consummate the reorganization (see Agreement, paragraph 7).
The obligations of each respective Acquired and Acquiring Fund are subject to
approval of the Agreement by the necessary vote of the outstanding shares of the
Acquired Fund, in accordance with the provisions of the Acquired Funds'
declaration of trust and
39
by-laws. The funds' obligations are also subject to the receipt of a favorable
opinion of Hale and Dorr LLP as to the federal income tax consequences of the
reorganization (see Agreement, paragraph 8).
Termination of Agreement. The board of trustees of each respective Acquired Fund
or Acquiring Fund may terminate the Agreement (even if the shareholders of an
Acquired Fund have already approved it) at any time before the reorganization
date, if that board believes that proceeding with the reorganization would no
longer be advisable.
Expenses of the Reorganization. John Hancock Advisers, LLC will pay each
Acquired Fund's merger costs and International Fund's merger costs, and each
other Acquiring Fund will pay its own costs incurred in connection with entering
into and carrying out the provisions of the Agreements, whether or not a
reorganization occurs. With respect to each proposal, the expenses for each fund
are estimated to be approximately $14,600 for Active Bond Fund and $12,200 for
Bond Fund; $14,000 for Independence Balanced Fund and $12,000 for Balanced Fund;
$14,000 for International Equity Fund and $12,000 for International Fund;
$14,000 for Medium Capitalization Growth Fund and $12,000 for Mid Cap Growth
Fund; and $14,200 for Small Cap Equity Fund Y and $12,000 for Small Cap Equity
Fund.
CAPITALIZATION
With respect to each Proposal, the following tables set forth the capitalization
of each fund as of the date specified for each proposal, and the pro forma
combined capitalization of both funds as if each reorganization had occurred on
that date. If a reorganization is consummated, the actual exchange ratios on the
reorganization date may vary from the exchange ratios indicated. This is due to
changes in the market value of the portfolio securities of both funds between
the date specified and the reorganization date, changes in the amount of
undistributed net investment income and net realized capital gains of both funds
during that period resulting from income and distributions, and changes in the
accrued liabilities of both funds during the same period.
It is impossible to predict how many shares of each Acquiring Fund will actually
be received and distributed by each corresponding Acquired Fund on the
reorganization date. The tables should not be relied upon to determine the
amount of Acquiring Fund shares that will actually be received and distributed.
Net assets for each fund are disclosed on the fund level. The Net Asset Value
per share and shares outstanding are referenced for each Fund's institutional
class. With respect to Balanced Fund, International Fund and Mid Cap Growth
Fund, the Net Asset Value per share is referenced for Class A shares, as Class I
shares were not operational as of the dates specified in the tables.
- --------------------------------------------------------------------------------
Proposal 1* Active Bond Fund Bond Fund Pro Forma
- --------------------------------------------------------------------------------
Net Assets (millions) $9.2 $1,452.2 $1,461.4
- --------------------------------------------------------------------------------
Net Asset Value Per Share $8.73 $14.95 $14.95
- --------------------------------------------------------------------------------
Shares Outstanding 1,055,248 668 616,933
- --------------------------------------------------------------------------------
*If the reorganization had taken place on November 30, 2001.
The table reflects pro forma exchange ratios of approximately 0.584 Class I
shares of Bond Fund being issued for each share of Active Bond Fund
- --------------------------------------------------------------------------------
Proposal 2* Independence Balanced Fund Pro Forma
Balanced Fund
- --------------------------------------------------------------------------------
Net Assets (millions) $16.9 $184.4 $201.3
- --------------------------------------------------------------------------------
Net Asset Value Per Share $9.25 $12.02 $12.02
- --------------------------------------------------------------------------------
Shares Outstanding 1,828,918 -- 1,406,438
- --------------------------------------------------------------------------------
*If the reorganization had taken place on December 31, 2001.
The table reflects pro forma exchange ratios of approximately 0.769 Class I
shares of Balanced Fund being issued for each share of Independence Balanced
Fund
- --------------------------------------------------------------------------------
Proposal 3* International International Fund Pro Forma
Equity Fund
- --------------------------------------------------------------------------------
Net Assets (millions) $4.1 $15.0 $19.1
- --------------------------------------------------------------------------------
Net Asset Value Per Share $6.42 $6.18 $6.18
- --------------------------------------------------------------------------------
Shares Outstanding 641,104 -- 666,715
- --------------------------------------------------------------------------------
*If the reorganization had taken place on October 31, 2001.
40
The table reflects pro forma exchange ratios of approximately 1.039 Class I
shares of International Fund being issued for each share of International Equity
Fund
- --------------------------------------------------------------------------------
Proposal 4* Medium Mid Cap Growth Fund Pro Forma
Capitalization
Growth Fund
- --------------------------------------------------------------------------------
Net Assets (millions) $5.2 $189.3 $194.5
- --------------------------------------------------------------------------------
Net Asset Value Per Share $7.23 $7.66 $7.66
- --------------------------------------------------------------------------------
Shares Outstanding 712,450 -- 672,553
- --------------------------------------------------------------------------------
*If the reorganization had taken place on October 31, 2001.
The table reflects pro forma exchange ratios of approximately 0.944 Class I
shares of Mid Cap Growth Fund shares being issued for each share of Medium
Capitalization Growth Fund
- --------------------------------------------------------------------------------
Proposal 5* Small Cap Equity Small Cap Equity Fund Pro Forma
Fund Y
- --------------------------------------------------------------------------------
Net Assets (millions) $27.1 $732.8 $764.9
- --------------------------------------------------------------------------------
Net Asset Value Per Share $10.39 $16.61 $16.61
- --------------------------------------------------------------------------------
Shares Outstanding 2,609,663 489 1,631,528
- --------------------------------------------------------------------------------
*If the reorganization had taken place on October 31, 2001.
The table reflects pro forma exchange ratios of approximately 0.625 Class I
shares of Small Cap Equity Fund being issued for each share of Small Cap Equity
Fund Y.
ADDITIONAL INFORMATION ABOUT THE FUNDS' BUSINESSES
The following table shows where in each fund's prospectus you can find
additional information about the business of each fund.
- --------------------------------------------------------------------------------
Type of Information Headings in Each Prospectus
- --------------------------------------------------------------------------------
Investment objective and Goal and Strategy / Main Risks
policies
- --------------------------------------------------------------------------------
Portfolio management Portfolio Management
- --------------------------------------------------------------------------------
Expenses Your Expenses
- --------------------------------------------------------------------------------
Eligible Investors Who Can Buy Shares
- --------------------------------------------------------------------------------
Purchase of shares Your Account: Opening an Account, Buying Shares,
Transaction Policies
- --------------------------------------------------------------------------------
Redemption or sale of Your Account: Selling shares, Transaction Policies
shares
- --------------------------------------------------------------------------------
Custodian Business Structure
- --------------------------------------------------------------------------------
Dividends, distributions Dividends and Account Policies
and taxes
- --------------------------------------------------------------------------------
41
BOARDS' EVALUATION AND RECOMMENDATION
For the reasons described above, the board of trustees of each Acquired Fund,
including the trustees who are not "interested persons" of either fund in each
proposed reorganization or the adviser ("independent trustees"), approved the
reorganizations. In particular, the trustees determined that each reorganization
is in the best interests of the Acquired Funds and that the interests of
Acquired Fund shareholders would not be diluted as a result of the
reorganization. Similarly, the board of trustees of each Acquiring Fund,
including the independent trustees, approved the reorganizations. They also
determined that each reorganization is in the best interests of the Acquiring
Funds and that the interests of Acquiring Fund shareholders would not be diluted
as a result of the reorganization.
The trustees of each Acquired Fund recommend that
shareholders of each Acquired Fund vote for the proposal to
approve the appropriate Agreement and Plan of Reorganization.
VOTING RIGHTS AND REQUIRED VOTE
Each Acquired Fund share is entitled to one vote. Approval of each proposal
described above requires the affirmative vote of a majority of the shares of
each Acquired Fund outstanding and entitled to vote on each respective proposal.
For this purpose, a majority of the outstanding shares of your fund means the
vote of the lesser of :
(1) 67% or more of the shares present at the meeting, if the holders of more
than 50% of the shares of the fund are present or represented by proxy, or
(2) more than 50% of the outstanding shares of the fund.
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Quorum Voting
- -----------------------------------------------------------------------------------------------------------------------------------
In General All shares "present" in Shares "present" in person will be voted in person at the meeting.
person or by proxy are Shares present by proxy will be voted in accordance with
counted towards a quorum. instructions.
- -----------------------------------------------------------------------------------------------------------------------------------
Proxy with No Voting Considered "present" at Voted "for" a proposal.
Instruction (other than meeting.
Broker Non-Vote)
- -----------------------------------------------------------------------------------------------------------------------------------
Broker Non-Vote Considered "present" at Not voted. Same effect as a vote "against" a proposal.
meeting.
- -----------------------------------------------------------------------------------------------------------------------------------
Vote to Abstain Considered "present" at Not voted. Same effect as a vote "against" a proposal.
meeting.
- -----------------------------------------------------------------------------------------------------------------------------------
If the required approval of shareholders is not obtained with respect to a
proposal, the Acquired Fund subject to the proposal will continue to engage in
business as a separate mutual fund and the board of trustees will consider what
further action may be appropriate. This action could include, among other
things, terminating a fund's expense limitation or closing the fund.
INFORMATION CONCERNING THE MEETING
Solicitation of Proxies
In addition to the mailing of these proxy materials, proxies may be solicited by
telephone, by e-mail, by fax or in person by the trustees, officers and
employees of your fund; by personnel of your fund's investment adviser, John
Hancock Advisers, LLC and its transfer agent, John Hancock Signature Services,
Inc.; or by broker-dealer firms. Signature Services, together with a third party
solicitation firm, has agreed to provide proxy solicitation services to each
Acquired Fund at a cost of approximately $____ per fund.
Revoking Proxies
Each Acquired Fund shareholder signing and returning a proxy has the power to
revoke it at any time before it is exercised:
o By filing a written notice of revocation with the Acquired Funds' transfer
agent, John Hancock Signature Services, Inc., 1 John Hancock Way, Suite
1000, Boston, Massachusetts 02217-1001, or
o By returning a duly executed proxy with a later date before the time of
the meeting, or
42
o If a shareholder has executed a proxy but is present at the meeting and
wishes to vote in person, by notifying the secretary of your fund (without
complying with any formalities) at any time before it is voted.
Being present at the meeting alone does not revoke a previously executed and
returned proxy.
Outstanding Shares and Quorum
As of March 15, 2002 (the "record date"), the number of shares of beneficial
interest of each Acquired Fund outstanding were as follows:
------------------------------------------------------------
FUND SHARES OUTSTANDING
------------------------------------------------------------
Active Bond Fund
------------------------------------------------------------
Independence Balanced Fund
------------------------------------------------------------
International Equity Fund
------------------------------------------------------------
Medium Capitalization Growth Fund
------------------------------------------------------------
Small Cap Equity Fund Y
------------------------------------------------------------
Only shareholders of record on the record date are entitled to notice of and to
vote at the meeting. A majority of the outstanding shares of each Acquired Fund
that are entitled to vote will be considered a quorum for the transaction of
business.
Other Business
Each Acquired Fund's board of trustees knows of no business to be presented for
consideration at the meeting other than the proposals. If other business is
properly brought before the meeting, proxies will be voted according to the best
judgment of the persons named as proxies.
Adjournments
If a quorum is not present in person or by proxy at the time any session of the
meeting is called to order, the persons named as proxies may vote those proxies
that have been received to adjourn the meeting to a later date. If a quorum is
present but there are not sufficient votes in favor of a proposal, the persons
named as proxies may propose one or more adjournments of the meeting to permit
further solicitation of proxies concerning the proposal. Any adjournment will
require the affirmative vote of a majority of an Acquired Fund's shares at the
session of the meeting to be adjourned. If an adjournment of the meeting is
proposed because there are not sufficient votes in favor of a proposal, the
persons named as proxies will vote those proxies favoring the proposal in favor
of adjournment, and will vote those proxies against the reorganization against
adjournment.
Telephone Voting
In addition to soliciting proxies by mail, by fax or in person, your fund(s) may
also arrange to have votes recorded by telephone by officers and employees of
your fund(s) or by personnel of the adviser or transfer agent or a third party
solicitation firm. The telephone voting procedure is designed to verify a
shareholder's identity, to allow a shareholder to authorize the voting of shares
in accordance with the shareholder's instructions and to confirm that the voting
instructions have been properly recorded. If these procedures were subject to a
successful legal challenge, these telephone votes would not be counted at the
meeting. Your fund has not obtained an opinion of counsel about telephone
voting, but is currently not aware of any challenge.
o A shareholder will be called on a recorded line at the telephone number in
a fund's account records and will be asked to provide the shareholder's
social security number or other identifying information.
o The shareholder will then be given an opportunity to authorize proxies to
vote his or her shares at the meeting in accordance with the shareholder's
instructions.
o To ensure that the shareholder's instructions have been recorded
correctly, the shareholder will also receive a confirmation of the voting
instructions by mail.
o A toll-free number will be available in case the voting information
contained in the confirmation is incorrect.
o If the shareholder decides after voting by telephone to attend the
meeting, the shareholder can revoke the proxy at that time and vote the
shares at the meeting.
43
Internet Voting
You will also have the opportunity to submit your voting instructions via the
internet by utilizing a program provided through a vendor. Voting via the
internet will not affect your right to vote in person if you decide to attend
the meting. Do not mail the proxy card if you are voting via the internet. To
vote via the internet , you will need the "control number" that appears on your
proxy card. These Internet voting procedures are designed to authenticate
shareholder identities, to allow shareholders give their voting instructions,
and to confirm that shareholders instructions have been recorded properly. If
you are voting via the internet you should understand that there may be costs
associated with electronic access, such as usage charges from internet access
providers and telephone companies, that must be borne to you.
o Read the proxy statement and have your proxy card(s) at hand.
o Go to the Web site www.jhfunds.com.
o Select the shareholder entryway.
o Select the proxy-voting link for your Fund(s).
o Enter the "control number" found on your proxy card.
o Follow the instructions on the Web site. Please call us at 1-800-225-5291
if you have any problems.
o To insure that your instructions have been recorded correctly, you will
receive a confirmation of your voting instructions immediately after your
submission and also by email if chosen.
Shareholders' Proposals
The Funds are not required, and do not intend, to hold meetings of shareholders
each year. Instead, meetings will be held only when and if required. Any
shareholders desiring to present a proposal for consideration at the next
meeting for shareholders of their respective Funds must submit the proposal in
writing, so that it is received by the appropriate Fund at 101 Huntington
Avenue, Boston, Massachusetts 02199 within a reasonable time before any meeting.
OWNERSHIP OF SHARES OF THE FUNDS
To the knowledge of each fund, as of March 15, 2002, the following persons owned
of record or beneficially 5% or more of the outstanding shares of each fund,
respectively:
- -----------------------------------------------------------------------------------------------------------------------------------
Names and Addresses of Owners of More Than 5% of Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Proposal 1 Active Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class I
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Proposal 2 Independence Balanced Fund
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Balanced Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class I
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
44
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Proposal 3 International Equity Fund
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
International Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class I
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Proposal 4 Medium Capitalization Growth Fund
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class I
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Proposal 5 Small Cap Equity Fund Y
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class I
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
As of March 15, 2002, the trustees and officers of each fund owned in the
aggregate less than 1% of the outstanding shares of their respective funds.
EXPERTS
The financial statements and the financial highlights of the Acquiring Funds for
the period ended October 31, 2001 for International Fund, Mid Cap Growth Fund
and Small Cap Equity Fund, November 30, 2001 for Bond Fund, and December 31,
2001 for Balanced Fund and the financial statements and financial highlights for
each Acquired Fund for the period ended August 31, 2001 are incorporated by
reference into this proxy statement and prospectus. The financial statements and
financial highlights for each Acquired Fund have been independently audited by
Deloitte & Touche LLP, for Balanced Fund, Bond Fund, and Small Cap Equity Fund
by Ernst & Young, LLP and for International Fund and Mid Cap Growth Fund, by
PricewaterhouseCoopers, LLP as stated in their reports appearing in the
statement of additional information. These financial statements and financial
highlights have been included in reliance on their reports given on their
authority as experts in accounting and auditing.
45
AVAILABLE INFORMATION
Each fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 and files reports,
proxy statements and other information with the SEC. These reports, proxy
statements and other information filed by the funds can be inspected and copied
(for a duplication fee) at the public reference facilities of the SEC at 450
Fifth Street, N.W., Washington, D.C., and at the Midwest Regional Office (500
West Madison Street, Suite 1400, Chicago, Illinois). Copies of these materials
can also be obtained by mail from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition,
copies of these documents may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov.
46
Exhibit A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 1st day
of March, 2002, by and between ______________________ (the "Acquiring Fund"), a
series of _________________________, a Massachusetts business trust (the
"Trust"), and _________________________ (the "Acquired Fund"), a series of John
Hancock Institutional Series Trust, a Massachusetts business trust (the "Trust
II"), each with their principal place of business at 101 Huntington Avenue,
Boston, Massachusetts 02199. The Acquiring Fund and the Acquired Fund are
sometimes referred to collectively herein as the "Funds" and individually as a
"Fund."
This Agreement is intended to be and is adopted as a plan of "reorganization,"
as such term is used in Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The reorganization will consist of the transfer of all of
the assets of the Acquired Fund to the Acquiring Fund in exchange solely for the
issuance of Class I Shares of beneficial interest of the Acquiring Fund (the
"Acquiring Fund Shares") to the Acquired Fund and the assumption by the
Acquiring Fund of all of the liabilities of the Acquired Fund, followed by the
distribution by the Acquired Fund, on or promptly after the Closing Date
hereinafter referred to, of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in liquidation and termination of the Acquired Fund as provided
herein, all upon the terms and conditions set forth in this Agreement.
In consideration of the premises of the covenants and agreements hereinafter set
forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE
ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting, without
limitation, of portfolio securities and instruments, dividends and
interest receivables, cash and other assets), as set forth in the
statement of assets and liabilities referred to in Paragraph 7.2 hereof
(the "Statement of Assets and Liabilities"), to the Acquiring Fund free
and clear of all liens and encumbrances, except as otherwise provided
herein, in exchange for (i) the assumption by the Acquiring Fund of the
known and unknown liabilities of the Acquired Fund, including the
liabilities set forth in the Statement of Assets and Liabilities (the
"Acquired Fund Liabilities"), which shall be assigned and transferred to
the Acquiring Fund by the Acquired Fund and assumed by the Acquiring Fund,
and (ii) delivery by the Acquiring Fund to the Acquired Fund, for
distribution pro rata by the Acquired Fund to its shareholders in
proportion to their respective ownership of shares of beneficial interest
of the Acquired Fund, as of the close of business on June 7, 2002 (the
"Closing Date"), of a number of the Acquiring Fund Shares having an
aggregate net asset value equal to the value of the assets, less such
liabilities (herein referred to as the "net value of the assets") assumed,
assigned and delivered, all determined as provided in Paragraph 2.1 hereof
and as of a date and time as specified therein. Such transactions shall
take place at the closing provided for in Paragraph 3.1 hereof (the
"Closing"). All computations shall be provided by The Bank of New York
(the "Custodian"), as custodian and pricing agent for the Acquiring Fund
and the Acquired Fund.
1.2 The Acquired Fund has provided the Acquiring Fund with a list of the
current securities holdings of the Acquired Fund as of the date of
execution of this Agreement. The Acquired Fund reserves the right to sell
any of these securities (except to the extent sales may be limited by
representations made in connection with issuance of the tax opinion
provided for in paragraph 8.6 hereof) but will not, without the prior
approval of the Acquiring Fund, acquire any additional securities other
than securities of the type in which the Acquiring Fund is permitted to
invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own expenses
in connection with the transactions contemplated by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund will liquidate and distribute pro
rata to shareholders of record (the "Acquired Fund shareholders"),
determined as of the close of regular trading on the New York Stock
Exchange on the Closing Date, the Acquiring Fund Shares received by the
Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund
Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund, to open accounts on the share records of the Acquiring
Fund in the names of the Acquired Fund shareholders and representing the
respective pro rata number of Acquiring Fund Shares due such shareholders.
The Acquiring Fund shall not issue certificates representing Acquiring
Fund Shares in connection with such exchange.
1.5 The Acquired Fund shareholders holding certificates representing their
ownership of shares of beneficial interest of the Acquired Fund shall
surrender such certificates or deliver an affidavit with respect to lost
certificates in such form and accompanied by such surety bonds as the
Acquired Fund may require (collectively, an "Affidavit"), to John Hancock
Signature Services, Inc. prior to the Closing Date. Any Acquired Fund
share certificate which remains outstanding on the
47
Closing Date shall be deemed to be canceled, shall no longer evidence
ownership of shares of beneficial interest of the Acquired Fund and shall
evidence ownership of Acquiring Fund Shares. Unless and until any such
certificate shall be so surrendered or an Affidavit relating thereto shall
be delivered, dividends and other distributions payable by the Acquiring
Fund subsequent to the Liquidation Date with respect to Acquiring Fund
Shares shall be paid to the holder of such certificate(s), but such
shareholders may not redeem or transfer Acquiring Fund Shares received in
the Reorganization. The Acquiring Fund will not issue share certificates
in the Reorganization.
1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than the registered holder of the Acquired Fund Shares on the
books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7 The existence of the Acquired Fund shall be terminated as promptly as
practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Acquired Fund, including, but not
limited to, the responsibility for filing of regulatory reports, tax
returns, or other documents with the Securities and Exchange Commission
(the "Commission"), any state securities commissions, and any federal,
state or local tax authorities or any other relevant regulatory authority,
is and shall remain the responsibility of the Acquired Fund.
2. VALUATION
2.1 The net asset values of the Acquiring Fund Shares and the net values of
the assets and liabilities of the Acquired Fund to be transferred shall,
in each case, be determined as of the close of business (4:00 p.m. Boston
time) on the Closing Date. The net asset values of the Acquiring Fund
Shares shall be computed by the Custodian in the manner set forth in the
Acquiring Fund's Declaration of Trust as amended and restated (the
"Declaration"), or By-Laws and the Acquiring Fund's then-current
prospectus and statement of additional information and shall be computed
in each case to not fewer than four decimal places. The net values of the
assets of the Acquired Fund to be transferred shall be computed by the
Custodian by calculating the value of the assets transferred by the
Acquired Fund and by subtracting therefrom the amount of the liabilities
assigned and transferred to and assumed by the Acquiring Fund on the
Closing Date, said assets and liabilities to be valued in the manner set
forth in the Acquired Fund's then current prospectus and statement of
additional information and shall be computed in each case to not fewer
than four decimal places.
2.2 The number of Acquiring Fund Shares to be issued (including fractional
shares, if any) in exchange for the Acquired Fund's assets shall be
determined by dividing the value of the Acquired Fund's assets less the
liabilities assumed by the Acquiring Fund, by the Acquiring Fund's net
asset value per share, all as determined in accordance with Paragraph 2.1
hereof.
2.3 All computations of value shall be made by the Custodian in accordance
with its regular practice as pricing agent for the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be June 7, 2002 or such other date on or before
December 31, 2002 as the parties may agree. The Closing shall be held as
of 5:00 p.m. at the offices of the Trust and the Trust II, 101 Huntington
Avenue, Boston, Massachusetts 02199, or at such other time and/or place as
the parties may agree.
3.2 Portfolio securities that are not held in book-entry form in the name of
the Custodian as record holder for the Acquired Fund shall be presented by
the Acquired Fund to the Custodian for examination no later than three
business days preceding the Closing Date. Portfolio securities which are
not held in book-entry form shall be delivered by the Acquired Fund to the
Custodian for the account of the Acquiring Fund on the Closing Date, duly
endorsed in proper form for transfer, in such condition as to constitute
good delivery thereof in accordance with the custom of brokers, and shall
be accompanied by all necessary federal and state stock transfer stamps or
a check for the appropriate purchase price thereof. Portfolio securities
held of record by the Custodian in book-entry form on behalf of the
Acquired Fund shall be delivered to the Acquiring Fund by the Custodian by
recording the transfer of beneficial ownership thereof on its records. The
cash delivered shall be in the form of currency or by the Custodian
crediting the Acquiring Fund's account maintained with the Custodian with
immediately available funds.
3.3 In the event that on the Closing Date (a) the New York Stock Exchange
shall be closed to trading or trading thereon shall be restricted or (b)
trading or the reporting of trading on said Exchange or elsewhere shall be
disrupted so that accurate appraisal of the value of the net assets of the
Acquiring Fund or the Acquired Fund is impracticable, the Closing Date
shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored;
provided that if trading shall not be fully resumed and reporting restored
on or before December 31, 2002,
48
this Agreement may be terminated by the Acquiring Fund or by the Acquired
Fund upon the giving of written notice to the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding
and nonresident alien withholding status of the Acquired Fund shareholders
and the number of outstanding shares of beneficial interest of the
Acquired Fund owned by each such shareholder, all as of the close of
business on the Closing Date, certified by its Treasurer, Secretary or
other authorized officer (the "Shareholder List"). The Acquiring Fund
shall issue and deliver to the Acquired Fund a confirmation evidencing the
Acquiring Fund Shares to be credited on the Closing Date, or provide
evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares
have been credited to the Acquired Fund's account on the books of the
Acquiring Fund. At the Closing, each party shall deliver to the other such
bills of sale, checks, assignments, stock certificates, receipts or other
documents as such other party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Trust II on behalf of the Acquired Fund represents, warrants and
covenants to the Acquiring Fund as follows:
(a) The Trust II is a business trust, duly organized, validly existing
and in good standing under the laws of the Commonwealth of
Massachusetts and has the power to own all of its properties and
assets and, subject to approval by the shareholders of the Acquired
Fund, to carry out the transactions contemplated by this Agreement.
Neither the Trust II nor the Acquired Fund is required to qualify to
do business in any jurisdiction in which it is not so qualified or
where failure to qualify would subject it to any material liability
or disability. The Trust II has all necessary federal, state and
local authorizations to own all of its properties and assets and to
carry on its business as now being conducted;
(b) The Trust II is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), is in full force and effect. The Acquired
Fund is a diversified series of the Trust II;
(c) The Trust II and the Acquired Fund are not, and the execution,
delivery and performance of their obligations under this Agreement
will not result, in violation of any provision of the Trust II's
Declaration of Trust, as amended and restated (the "Trust II's
Declaration") or By-Laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the Trust II or the
Acquired Fund is a party or by which it is bound;
(d) Except as otherwise disclosed in writing and accepted by the
Acquiring Fund, no material litigation or administrative proceeding
or investigation of or before any court or governmental body is
currently pending or threatened against the Trust II or the Acquired
Fund or any of the Acquired Fund's properties or assets. The Trust
II knows of no facts which might form the basis for the institution
of such proceedings, and neither the Trust II nor the Acquired Fund
is a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and
adversely affects the Acquired Fund's business or its ability to
consummate the transactions herein contemplated;
(e) The Acquired Fund has no material contracts or other commitments
(other than this Agreement or agreements for the purchase of
securities entered into in the ordinary course of business and
consistent with its obligations under this Agreement) which will not
be terminated without liability to the Acquired Fund at or prior to
the Closing Date;
(f) The audited statement of assets and liabilities, including the
schedule of investments, of the Acquired Fund as of
_________________ and the related statement of operations (copies of
which have been furnished to the Acquiring Fund) and the unaudited
statements as of ___________________, present fairly in all material
respects the financial condition of the Acquired Fund as of
________________ and ________________ and the results of its
operations for the period then ended in accordance with generally
accepted accounting principles consistently applied, and there were
no known actual or contingent liabilities of the Acquired Fund as of
the respective dates thereof not disclosed therein;
(g) Since ________________, there has not been any material adverse
change in the Acquired Fund's financial condition, assets,
liabilities, or business other than changes occurring in the
ordinary course of business, or any incurring by the Acquired Fund
of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and
accepted by the Acquiring Fund;
(h) At the date hereof and by the Closing Date, all federal, state and
other tax returns and reports, including information returns and
payee statements, of the Acquired Fund required by law to have been
filed or furnished by such dates shall have been filed or furnished,
and all federal, state and other taxes, interest and penalties shall
have been paid so far as due, or provision shall have been made for
the payment thereof, and to the best of the Acquired Fund's
knowledge no such return is currently under audit and no assessment
has been asserted with respect to such returns or reports;
49
(i) The Acquired Fund has qualified as a regulated investment company
for each taxable year of its operation and the Acquired Fund will
qualify as such as of the Closing Date with respect to its taxable
year ending on the Closing Date;
(j) The authorized capital of the Acquired Fund consists of an unlimited
number of shares of beneficial interest, no par value. All issued
and outstanding shares of beneficial interest of the Acquired Fund
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Trust II. All of
the issued and outstanding shares of beneficial interest of the
Acquired Fund will, at the time of Closing, be held by the persons
and in the amounts set forth in the Shareholder List submitted to
the Acquiring Fund pursuant to Paragraph 3.4 hereof. The Acquired
Fund does not have outstanding any options, warrants or other rights
to subscribe for or purchase any of its shares of beneficial
interest, nor is there outstanding any security convertible into any
of its shares of beneficial interest;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to the assets to be transferred to the Acquiring Fund pursuant
to Paragraph 1.1 hereof, and full right, power and authority to
sell, assign, transfer and deliver such assets hereunder, and upon
delivery and payment for such assets, the Acquiring Fund will
acquire good and marketable title thereto subject to no restrictions
on the full transfer thereof, including such restrictions as might
arise under the Securities Act of 1933, as amended (the "1933 Act");
(l) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of the Trust II
on behalf of the Acquired Fund, and this Agreement constitutes a
valid and binding obligation of the Acquired Fund enforceable in
accordance with its terms, subject to the approval of the Acquired
Fund's shareholders;
(m) The information to be furnished by the Acquired Fund to the
Acquiring Fund for use in applications for orders, registration
statements, proxy materials and other documents which may be
necessary in connection with the transactions contemplated hereby
shall be accurate and complete and shall comply in all material
respects with federal securities and other laws and regulations
thereunder applicable thereto;
(n) The proxy statement of the Acquired Fund (the "Proxy Statement") to
be included in the Registration Statement referred to in Paragraph
5.7 hereof (other than written information furnished by the
Acquiring Fund for inclusion therein, as covered by the Acquiring
Fund's warranty in Paragraph 4.2(m) hereof), on the effective date
of the Registration Statement, on the date of the meeting of the
Acquired Fund shareholders and on the Closing Date, shall not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquired Fund of the transactions contemplated by this Agreement;
(p) All of the issued and outstanding shares of beneficial interest of
the Acquired Fund have been offered for sale and sold in conformity
with all applicable federal and state securities laws;
(q) The prospectus of the Acquired Fund, dated ______________ (the
"Acquired Fund Prospectus"), furnished to the Acquiring Fund, does
not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they
were made, not misleading; and
(r) The Acquired Fund Tax Representation Certificate to be delivered by
the Acquired Fund to the Acquiring Fund at Closing pursuant to
Section 7.5 (the "Acquired Fund Tax Representation Certificate")
will not on the Closing Date contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein not misleading.
4.2 The Trust on behalf of the Acquiring Fund represents, warrants and
covenants to the Acquired Fund as follows:
(a) The Trust is a business trust duly organized, validly existing and
in good standing under the laws of The Commonwealth of Massachusetts
and has the power to own all of its properties and assets and to
carry out the Agreement. Neither the Trust nor the Acquiring Fund is
required to qualify to do business in any jurisdiction in which it
is not so qualified or where failure to qualify would subject it to
any material liability or disability. The Trust has all necessary
federal, state and local authorizations to own all of its properties
and assets and to carry on its business as now being conducted;
(b) The Trust is a registered investment company classified as a
management company and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
The Acquiring Fund is a diversified series of the Trust;
(c) The prospectus (the "Acquiring Fund Prospectus") and statement of
additional information of the Acquiring Fund, each dated
______________, and any amendments or supplements thereto on or
prior to the Closing Date, and the Registration
50
Statement on Form N-14 filed in connection with this Agreement (the
"Registration Statement") (other than written information furnished
by the Acquired Fund for inclusion therein, as covered by the
Acquired Fund's warranty in Paragraph 4.1(m) hereof) will conform in
all material respects to the applicable requirements of the 1933 Act
and the 1940 Act and the rules and regulations of the Commission
thereunder, the Acquiring Fund Prospectus does not include any
untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading and the Registration Statement will not
include any untrue statement of material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading;
(d) At the Closing Date, the Trust on behalf of the Acquiring Fund will
have good and marketable title to the assets of the Acquiring Fund;
(e) The Trust and the Acquiring Fund are not, and the execution,
delivery and performance of their obligations under this Agreement
will not result in a violation of any provisions of the Trust's
Declaration, or By-Laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the Trust or the
Acquiring Fund is a party or by which the Trust or the Acquiring
Fund is bound;
(f) Except as otherwise disclosed in writing and accepted by the
Acquired Fund, no material litigation or administrative proceeding
or investigation of or before any court or governmental body is
currently pending or threatened against the Trust or the Acquiring
Fund or any of the Acquiring Fund's properties or assets. The Trust
knows of no facts which might form the basis for the institution of
such proceedings, and neither the Trust nor the Acquiring Fund is a
party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and
adversely affects the Acquiring Fund's business or its ability to
consummate the transactions herein contemplated;
(g) The audited statement of assets and liabilities, including the
schedule of investments, of the Acquiring Fund as of ______________
and the related statement of operations (copies of which have been
furnished to the Acquired Fund) and the unaudited statements as of
________________, present fairly in all material respects the
financial condition of the Acquiring Fund as of _______________ and
_______________ and the results of its operations for the period
then ended in accordance with generally accepted accounting
principles consistently applied, and there were no known actual or
contingent liabilities of the Acquiring Fund as of the respective
dates thereof not disclosed therein;
(h) Since _______________, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by the Trust on behalf of the
Acquiring Fund of indebtedness maturing more than one year from the
date such indebtedness was incurred, except as disclosed to and
accepted by the Acquired Fund;
(i) Each of the Acquiring Fund and its predecessors has qualified as a
regulated investment company for each taxable year of its operation
and the Acquiring Fund will qualify as such as of the Closing Date;
(j) The authorized capital of the Trust consists of an unlimited number
of shares of beneficial interest, no par value per share. All issued
and outstanding shares of beneficial interest of the Acquiring Fund
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Trust. The
Acquiring Fund does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of its shares of
beneficial interest, nor is there outstanding any security
convertible into any of its shares of beneficial interest;
(k) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary action on the part of the Trust on
behalf of the Acquiring Fund, and this Agreement constitutes a valid
and binding obligation of the Acquiring Fund enforceable in
accordance with its terms;
(l) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund pursuant to the terms of this Agreement, when so issued and
delivered, will be duly and validly issued shares of beneficial
interest of the Acquiring Fund and will be fully paid and
nonassessable by the Trust;
(m) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements, proxy materials
and other documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and
other laws and regulations applicable thereto;
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquiring Fund of the transactions contemplated by the Agreement,
except for the registration of the Acquiring Fund Shares under the
1933 Act and the 1940 Act; and
51
(o) The Acquiring Fund Tax Representation Certificate to be delivered by
the Acquiring Fund to the Acquired Fund at Closing pursuant to
Section 6.3 (the "Acquiring Fund Tax Representation Certificate")
will not on the Closing Date contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein not misleading.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary, the Trust II on
behalf of the Acquired Fund and the Trust on behalf of the Acquiring Fund,
will operate their respective businesses in the ordinary course between
the date hereof and the Closing Date, it being understood that such
ordinary course of business will include customary dividends and
distributions and any other distributions necessary or desirable to avoid
federal income or excise taxes.
5.2 The Trust II will call a meeting of the Acquired Fund shareholders to
consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be issued
hereunder are not being acquired by the Acquired Fund for the purpose of
making any distribution thereof other than in accordance with the terms of
this Agreement.
5.4 The Trust II on behalf of the Acquired Fund will provide such information
within its possession or reasonably obtainable as the Trust on behalf of
the Acquiring Fund requests concerning the beneficial ownership of the
Acquired Fund's shares of beneficial interest.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund each shall take, or cause to be taken, all action, and do or
cause to be done, all things reasonably necessary, proper or advisable to
consummate the transactions contemplated by this Agreement.
5.6 The Trust II on behalf of the Acquired Fund shall furnish to the Trust on
behalf of the Acquiring Fund on the Closing Date the Statement of Assets
and Liabilities of the Acquired Fund as of the Closing Date, which
statement shall be prepared in accordance with generally accepted
accounting principles consistently applied and shall be certified by the
Acquired Fund's Treasurer or Assistant Treasurer. As promptly as
practicable but in any case within 60 days after the Closing Date, the
Acquired Fund shall furnish to the Acquiring Fund, in such form as is
reasonably satisfactory to the Trust, a statement of the earnings and
profits of the Acquired Fund for federal income tax purposes and of any
capital loss carryovers and other items that will be carried over to the
Acquiring Fund as a result of Section 381 of the Code, and which statement
will be certified by the President of the Acquired Fund.
5.7 The Trust on behalf of the Acquiring Fund will prepare and file with the
Commission the Registration Statement in compliance with the 1933 Act and
the 1940 Act in connection with the issuance of the Acquiring Fund Shares
as contemplated herein.
5.8 The Trust II on behalf of the Acquired Fund will prepare a Proxy
Statement, to be included in the Registration Statement in compliance with
the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934
Act"), and the 1940 Act and the rules and regulations thereunder
(collectively, the "Acts") in connection with the special meeting of
shareholders of the Acquired Fund to consider approval of this Agreement.
5.9 Neither the Acquired Fund nor the Acquiring Fund shall take any action
that is inconsistent with the representations set forth in, with respect
to the Acquired Fund, the Acquired Fund Tax Representation Certificate,
and with respect to the Acquiring Fund, the Acquiring Fund Tax
Representation Certificate, to the extent such action would prevent the
reorganization from qualifying as a "reorganization" under Section 368(a)
of the Code.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST II ON BEHALF OF THE
ACQUIRED FUND
The obligations of the Trust II on behalf of the Acquired Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Trust on behalf of the Acquiring Fund of all the obligations
to be performed by it hereunder on or before the Closing Date, and, in addition
thereto, the following further conditions:
6.1 All representations and warranties of the Trust on behalf of the Acquiring
Fund contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with
the same force and effect as if made on and as of the Closing Date;
52
6.2 The Trust on behalf of the Acquiring Fund shall have delivered to the
Trust II on behalf of the Acquired Fund a certificate executed in its name
by the Trust's President or Vice President and its Treasurer or Assistant
Treasurer, in form and substance satisfactory to the Trust II on behalf of
the Acquired Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Trust on behalf of the Acquiring
Fund made in this Agreement are true and correct at and as of the Closing
Date, except as they may be affected by the transactions contemplated by
this Agreement, and as to such other matters as the Trust II on behalf of
the Acquired Fund shall reasonably request; and
6.3 The Acquiring Fund shall have delivered to the Acquired Fund an Acquiring
Fund Tax Representation Certificate substantially in the form attached to
this Agreement as Annex A concerning certain tax-related matters with
respect to the Acquiring Fund.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST ON BEHALF OF THE
ACQUIRING FUND
The obligations of the Trust on behalf of the Acquiring Fund to complete the
transactions provided for herein shall be, at its election, subject to the
performance by the Trust II on behalf of the Acquired Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and,
in addition thereto, the following conditions:
7.1 All representations and warranties of the Trust II on behalf of the
Acquired Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the
Closing Date with the same force and effect as if made on and as of the
Closing Date;
7.2 The Trust II on behalf of the Acquired Fund shall have delivered to the
Trust on behalf of the Acquiring Fund the Statement of Assets and
Liabilities of the Acquired Fund, together with a list of its portfolio
securities showing the federal income tax bases and holding periods of
such securities, as of the Closing Date, certified by the Treasurer or
Assistant Treasurer of the Acquired Fund;
7.3 The Trust II on behalf of the Acquired Fund shall have delivered to the
Trust on behalf of the Acquiring Fund on the Closing Date a certificate
executed in the name of the Acquired Fund by a President or Vice President
and a Treasurer or Assistant Treasurer of the Acquired Fund, in form and
substance satisfactory to the Trust on behalf of the Acquiring Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of the Acquired Fund in this Agreement are true and correct at
and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters
as the Trust on behalf of the Acquiring Fund shall reasonably request;
7.4 At or prior to the Closing Date, the Acquired Fund's investment adviser,
or an affiliate thereof, shall have made all payments, or applied all
credits, to the Acquired Fund required by any applicable contractual
expense limitation; and
7.5 The Acquired Fund shall have delivered to the Acquiring Fund an Acquired
Fund Tax Representation Certificate substantially in the form attached to
this Agreement as Annex B concerning certain tax-related matters with
respect to the Acquired Fund.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST II ON BEHALF OF
THE ACQUIRED FUND AND THE TRUST ON BEHALF OF THE ACQUIRING FUND
The obligations hereunder of the Trust II on behalf of the Acquired Fund and the
Trust on behalf of the Acquiring Fund are each subject to the further conditions
that on or before the Closing Date:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
beneficial interest of the Acquired Fund in accordance with the provisions
of the Trust II's Declaration and By-Laws, and certified copies of the
resolutions evidencing such approval by the Acquired Fund's shareholders
shall have been delivered by the Acquired Fund to the Trust on behalf of
the Acquiring Fund;
8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain
or prohibit, or obtain changes or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and permits
of federal, state and local regulatory authorities (including those of the
Commission and their "no-action" positions) deemed necessary by the Trust
II or the Trust to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where
failure to obtain any such consent, order or permit would not involve a
risk of a material adverse effect on the assets or
53
properties of the Acquiring Fund or the Acquired Fund, provided that
either party hereto may waive any such conditions for itself;
8.4 The Registration Statement shall have become effective under the 1933 Act
and the 1940 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto,
no investigation or proceeding for that purpose shall have been instituted
or be pending, threatened or contemplated under the 1933 Act or the 1940
Act;
8.5 The Acquired Fund shall have distributed to its shareholders, in a
distribution or distributions qualifying for the deduction for dividends
paid under Section 561 of the Code, all of its investment company taxable
income (as defined in Section 852(b)(2) of the Code determined without
regard to Section 852(b)(2)(D) of the Code) for its taxable year ending on
the Closing Date, all of the excess of (i) its interest income excludable
from gross income under Section 103(a) of the Code over (ii) its
deductions disallowed under Sections 265 and 171(a)(2) of the Code for its
taxable year ending on the Closing Date, and all of its net capital gain
(as such term is used in Sections 852(b)(3)(A) and (C) of the Code), after
reduction by any available capital loss carryforward, for its taxable year
ending on the Closing Date; and
8.6 The parties shall have received an opinion of Hale and Dorr LLP,
satisfactory to the Trust II on behalf of the Acquired Fund and the Trust
on behalf of the Acquiring Fund, substantially to the effect that for
federal income tax purposes the acquisition by the Acquiring Fund of all
of the assets of the Acquired Fund solely in exchange for the issuance of
Acquiring Fund Shares to the Acquired Fund and the assumption of all of
the Acquired Fund Liabilities by the Acquiring Fund, followed by the
distribution by the Acquired Fund, in liquidation of the Acquired Fund, of
Acquiring Fund Shares to the shareholders of the Acquired Fund in exchange
for their shares of beneficial interest of the Acquired Fund and the
termination of the Acquired Fund, will constitute a "reorganization"
within the meaning of Section 368(a) of the Code. Notwithstanding anything
herein to the contrary, neither the Trust II nor the Trust may waive the
conditions set forth in this Paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1 The Trust on behalf of the Acquiring Fund and the Trust II on behalf of
the Acquired Fund each represent and warrant to the other that there are
no brokers or finders entitled to receive any payments in connection with
the transactions provided for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely for
its own expenses incurred in connection with entering into and carrying
out the provisions of this Agreement whether or not the transactions
contemplated hereby are consummated.
54
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Trust on behalf of the Acquiring Fund and the Trust II on behalf of
the Acquired Fund agree that neither party has made any representation,
warranty or covenant not set forth herein or referred to in Paragraph 4
hereof and that this Agreement constitutes the entire agreement between
the parties.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Trust on
behalf of the Acquiring Fund and the Trust II on behalf of the Acquired
Fund. In addition, either party may at its option terminate this Agreement
at or prior to the Closing Date:
(a) because of a material breach by the other of any representation,
warranty, covenant or agreement contained herein to be performed at
or prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to the
obligations of the terminating party which has not been met and
which reasonably appears will not or cannot be met;
(c) by resolution of the Trust's Board of Trustees if circumstances
should develop that, in the good faith opinion of such Board, make
proceeding with the Agreement not in the best interests of the
Acquiring Fund's shareholders; or
(d) by resolution of the Trust II's Board of Trustees if circumstances
should develop that, in the good faith opinion of such Board, make
proceeding with the Agreement not in the best interests of the
Acquired Fund's shareholders.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of the Trust, the Acquiring Fund, the Trust II, or the
Acquired Fund, or the Trustees or officers of the Trust or the Trust II,
but each party shall bear the expenses incurred by it incidental to the
preparation and carrying out of this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon by the authorized officers of the Trust and the Trust II.
However, following the meeting of shareholders of the Acquired Fund held
pursuant to Paragraph 5.2 of this Agreement, no such amendment may have the
effect of changing the provisions regarding the method for determining the
number of Acquiring Fund Shares to be received by the Acquired Fund shareholders
under this Agreement to the detriment of such shareholders without their further
approval; provided that nothing contained in this Article 12 shall be construed
to prohibit the parties from amending this Agreement to change the Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any provisions
of this Agreement shall be in writing and shall be given by prepaid telegraph,
telecopy or certified mail addressed to the Acquiring Fund or to the Acquired
Fund, each at 101 Huntington Avenue, Boston, Massachusetts 02199, Attention:
President, and, in either case, with copies to Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109, Attention: Pamela J. Wilson, Esq.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by any
party without the prior written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation, other than the parties hereto and
their respective successors and assigns, any rights or remedies under or
by reason of this Agreement.
55
14.5 All persons dealing with the Trust or the Trust II must look solely to the
property of the Trust or the Trust II, respectively, for the enforcement
of any claims against the Trust or the Trust II as the Trustees, officers,
agents and shareholders of the Trust or the Trust II assume no personal
liability for obligations entered into on behalf of the Trust or the Trust
II, respectively. None of the other series of the Trust or the Trust II
shall be responsible for any obligations assumed by on or behalf of the
Acquiring Fund or the Acquired Fund under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed as of the date first set forth above by its President or Vice President
and has caused its corporate seal to be affixed hereto.
on behalf of
----------------------------------------------
----------------------------------------------
By:
----------------------------------------------
Maureen R. Ford
Chairman, President and Chief Executive Officer
JOHN HANCOCK INSTITUTIONAL SERIES TRUST on behalf of
----------------------------------------------
By:
----------------------------------------------
Susan S. Newton
Senior Vice President and Secretary
56
Thank
You
for mailing
your proxy card
promptly!
[LOGO]
57
JOHN HANCOCK
- --------------------------------------------------------------------------------
Prospectus 3.1.02 Balanced Fund
INSTITUTIONAL CLASS I
[LOGO](R) As with all mutual funds, the Securities and Exchange
- ------------------ Commission has not approved or disapproved these funds
JOHN HANCOCK FUNDS or determined whether the information in this prospectus
is adequate and accurate. Anyone who indicates otherwise
is committing a federal crime.
Contents
- --------------------------------------------------------------------------------
A summary of the fund's Balanced Fund 4
goals, strategies, risks,
performance and expenses.
Policies and instructions for Your account
opening, maintaining and
closing an account. Who can buy shares 6
Opening an account 6
Buying shares 7
Selling shares 8
Transaction policies 10
Dividends and account policies 10
Further information on Fund details
the fund.
Business structure 11
Management biographies 12
Financial highlights 13
For more information back cover
Balanced Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks current income, long-term growth of capital and income
and preservation of capital. To pursue these goals, the fund allocates its
investments among a diversified mix of debt and equity securities. The fund
normally invests at least 25% of assets in equity securities and at least 25% of
assets in senior debt securities.
At least 80% of the fund's common stock investments are "dividend performers."
These are companies that have typically increased their dividend payments over
time, or that the managers believe demonstrate the potential for above-average
stability of growth of earnings and dividends. In managing the fund's stock
portfolio, the managers use fundamental financial analysis to identify
individual companies with high-quality income statements, substantial cash
reserves and identifiable catalysts for growth, which may be new products or
benefits from industrywide growth. The managers generally visit companies to
evaluate the strength and consistency of their management strategy. Finally, the
managers look for stocks that are reasonably priced relative to their earnings
and industry. Historically, companies that meet these criteria have tended to
have large or medium market capitalizations.
The fund's debt securities are used to enhance current income and provide some
added stability. The fund's investments in bonds of any maturity are primarily
investment-grade (rated BBB or above and their unrated equivalents). However, up
to 20% of assets may be in junk bonds rated as low as C and their unrated
equivalents.
Although the fund invests primarily in U.S. securities, it may invest up to 35%
of assets in foreign securities. The fund may also make limited use of certain
derivatives (investments whose value is based on indexes, securities or
currencies).
In abnormal market conditions, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. Since Class I shares have no operational history, the
year-by-year and average annual figures are for Class A shares, which are
offered in a separate prospectus. Annual returns should be substantially similar
since all classes invest in the same portfolio. Class I shares have no sales
charges and lower expenses than Class A shares. The average annual figures
reflect sales charges; the year-by-year and index figures do not, and would be
lower if they did. All figures assume dividend reinvestment. Past performance
before and after taxes does not indicate future results.
Class A, total returns
Best quarter: Q4 '98, 11.40%
Worst quarter: Q3 '01, -7.12%
After-tax returns
After-tax returns are shown for Class A shares only and would be different for
the other classes. They are calculated using the historical highest individual
federal marginal income-tax rates and do not reflect the impact of state and
local taxes. Actual after-tax returns depend on the investor's tax situation and
may differ from those shown. The after-tax returns shown are not relevant to
investors who hold their fund shares through tax-deferred arrangements such as
401(k) plans or individual retirement accounts.
Indexes (reflect no fees or taxes)
Standard & Poor's 500 Index, an unmanaged
index of 500 stocks.
Lehman Brothers Government/Credit
Bond Index, an unmanaged index of U.S.
government, U.S. Corporate and Yankee bonds.
- --------------------------------------------------------------------------------
Class A calendar year total returns (without sales charges)
- --------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999 2000 2001
11.38% -3.51% 24.22% 12.13% 20.79% 14.01% 3.89% -1.83% -5.23%
- --------------------------------------------------------------------------------
Average annual total returns (including sales charge)
for periods ending 12-31-01
- --------------------------------------------------------------------------------
Life of
1 year 5 year Class A
Class A before tax (began 10-5-92) -9.99% 4.80% 7.42%
Class A after tax on distributions -10.94% 2.99% 5.47%
Class A after tax on distributions, with sale -6.09% 3.33% 5.30%
Class I before tax (no operational history) -- -- --
Standard & Poor's 500 Index -11.89% 10.70% 14.07%
Lehman Brothers Government/Credit Bond Index 8.50% 7.37% 7.04%*
* as of September 30, 1992
4
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to stock and
bond market movements.
The fund's management strategy has a significant influence on fund performance.
Large- or medium-capitalization stocks as a group could fall out of favor with
the market, causing the fund to underperform investments that focus on
small-capitalization stocks. Medium-capitalization stocks tend to be more
volatile than stocks of larger companies. In addition, if the managers' security
selection strategies do not perform as expected, the fund could underperform its
peers or lose money.
To the extent that the fund makes investments with additional risks, these risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses.
o In a down market, higher-risk securities and derivatives could become
harder to value or to sell at a fair price.
o Any bonds held by the fund could be downgraded in credit quality or go
into default. In addition, bond prices generally fall when interest rates
rise; this risk is greater for longer maturity bonds. Junk bond prices can
fall on bad news about the issuer, an industry or the economy in general.
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable distributions.
Investments in the fund are not bank deposits and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency. You
could lose money by investing in this fund.
================================================================================
YOUR EXPENSES
[Clip Art] Operating expenses are paid from the fund's assets, and therefore are
paid by shareholders indirectly. Because Class I is new, its expenses are based
on Class A expenses, adjusted to reflect any changes.
- --------------------------------------------------------------------------------
Annual operating expenses
- --------------------------------------------------------------------------------
Management fee 0.60%
Other expenses 0.16%
Total fund operating expenses 0.76%
The hypothetical example below shows what your expenses would be if you
invested $10,000 over the time frames indicated, assuming you reinvested all
distributions and that the average annual return was 5%. The example is for
comparison only, and does not represent the fund's actual expenses and returns,
either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
Class I $78 $243 $422 $942
================================================================================
PORTFOLIO MANAGERS
John F. Snyder, III
Joined fund team in 1994
Barry H. Evans, CFA
Joined fund team in 1996
Steve Paspal, CFA
Joined fund team in 1997
See page 12 for the management biographies.
FUND CODES
Class I Ticker --
CUSIP 47803P807
Newspaper --
SEC number 811-0560
JH fund number 432
5
Your account
- --------------------------------------------------------------------------------
WHO CAN BUY SHARES
Class I shares are offered without any sales charge to certain types of
investors, as noted below:
o Retirement and other benefit plans and their participants
o Rollover assets for participants whose plans are invested in the fund
o Certain trusts, endowment funds and foundations
o Any state, county or city, or its instrumentality, department, authority
or agency
o Insurance companies, trust companies and bank trust departments buying
shares for their own account
o Investment companies not affiliated with the adviser
o Clients of service agents and broker-dealers who have entered into an
agreement with John Hancock Funds.
o Investors who participate in fee-based, wrap and other investment platform
programs
o Any entity that is considered a corporation for tax purposes
o Fund trustees and other individuals who are affiliated with this fund or
other John Hancock funds.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine if you are eligible, by referring to "Who can buy shares" on the
left.
3 Determine how much you want to invest. The minimum initial investment is
$10,000. There is no minimum investment for retirement plans with at least
350 eligible employees.
4 Complete the appropriate parts of the account application, carefully
following the instructions. By applying for privileges now, you can avoid
the delay and inconvenience of having to file an additional application if
you want to add privileges later. You must submit additional documentation
when opening trust, corporate or power of attorney accounts.
5 Make your initial investment using the table on the next page.
6 If you have questions or need more information, please contact your
financial representative or call Signature Services at 1-888-972-8696.
John Hancock Funds may pay significant compensation out of its own resources to
your financial representative.
Your broker or agent may charge you a fee to effect transactions in fund shares.
6 YOUR ACCOUNT
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip Art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable to
"John Hancock Signature "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no slip
mail them to Signature is available, include a note
Services (address below). specifying the fund name(s),
your share class, your
account number and the
name(s) in which the account
is registered.
o Deliver the check and
investment slip or note to
your financial
representative, or mail them
to Signature Services
(address below).
By exchange
[Clip Art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
o You may only exchange for o You may only exchange for
shares of other institutional shares of other institutional
funds or Class I shares. funds or Class I shares.
By wire
[Clip Art] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your investment
representative or mail it to to:
Signature Services.
First Signature Bank & Trust
o Obtain your account number by Account # 900022260
calling your financial Routing # 211475000
representative or Signature
Services. Specify the fund name(s), your
share class, your account number
o Instruct your bank to wire and the name(s) in which the
the amount of your investment account is registered. Your bank
to: may charge a fee to wire funds.
First Signature Bank & Trust
Account # 900022260
Routing # 211475000
Specify the fund name(s), the
share class, the new account
number and the name(s) in which
the account is registered. Your
bank may charge a fee to wire
funds.
By phone
[Clip Art] See "By exchange" and "By wire." o Verify that your bank or
credit union is a member of
the Automated Clearing House
(ACH) system.
o Complete the "To Purchase,
Exchange or Redeem Shares via
Telephone" and "Bank
Information" sections on your
account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Call your financial
representative or Signature
Services with the fund
name(s), your share class,
your account number, the
name(s) in which the account
is registered and the amount
of your investment.
- ----------------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1001
Boston, MA 02217-1001
Phone Number: 1-888-972-8696
Or contact your financial representative
for instructions and assistance.
- ----------------------------------------------
YOUR ACCOUNT 7
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip Art] o Sales of any amount; however, o Write a letter of instruction
sales of $5 million or more indicating the fund name,
must be made by letter. your account number, your
share class, the name(s) in
o Certain requests will require which the account is
a Medallion signature registered and the dollar
guarantee. Please refer to value or number of shares you
"Selling shares in writing." wish to sell.
o Include all signatures and
any additional documents that
may be required (see next
page).
o Mail the materials to
Signature Services.
o A check or wire will be sent
according to your letter of
instruction.
By phone
[Clip Art] o Sales of up to $5 million. o To place your request with a
representative at John
Hancock Funds, call Signature
Services between 8 A.M. and 4
P.M. Eastern Time on most
business days.
o Redemption proceeds of up to
$100,000 may be sent by wire
or by check. A check will be
mailed to the exact name(s)
and address on the account.
Redemption proceeds exceeding
$100,000 must be wired to
your designated bank account.
By wire or electronic funds transfer (EFT)
[Clip Art] o Requests by letter to sell o To verify that the telephone
any amount. redemption privilege is in
place on an account, or to
o Requests by phone to sell up request the forms to add it
to $5 million (accounts with to an existing account, call
telephone redemption Signature Services.
privileges).
o Amounts of $5 million or more
will be wired on the next
business day.
o Amounts up to $100,000 may be
sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day. Your
bank may charge a fee for
this service.
By exchange
[Clip Art] o Sales of any amount. o Obtain a current prospectus
for the fund into which you
are exchanging by calling
your financial representative
or Signature Services.
o You may only exchange for
shares of other institutional
funds or Class I shares.
o Call your financial
representative or Signature
Services to request an
exchange.
8 YOUR ACCOUNT
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below, unless they were previously provided
to Signature Services and are still accurate. You may also need to include a
Medallion signature guarantee, which protects you against fraudulent orders. You
will need a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares and are requesting
payment by check
o you are selling more than $5 million worth of shares
You will need to obtain your Medallion signature guarantee from a member of the
Signature Guarantee Medallion Program. Most brokers and securities dealers are
members of this program. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
- --------------------------------------------------------------------------------
[Clip Art]
Owners of individual, joint or o Letter of instruction.
UGMA/UTMA accounts (custodial accounts
for minors). o On the letter, the signatures of
all persons authorized to sign for
the account, exactly as the account
is registered.
o Medallion signature guarantee if
applicable (see above).
Owners of corporate, sole o Letter of instruction.
proprietorship, general partner or
association accounts. o Corporate business/organization
resolution, certified within the
past 12 months, or a John Hancock
Funds business/ organization
certification form.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Medallion signature guarantee if
applicable (see above).
Owners or trustees of retirement plan, o Letter of instruction.
pension trust and trust accounts.
o On the letter, the signature(s) of
the trustee(s).
o Copy of the trust document
certified within the past 12 months
or a John Hancock Funds trust
certification form.
o Medallion signature guarantee if
applicable (see above).
Joint tenancy shareholders with rights o Letter of instruction signed by
of survivorship whose co-tenants are surviving tenant.
deceased.
o Copy of death certificate.
o Medallion signature guarantee if
applicable (see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor,
certified within the past 12
months.
o Medallion signature guarantee if
applicable (see above).
Administrators, conservators, o Call 1-888-972-8696 for
guardians and other sellers or account instructions.
types not listed above.
- -----------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1001
Boston, MA 02217-1001
Phone Number: 1-888-972-8696
Or contact your financial representative
for instructions and assistance.
- -----------------------------------------
YOUR ACCOUNT 9
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value (NAV) per share for the fund is
determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time). The fund uses market prices in
valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable. The fund may also value securities at fair value
if the value of these securities has been materially affected by events
occurring after the close of a foreign market. The fund may trade foreign stock
or other portfolio securities on U.S. holidays and weekends, even though the
fund's shares will not be priced on those days. This may change a fund's NAV on
days when you cannot buy or sell shares.
Buy and sell prices When you buy shares, you pay the NAV. When you sell shares,
you receive the NAV.
Execution of requests The fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after Signature Services receives your
request in good order.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider sending your request in writing.
In unusual circumstances, the fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. Also for your protection, telephone
transactions are not permitted on accounts whose names or addresses have changed
within the past 30 days. Proceeds from telephone transactions can only be mailed
to the address of record.
Exchanges You may exchange Class Ishares for any institutional fund or Class I
shares. The registration for both accounts involved must be identical.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties who, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. The fund reserves the right to require that
previously exchanged shares and reinvested dividends be in the fund for 90 days
before a shareholder is permitted a new exchange. The fund may also refuse any
exchange order. A fund may change or cancel its exchange policies at any time,
upon 60 days' notice to its shareholders.
Certificated shares The fund no longer issues share certificates. Shares are
electronically recorded. Any existing certificated shares can only be sold by
returning the certificated shares to Signature Services, along with a letter of
instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, at least quarterly
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The fund generally distributes most or all of its net earnings in the
form of dividends. Any capital gains are distributed annually. The fund
typically pays income dividends quarterly.
Dividend reinvestments Dividends will be reinvested automatically in additional
shares of the same fund on the dividend record date. Alternatively, you can
choose to have your dividends and capital gains sent directly to your bank
account or a check will be sent in the amount of more than $10. However, if the
check is not deliverable or the combined dividend and capital gains amount is
$10 or less, your proceeds will be reinvested. If five or more of your dividend
or capital gains checks remain uncashed after 180 days, all subsequent dividends
and capital gains will be reinvested.
10 YOUR ACCOUNT
Taxability of dividends For investors who are not exempt from federal income
taxes, dividends you receive from a fund, whether reinvested or taken as cash,
are generally considered taxable. Dividends from a fund's short-term capital
gains are taxable as ordinary income. Dividends from a fund's long-term capital
gains are taxable at a lower rate. Whether gains are short-term or long-term
depends on the fund's holding period. Some dividends paid in January may be
taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you if you are not exempt from federal income
taxes. Depending on the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or a loss on the transaction. You are
responsible for any tax liabilities generated by your transactions.
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The fund's board of trustees oversees the fund's business activities and retains
the services of the various firms that carry out the fund's operations. The
trustees have the power to change the fund's investment goals without
shareholder approval.
The investment adviser The fund is managed by John Hancock Advisers, LLC, 101
Huntington Avenue, Boston, MA 02199-7603. Founded in 1968, John Hancock Advisers
is a wholly owned subsidiary of John Hancock Financial Services, Inc. and
manages approximately $30 billion in assets.
Management fees For the period ended December 31, 2001, the fund paid the
investment adviser management fees at a rate of 0.60% of average net assets.
YOUR ACCOUNT 11
- --------------------------------------------------------------------------------
MANAGEMENT BIOGRAPHIES
Below is an alphabetical list of the portfolio managers of the John Hancock
Balanced Fund. It is a brief summary of their business careers over the past
five years.
Barry H. Evans, CFA
- ------------------------------------------
Senior vice president
Joined John Hancock Advisers in 1986
Began business career in 1986
Steve Paspal, CFA
- ------------------------------------------
Second vice president
Joined John Hancock Advisers in 1997
Vice president and senior research analyst
at Pennsylvania Merchant Group
(1995-1997)
Began career in 1990
John F. Snyder, III
- ------------------------------------------
Executive vice president
Joined John Hancock Advisers in 1991
Began business career in 1971
12 FUND DETAILS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Since Class I shares have no operational history, financial highlights are
provided for the fund's Class A shares, which are offered in a separate
prospectus. This table details the performance of the fund's Class A shares,
including total return information showing how much an investment in the fund
has increased or decreased each year.
Balanced Fund
Figures audited by Ernst & Young LLP.
CLASS A SHARES PERIOD ENDED: 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01(1)
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.27 $13.33 $14.06 $14.05 $13.03
Net investment income(2) 0.37 0.36 0.35 0.33 0.30
Net realized and unrealized gain (loss) on investments 2.14 1.47 0.18 (0.59) (0.99)
Total from investment operations 2.51 1.83 0.53 (0.26) (0.69)
Less distributions
From net investment income (0.37) (0.36) (0.36) (0.33) (0.32)
In excess of net investment income -- -- --(3) -- --
From net realized gain (1.08) (0.74) (0.18) (0.43) --
(1.45) (1.10) (0.54) (0.76) (0.32)
Net asset value, end of period $13.33 $14.06 $14.05 $13.03 $12.02
Total return(4) (%) 20.79 14.01 3.89 (1.83) (5.23)
- --------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $84 $97 $131 $148 $136
Ratio of expenses to average net assets (%) 1.22 1.21 1.22 1.31 1.37
Ratio of net investment income to average net assets (%) 2.77 2.61 2.47 2.52 2.45
Portfolio turnover (%) 115 83 94 99 98
(1) As required, effective January 1, 2001 the fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies, as
revised, and began amortizing premiums on debt securities. The effect of
this change for the year ended December 31, 2001 was to decrease net
investment income per share by $0.01, decrease net realized and unrealized
losses per share by $0.01, and, had the fund not amortized premiums on
debt securities, the annualized ratio of net investment income to average
net assets would have been 2.50% for Class A shares. Per share ratios and
supplemental data for periods prior to January 1, 2001 have not been
restated to reflect this change in presentation.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
FUND DETAILS 13
For more information
Two documents are available that offer further information on the John Hancock
Balanced Fund:
Annual/Semiannual Report to Shareholders
Includes financial statements, a
discussion of the market conditions and investment strategies that significantly
affected performance, as well as the auditors' report (in annual report only).
Statement of Additional Information (SAI)
The SAI contains more detailed information on all aspects of the fund. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1001
Boston, MA 02217-1001
By phone: 1-888-972-8696
By EASI-Line: 1-800-597-1897
By TDD: 1-800-462-0825
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public Reference Room in Washington, DC. For access to
the Reference Room call 1-202-942-8090
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
By electronic request: publicinfo@sec.gov
(duplicating fee required)
On the Internet: www.sec.gov
[LOGO](R)
[OLYMPIC LOGO]
WORLDWIDE SPONSOR
John Hancock Funds, LLC
MEMBER NASD
101 Huntington Avenue
Boston, MA 02199-7603
www.jhfunds.com
Mutual Funds
Institutional Services
Private Managed Accounts
Retirement Plans
(C)2002 JOHN HANCOCK FUNDS, LLC
36IPN 3/02
John Hancock
Balanced
Fund
ANNUAL
REPORT
12.31.01
Sign up for electronic delivery at
www.jhancock.com/funds/edelivery
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."]
[A photo of Maureen R. Ford, Chairman and Chief Executive Officer, flush
left next to first paragraph.]
WELCOME
Table of contents
Your fund at a glance
page 1
Managers' report
page 2
A look at performance
page 6
Growth of $10,000
page 7
Fund's investments
page 8
Financial statements
page 13
For your information
page 29
Dear Fellow Shareholders,
The U.S. stock market produced double-digit losses for the second year
in a row in 2001 -- the first back-to-back down years for stocks since
the 1973-74 bear market. The economy slipped into recession, wreaking
havoc with corporate profits, and the tragic events of September 11
further rattled investors. Even a strong fourth quarter rally was not
enough to lift the major indexes into positive territory. The Standard &
Poor's 500 Index finished the year losing 11.88%, including reinvested
dividends, and the Dow Jones Industrial Average lost 5.42%. The
tech-heavy Nasdaq Composite Index fell 21.05% -- tamer than 2000's loss
thanks to a late-year rebound in the beleaguered technology and
telecommunications sectors.
Stock mutual fund investors didn't find many places to hide, and 83% of
U.S. stock funds posted negative returns in 2001, with the average stock
fund falling 10.89%, according to Lipper, Inc. In stark contrast, bonds
beat stocks for the second straight year and produced positive results,
buoyed by falling interest rates and investors' search for safety.
These last two years couldn't have provided a more vivid example of the
importance of being well diversified, since a portfolio concentrated
solely in stocks would have fallen more in the last two years than one
combining investments in both stocks and bonds.
Two disappointing years of stock performance could also be a reason to
re-evaluate with your investment professional whether you are still on
track to meet your long-term financial goals. It's possible that
downsized results, and modified expectations, could foster some changes
in your investing strategies. And now is certainly a good time to
perform this review, given the increased opportunities for retirement
and college savings offered in President Bush's major tax-cut
legislation enacted in June.
With the market's fourth quarter rally, and the growing expectation that
the economy would rebound sometime in 2002, we begin the year on a
positive note, confident in the resilience of the economy, the financial
markets and the nation.
Sincerely,
/S/ MAUREEN R. FORD
Maureen R. Ford,
Chairman and Chief Executive Officer
YOUR FUND
AT A GLANCE
The Fund seeks
current income,
long-term growth
of capital and
income and
preservation of
capital. To pursue
these goals, the
Fund allocates its
investments
among a
diversified mix
of debt and
equity securities.
Over the last twelve months
* The stock market lost ground for a second straight year due to an
economy in recession.
* The Fund's bond stake held up well, as bonds outperformed stocks.
* The Fund placed more emphasis on companies that were most sensitive to
an economic and market rebound in 2002.
[Bar chart with heading "John Hancock Balanced Fund." Under the heading
is a note that reads "Fund performance for the year ended December 31,
2001." The chart is scaled in increments of 2% with -8% at the bottom
and 0% at the top. The first bar represents the -5.23% total return for
Class A. The second bar represents the -5.99% total return for Class B.
The third bar represents the -5.99% total return for Class C. A note
below the chart reads "Total returns for the Fund are at net asset value
with all distributions reinvested."]
Top 10 holdings
5.1% CSC Holdings
2.3% Midland Funding
2.2% Philip Morris
2.1% Government National Mortgage Assn.
2.0% Citigroup
1.9% United States Treasury
1.9% Hydro-Quebec
1.9% Lasmo America Ltd., 8.15%
1.7% Baxter International
1.7% Federal National Mortgage Assn.
As a percentage of net assets on December 31, 2001.
MANAGERS'
REPORT
BY JOHN F. SNYDER, III, PORTFOLIO MANAGEMENT TEAM LEADER, AND
BARRY H. EVANS, CFA, AND STEVE PASPAL, CFA, PORTFOLIO MANAGERS
John Hancock
Balanced Fund
It was a tumultuous year for stock investors. Despite widespread layoffs
and drastic cost-cutting measures, U.S. corporations posted their
steepest earnings decline since the 1930s. What's more, after months of
speculation, the U.S. economy officially entered its first recession in
more than a decade. Finally, the events of September 11 magnified the
uncertainty in the market. Although the Federal Reserve cut interest
rates 11 times in an effort to boost the weak economy, stock prices
tumbled throughout most of 2001. The Dow Jones Industrial Average fell
5.42% and the Standard & Poor's 500 Index dropped 11.88%, making this
the second year in a row that the major market averages posted a
decline.
"It was a tumultuous year
for stock investors."
Much like last year, technology stocks were among the hardest hit by the
downturn. However, tech wasn't the only sector to suffer. This year, the
damage was much more widespread, extending into manufacturing, financial
and consumer stocks. With the market in turmoil, investors continued
their migration to "safer havens" -- those stocks with steady earnings
growth, even in a slower economy, and more reasonable valuations.
PERFORMANCE REVIEW
For the 12 months ended December 31, 2001, John Hancock Balanced Fund's
Class A, Class B and Class C shares returned -5.23%, -5.99% and
- -5.99% at net asset value. By comparison, the average balanced fund
returned -4.39%, according to Lipper Inc.1 Keep in mind that your net
asset value return will be different from the Fund's performance if you
were not invested in the Fund for the entire period and did not reinvest
all distributions. Please see pages six and seven for historical
performance information.
[A photo of Team leader John Snyder flush right next to first
paragraph.]
Our relative performance was negatively impacted by some of our longtime
holdings in the financial sector. Insurance giant AFLAC, for example,
suffered from weak new product introductions and the lackluster Japanese
economy, from which it derives a significant portion of its revenues.
With the dismal performance in capital markets, investment bank J.P.
Morgan Chase experienced a sharp drop-off in revenues. In addition,
several of our technology holdings -- such as Nortel Networks and
Tellabs -- tumbled under the pressure on technology stocks.
"Our relative performance
was negatively impacted
by some of our longtime
holdings in the financial
sector."
On the positive side, however, stock selection boosted our performance
elsewhere. IBM, for example, jumped sharply, even as most tech stocks
dropped, due to its diverse product line and strong earnings. In the
basic materials sector, Air Products & Chemicals and Bemis Co. turned in
strong performances, thanks to their reasonable valuations and the
belief that they would rebound when the economy eventually bounces back.
Despite a sharp decline in the health-care sector, our holdings in
Baxter International and Johnson & Johnson posted solid returns, due to
their minimal exposure to patent expirations and strong product cycles.
Finally, retailers Lowe's and Family Dollar Stores outperformed in this
difficult environment.
FALLING INTEREST RATES BOOST BONDS
With the Federal Reserve cutting interest rates sharply throughout the
year, our bond holdings performed well, since bond prices typically rise
when interest rates fall. However, our smaller weighting in bonds versus
our peers detracted somewhat from the Fund's relative performance.
Looking ahead, we plan to maintain our approximately 25% weighting in
bonds. With the economy likely to pick up at some point next year, bonds
are likely to turn in more modest returns. As we discussed in the
semiannual report, our focus remains primarily on corporate bonds rather
than U.S. Treasuries. Not only do corporate issues offer more attractive
yields, but we feel they will have more upside when the economy turns
around.
[Table at top left-hand side of page entitled "Top five industry
groups." The first listing is Utilities 14%, the second is Electronics
10%, the third Medical 8%, the fourth Oil & gas 6%, and the fifth
Computer 6%.
STRATEGIC SHIFTS IN STOCKS
Given our long-term investment strategy, we don't make drastic changes
in the portfolio's holdings, but rather gradual strategic shifts as
market conditions warrant. Financial stocks, including banks, insurance,
mortgage banking and finance companies, remained one of our largest
sectors. Within the sector, however, we shifted our emphasis to those
companies well positioned to leverage an upturn in the capital markets.
After an abysmal year in 2001, we expect the capital markets to bounce
back at some point this year, so we've added to our positions in The
Bank of New York, Morgan Stanley Dean Witter and FleetBoston Financial.
[Pie chart at middle of page with heading "Portfolio diversification As
a percentage of net assets on 12-31-01." The chart is divided into five
sections (from top to left): Common stocks 66%, Preferred stocks 7%,
Corporate bonds, 18%, U.S. government & agencies 8%, and Short-term
investments 1%.]
We've also increased our weighting in capital goods and basic materials
stocks with names such as Dow Chemical, Honeywell and Rohm & Haas. Not
only do these companies have reasonable valuations, but they also have
significantly pruned back their costs and successfully gained market
share. With the economy likely to pick up in 2002, we believe these
stocks will be among the biggest beneficiaries of the turnaround.
[Table at top of page entitled "SCORECARD." The header for the left
column is "INVESTMENT" and the header for the right column is "RECENT
PERFORMANCE...AND WHAT'S BEHIND THE NUMBERS." The first listing is AFLAC
followed by a down arrow with the phrase "Weak new product
introductions." The second listing is Tellabs followed by a down arrow
with the phrase "Pressure on tech stocks." The third listing is Johnson
& Johnson followed by an up arrow with the phrase "Strong product
cycle."]
WHAT'S AHEAD
After two painful years of negative returns in the market, we're
cautiously optimistic about the prospects for 2002. The sharp market
rebound at the end of last year has left many investors wondering
whether the gains will continue into this year. We believe that the
overall trend in the market is likely to be up, but investors should be
prepared for more ups and downs as the market sorts out the direction of
the economy, corporate earnings and stock prices.
"After two painful years
of negative returns in the
market, we're cautiously
optimistic about the
prospects for 2002."
Although we're optimistic, we're also realistic about the market's
prospects. Even when stocks do rebound, we're not likely to see the
20%-plus gains of the late 1990s. Returns are likely to be much more
modest for several reasons. First of all, historical stock returns tend
to average closer to 10% over the long term. Given that stocks exceeded
that average in the late 1990s, some analysts suggest returns over the
next few years could be below historic averages. What's more, despite
the two-year decline in the market, stocks remain relatively expensive.
Finally, the economic recovery is more likely to be a gradual upturn
rather than a sharp rebound.
This commentary reflects the views of the portfolio managers through the
end of the Fund's period discussed in this report. Of course, the
managers' views are subject to change as market and other conditions
warrant.
1 Figures from Lipper, Inc. include reinvested dividends and do not take
into account sales charges. Actual load-adjusted performance is lower.
A LOOK AT
PERFORMANCE
For the period ended
December 31, 2001
The index used for
comparison is the
Standard & Poor's
500 Index, an
unmanaged index
that includes 500
widely traded
common stocks.
It is not possible to
invest in an index.
Class A Class B Class C Index
Inception date 10-5-92 10-5-92 5-3-99 --
Average annual returns with maximum sales charge (POP)
One year -9.99% -10.60% -7.83% -11.88%
Five years 4.80% 4.81% -- 10.70%
Since inception 7.42% 7.27% -4.01% --
Cumulative total returns with maximum sales charge (POP)
One year -9.99% -10.60% -7.83% -11.88%
Five years 26.42% 26.47% -- 66.26%
Since inception 93.76% 91.28% -10.33% --
SEC 30-day yield as of December 31, 2001
1.91% 1.34% 1.31% --
Performance figures assume all distributions are reinvested. Returns
with maximum sales charge reflect a sales charge on Class A shares of 5%
and Class C shares of 1%, and the applicable contingent deferred sales
charge (CDSC) on Class B and Class C shares. The Class B shares' CDSC
declines annually between years 1-6 according to the following
schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the
sixth year. Class C shares held for less than one year are subject to a
1% CDSC. The return and principal value of an investment in the Fund
will fluctuate, so that shares, when redeemed, may be worth more or less
than the original cost. Index figures do not reflect sales charges and
would be lower if they did.
The returns reflect past results and should not be considered indicative
of future performance. The performance table above and the chart on the
next page do not reflect the deduction of taxes that a shareholder would
pay on fund distributions or the redemption of fund shares.
GROWTH OF
$10,000
This chart shows what happened to a hypothetical $10,000 investment in
Class A shares for the period indicated. For comparison, we've shown the
same investment in the Standard & Poor's 500 Index.
Line chart with the heading "GROWTH OF $10,000." Within the chart are
three lines. The first line represents the Index and is equal to $32,921
as of December 31, 2001. The second line represents the value of the
hypothetical $10,000 investment made in the John Hancock Balanced Fund,
before sales charge, and is equal to $20,403 as of December 31, 2001.
The third line represents the value of the same hypothetical investment
made in the John Hancock Balanced Fund, after sales charge, and is equal
to $19,376 as of December 31, 2001.
Class B 1 Class C 1
Inception date 10-5-92 5-3-99
Without sales charge $19,128 $9,059
With maximum sales charge -- $8,969
Index $32,921 $8,891
Assuming all distributions were reinvested for the period indicated, the
chart above shows the value of a $10,000 investment in the Fund's Class
B and Class C shares, respectively, as of December 31, 2001. Performance
of the classes will vary based on the difference in sales charges paid
by shareholders investing in the different classes and the fee structure
of those classes.
1 No contingent deferred sales charge applicable.
FINANCIAL STATEMENTS
FUND'S
INVESTMENTS
Securities owned
by the Fund on
December 31, 2001
This schedule is divided into five main categories: common stocks,
preferred stocks, corporate bonds, U.S. government and agencies
securities, and short-term investments. The common and preferred stocks
and corporate bonds are further broken down by industry group.
Short-term investments, which represent the Fund's cash position, are
listed last.
SHARES ISSUER VALUE
COMMON STOCKS 66.09% $121,885,390
(Cost $105,174,572)
Banks -- United States 1.36% $2,518,000
40,000 Bank of America Corp. 2,518,000
Beverages 1.19% 2,191,050
45,000 PepsiCo, Inc. 2,191,050
Chemicals 3.70% 6,818,580
43,000 Air Products & Chemicals, Inc. 2,017,130
55,000 Dow Chemical Co. (The) 1,857,900
85,000 Rohm & Haas Co. 2,943,550
Computers 5.89% 10,866,780
130,000 Cisco Systems, Inc.* 2,354,300
65,000 Dell Computer Corp.* 1,766,700
30,000 Electronic Data Systems Corp. 2,056,500
20,500 International Business Machines Corp. 2,479,680
160,000 Oracle Corp.* 2,209,600
Cosmetics & Personal Care 1.39% 2,557,500
55,000 Avon Products, Inc. 2,557,500
Diversified Operations 2.47% 4,554,300
65,000 Honeywell International, Inc. 2,198,300
40,000 Tyco International Ltd. 2,356,000
Electronics 10.15% 18,727,380
85,000 Altera Corp.* 1,803,700
55,000 Analog Devices, Inc.* 2,441,450
42,000 Emerson Electric Co. 2,398,200
45,000 General Electric Co. 1,803,600
55,000 Intel Corp. 1,729,750
47,000 Linear Technology Corp. 1,834,880
130,000 Motorola, Inc. 1,952,600
80,000 Teradyne, Inc.* 2,411,200
84,000 Texas Instruments, Inc. 2,352,000
Finance 3.64% 6,711,260
72,000 Citigroup, Inc. 3,634,560
55,000 Morgan Stanley Dean Witter & Co. 3,076,700
Food 0.76% 1,397,612
41,070 Kraft Foods, Inc. (Class A)* 1,397,612
Insurance 3.68% 6,780,800
100,000 AFLAC, Inc. 2,456,000
30,000 American International Group, Inc. 2,382,000
40,000 Lincoln National Corp. 1,942,800
Media 1.53% 2,824,800
88,000 AOL Time Warner, Inc.* 2,824,800
Medical 8.36% 15,409,870
32,000 Abbott Laboratories 1,784,000
50,000 American Home Products Corp. 3,068,000
59,000 Baxter International, Inc. 3,164,170
35,000 Cardinal Health, Inc. 2,263,100
50,000 Johnson & Johnson 2,955,000
37,000 Merck & Co., Inc. 2,175,600
Mortgage Banking 1.55% 2,862,000
36,000 Fannie Mae 2,862,000
Oil & Gas 4.13% 7,622,910
31,000 ChevronTexaco Corp. 2,777,910
60,000 Exxon Mobil Corp. 2,358,000
60,000 Shell Transport & Trading Co., PLC,
?!?!?! American Depositary Receipts (United Kingdom) 2,487,000
Retail 5.84% 10,772,160
83,000 Family Dollar Stores, Inc. 2,488,340
52,000 Home Depot, Inc. (The) 2,652,520
55,000 Lowe's Cos., Inc. 2,552,550
75,000 Target Corp. 3,078,750
Soap & Cleaning Preparations 1.50% 2,768,500
70,000 Clorox Co. (The) 2,768,500
Telecommunications 3.18% 5,861,750
115,000 AT&T Wireless Services, Inc.* 1,652,550
360,000 Lucent Technologies, Inc. 2,264,400
130,000 Tellabs, Inc.* 1,944,800
Tobacco 2.24% 4,126,500
90,000 Philip Morris Cos., Inc. 4,126,500
Utilities 3.53% 6,513,638
52,000 Duke Energy Corp. 2,041,520
100,000 Questar Corp. 2,505,000
50,220 SBC Communications, Inc. 1,967,118
PREFERRED STOCKS 6.97% $12,859,067
(Cost $12,484,590)
Media 5.12% 9,439,067
90,326 CSC Holdings, Inc., 11.125%, Ser M 9,439,067
Oil & Gas 1.85% 3,420,000
30,000 Lasmo America Ltd., 8.15% (R) 3,420,000
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING** (000s OMITTED) VALUE
CORPORATE BONDS 17.66% $32,568,680
(Cost $31,824,844)
Energy 1.14% 2,106,800
CalEnergy Co., Inc.,
Sr Bond 09-15-28 8.48% BBB- $2,000 2,106,800
Finance 2.14% 3,936,055
Household Finance Corp.,
Note 01-24-06 6.50 A 2,000 2,036,530
Standard Credit Card Master Trust I,
Class A Credit Card Part Ctf Ser 1994-2 04-07-08 7.25 AAA 1,000 1,070,310
Standard Credit Card Master Trust,
Series 1995-1 01-08-07 8.25 AAA 750 829,215
Leisure 0.55% 1,013,750
Station Casinos, Inc.,
Sr Note 02-15-08 8.38 BB- 1,000 1,013,750
Media 2.50% 4,616,500
Adelphia Communications Corp.,
Sr Note Ser B 07-15-04 (R) 10.50 B+ 500 502,500
Century Communications Corp.,
Sr Disc Note 03-15-03 Zero B+ 1,995 1,775,550
Rogers Cablesystems Ltd.,
Sr Sec 2nd Priority Note (Canada) 08-01-02 (Y) 9.63 BBB- 1,200 1,234,500
Viacom, Inc.,
Sr Deb 07-30-30 7.88 A- 1,000 1,103,950
Telecommunications 0.48% 890,820
Cingular Wireless,
Note 12-15-11 (R) 6.50 A+ 900 890,820
Utilities 10.85% 20,004,755
CMS Energy X-TRAS,
Pass Thru Ctf 01-15-05 7.00 BB 1,500 1,447,200
EIP Funding-PNM,
Sec Fac Bond 10-01-12 10.25 BBB- 1,755 1,886,625
Hydro-Quebec,
Gtd Deb Ser IF (Canada) 02-01-13 (Y) 8.00 A+ 3,000 3,438,750
Gtd Bond Ser HY (Canada) 01-15-22 (Y) 8.40 A+ 1,500 1,802,100
Kansas City Power & Light Co.,
Sr Note 11-15-11 6.50 BBB+ 2,000 1,930,440
Long Island Lighting Co.,
Deb 03-15-23 8.20 A- 2,500 2,581,250
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.75 BB+ 3,750 4,143,750
New Valley Generation II,
Pass Thru Ctf 05-01-20 5.57 AAA 1,000 942,500
Tucson Electric Power Co.,
1st Collateral Trust Bond Ser B 08-01-08 7.50 BBB- 1,814 1,832,140
U.S. GOVERNMENT AND AGENCIES SECURITIES 7.67% $14,142,219
(Cost $13,419,060)
Government -- U.S. 1.89% 3,489,045
United States Treasury,
Note 08-15-11 5.00 AAA 3,500 3,489,045
Government -- U.S. Agencies 5.78% 10,653,174
Federal National Mortgage Assn.,
12 Yr Pass Thru Ctf 07-01-11 7.00 AAA 730 759,701
15 Yr Pass Thru Ctf 08-01-08 7.50 AAA 468 493,899
Note 05-15-08 6.00 AAA 3,000 3,117,180
Financing Corp.,
Bond 11-02-18 9.65 AAA 1,790 2,444,746
Government National Mortgage Assn.,
30 Yr SF Pass Thru Ctf 04-15-21 9.00 AAA 33 36,157
30 Yr Pass Thru Ctf 04-15-29 6.50 AAA 3,780 3,801,491
INTEREST PAR VALUE
ISSUER, DESCRIPTION, MATURITY DATE RATE (000S OMITTED) VALUE
SHORT-TERM INVESTMENTS $1,870,000
(Cost $1,870,000)
Joint Repurchase Agreement 1.02%
Investment in a joint repurchase agreement
transaction with UBS Warburg, Inc. --
Dated 12-31-01, due 01-02-02 (Secured
by U.S. Treasury Bonds 9.875% due 11-15-15
and 8.750% due 05-15-17, U.S. Treasury Notes
5.625% due 12-31-02 and 6.250% due
02-15-03, U.S. Treasury Inflation Index Bond
3.375% due 04-15-32, U.S. Treasury Inflation
Index Note 3.375% due 01-15-07) 1.70% $1,870 $1,870,000
TOTAL INVESTMENTS 99.41% $183,325,356
OTHER ASSETS AND LIABILITIES, NET 0.59% $1,089,399
TOTAL NET ASSETS 100.00% $184,414,755
* Non-income producing security.
** Credit ratings are unaudited and rated by Moody's Investors Service or
John Hancock Advisers, LLC where Standard & Poor's ratings are not
available.
(R) This security is exempt from registration under rule 144A of the
Securities Act of 1933. Such security may be resold, normally to
qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $4,813,320, or 2.61% of
net assets, as of December 31, 2001.
(Y) Parenthetical disclosure of a foreign country in the security
description represents country of a foreign issuer; however, security is
U.S. dollar-denominated.
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
See notes to
financial statements.
ASSETS AND
LIABILITIES
December 31, 2001
This Statement
of Assets and
Liabilities is the
Fund's balance
sheet. It shows
the value of
what the Fund
owns, is due
and owes. You'll
also find the net
asset value and
the maximum
offering price
per share.
ASSETS
Investments at value (cost $164,773,066) $183,325,356
Cash 10,038
Receivable for shares sold 3,303
Dividends and interest receivable 1,425,171
Other assets 32,752
Total assets 184,796,620
LIABILITIES
Payable for shares repurchased 25,822
Payable to affiliates 270,017
Other payables and accrued expenses 86,026
Total liabilities 381,865
NET ASSETS
Capital paid-in 171,096,146
Accumulated net realized loss on investments (5,212,743)
Net unrealized appreciation of investments 18,552,290
Distributions in excess of net investment income (20,938)
Net assets $184,414,755
NET ASSET VALUE PER SHARE
Based on net asset values and shares outstanding
Class A ($135,716,416 [DIV] 11,295,060 shares) $12.02
Class B ($46,200,141 [DIV] 3,845,212 shares) $12.01
Class C ($2,498,198 [DIV] 207,933 shares) $12.01
MAXIMUM OFFERING PRICE PER SHARE
Class A 1 ($12.02 [DIV] 95%) $12.65
Class C ($12.01 [DIV] 99%) $12.13
1 On single retail sales of less than $50,000. On sales of $50,000 or
more and on group sales the offering price is reduced.
See notes to
financial statements.
OPERATIONS
For the year ended
December 31, 2001
This Statement
of Operations
summarizes the
Fund's invest-
ment income
earned and
expenses
incurred in
operating the
Fund. It also
shows net gains
(losses) for the
period stated.
INVESTMENT INCOME
Interest (including income on securities loaned of
$6,590 and net of foreign withholding taxes of $9,980) $4,477,035
Dividends (net of foreign withholding taxes of $11,739) 3,228,128
Total investment income 7,705,163
EXPENSES
Investment management fee 1,209,354
Class A distribution and service fee 421,236
Class B distribution and service fee 590,483
Class C distribution and service fee 20,950
Transfer agent fee 755,858
Custodian fee 46,235
Accounting and legal services fee 40,932
Registration and filing fee 36,446
Auditing fee 35,700
Printing 16,923
Trustees' fee 8,946
Miscellaneous 8,253
Interest expense 2,639
Legal fee 2,034
Total expenses 3,195,989
Net investment income 4,509,174
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized loss on investments (4,988,031)
Change in net unrealized appreciation
(depreciation) of investments (11,228,682)
Net realized and unrealized loss (16,216,713)
Decrease in net assets from operations ($11,707,539)
See notes to
financial statements.
CHANGES IN
NET ASSETS
This Statement
of Changes in
Net Assets
shows how the
value of the
Fund's net assets
has changed
since the end of
the previous
period. The dif-
ference reflects
earnings less
expenses, any
investment gains
and losses, distri-
butions paid to
shareholders, if
any, and any
increase or
decrease in
money share-
holders invested
in the Fund.
YEAR YEAR
ENDED ENDED
12-31-00 12-31-01
INCREASE (DECREASE) IN NET ASSETS
From operations
Net investment income $4,833,771 $4,509,174
Net realized gain (loss) 10,569,027 (4,988,031)
Change in net unrealized
appreciation (depreciation) (21,755,889) (11,228,682)
Decrease in net assets resulting
from operations (6,353,091) (11,707,539)
Distributions to shareholders
From net investment income
Class A (3,174,634) (3,665,443)
Class B (1,558,890) (1,073,270)
Class C (16,230) (42,365)
From net realized gain
Class A (4,509,993) --
Class B (2,531,171) --
Class C (43,240) --
(11,834,158) (4,781,078)
From fund share transactions 1,522,961 (25,015,532)
NET ASSETS
Beginning of period 242,583,192 225,918,904
End of period 1 $225,918,904 $184,414,755
1 Includes undistributed net investment income of $66,657 and
distribution in excess of net investment income $20,938, respectively.
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
CLASS A SHARES
The Financial Highlights show how the Fund's net asset value for a share
has changed since the end of the previous period.
PERIOD ENDED 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 1
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $12.27 $13.33 $14.06 $14.05 $13.03
Net investment income 2 0.37 0.36 0.35 0.33 0.30
Net realized and unrealized
gain (loss) on investments 2.14 1.47 0.18 (0.59) (0.99)
Total from
investment operations 2.51 1.83 0.53 (0.26) (0.69)
Less distributions
From net investment income (0.37) (0.36) (0.36) (0.33) (0.32)
In excess of net
investment income -- -- -- 3 -- --
From net realized gain (1.08) (0.74) (0.18) (0.43) --
(1.45) (1.10) (0.54) (0.76) (0.32)
Net asset value,
end of period $13.33 $14.06 $14.05 $13.03 $12.02
Total return 4 (%) 20.79 14.01 3.89 (1.83) (5.23)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in millions) $84 $97 $131 $148 $136
Ratio of expenses to average
net assets (%) 1.22 1.21 1.22 1.31 1.37
Ratio of net investment income
to average net assets (%) 2.77 2.61 2.47 2.52 2.45
Portfolio turnover (%) 115 83 94 99 98
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
CLASS B SHARES
PERIOD ENDED 12-31-97 12-31-98 12-31-99 12-31-00 12-31-01 1
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $12.27 $13.33 $14.06 $14.05 $13.03
Net investment income 2 0.28 0.27 0.26 0.24 0.22
Net realized and unrealized
gain (loss) on investments 2.14 1.46 0.17 (0.59) (1.00)
Total from
investment operations 2.42 1.73 0.43 (0.35) (0.78)
Less distributions
From net investment income (0.28) (0.26) (0.26) (0.24) (0.24)
In excess of net
investment income -- -- -- 3 -- --
From net realized gain (1.08) (0.74) (0.18) (0.43) --
(1.36) (1.00) (0.44) (0.67) (0.24)
Net asset value,
end of period $13.33 $14.06 $14.05 $13.03 $12.01
Total return 4 (%) 19.96 13.23 3.16 (2.51) (5.99)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in millions) $101 $116 $112 $77 $46
Ratio of expenses to average
net assets (%) 1.91 1.88 1.92 2.01 2.077
Ratio of net investment income
to average net assets (%) 2.08 1.93 1.76 1.78 1.75
Portfolio turnover (%) 115 83 94 99 98
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
CLASS C SHARES
PERIOD ENDED 12-31-99 5 12-31-00 12-31-01 1
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $14.60 $14.05 $13.03
Net investment income 2 0.19 0.24 0.21
Net realized and unrealized loss on investments (0.37) (0.59) (0.99)
Total from investment operations (0.18) (0.35) (0.78)
Less distributions
From net investment income (0.19) (0.24) (0.24)
In excess of net investment income -- 3 -- --
From net realized gain (0.18) (0.43) --
(0.37) (0.67) (0.24)
Net asset value, end of period $14.05 $13.03 $12.01
Total return 4 (%) (1.15) 6 (2.51) (5.99)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in millions) -- 7 $1 $2
Ratio of expenses to average net assets (%) 1.84 8 2.01 2.07
Ratio of net investment income to average net assets (%) 1.88 8 1.93 1.76
Portfolio turnover (%) 94 99 98
1 As required, effective January 1, 2001 the Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment
Companies, as revised, and began amortizing premiums on debt securities.
The effect of this change for the year ended December 31, 2001 was to
decrease net investment income per share by $0.01, decrease net realized
and unrealized losses per share by $0.01, and, had the Fund not
amortized premiums on debt securities, the annualized ratio of net
investment income to average net assets would have been 2.50%, 1.80% and
1.80% for Class A, Class B and Class C shares, respectively. Per share
ratios and supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
2 Based on the average of the shares outstanding at the end of each month.
3 Less than $0.01 per share.
4 Assumes dividend reinvestment and does not reflect the effect of sales
charges.
5 Class C shares began operations on 5-3-99.
6 Not annualized.
7 Less than $500,000.
8 Annualized.
See notes to
financial statements.
NOTES TO
STATEMENTS
NOTE A
Accounting policies
John Hancock Balanced Fund Fund (the "Fund") is a diversified series of
John Hancock Investment Trust, an open-end investment management company
registered under the Investment Company Act of 1940. The investment
objectives of the Fund are to provide current income, long-term growth
of capital and income and preservation of capital.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A, Class B and Class C shares. The
Trustees authorized the issuance of Class I shares effective March 1,
2002. The shares of each class represent an interest in the same
portfolio of investments of the Fund and have equal rights to voting,
redemptions, dividends and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to
each class of shares in accordance with current regulations of the
Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class that bears distribution and service expenses
under terms of a distribution plan have exclusive voting rights to that
distribution plan.
Significant accounting policies of the Fund are as follows:
Valuation of investments
Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or at
fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60
days are valued at amortized cost, which approximates market value.
Joint repurchase agreement
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with other registered investment companies
having a management contract with John Hancock Advisers, LLC (the
"Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
LLC, may participate in a joint repurchase agreement transaction.
Aggregate cash balances are invested in one or more large repurchase
agreements, whose underlying securities are obligations of the U.S.
government and/or its agencies. The Fund's custodian bank receives
delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
Investment transactions
Investment transactions are recorded as of the date of purchase, sale or
maturity. Net realized gains and losses on sales of investments are
determined on the identified cost basis.
Discount and premium on securities
The Fund accretes discount and amortizes premium from par value on
securities from either the date of issue or the date of purchase over
the life of the security.
Class allocations
Income, common expenses and realized and unrealized gains (losses) are
determined at the fund level and allocated daily to each class of shares
based on the appropriate net assets of the respective classes.
Distribution and service fees, if any, are calculated daily at the class
level based on the appropriate net assets of each class and the specific
expense rate(s) applicable to each class.
Expenses
The majority of the expenses are directly identifiable to an individual
fund. Expenses that are not readily identifiable to a specific fund will
be allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and
the relative sizes of the funds.
Bank borrowings
The Fund is permitted to have bank borrowings for temporary or emergency
purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. The Fund has
entered into a syndicated line of credit agreement with various banks.
This agreement enables the Fund to participate with other funds managed
by the Adviser in an unsecured line of credit with banks, which permit
borrowings up to $500 million, collectively. Interest is charged to each
fund, based on its borrowing. In addition, a commitment fee is charged
to each fund based on the average daily unused portion of the line of
credit and is allocated among the participating funds. The average daily
loan balance during the period for which loans were outstanding amounted
to $2,605,000, and the weighted average interest rate was 4.62%.
Interest expense includes $2,639, paid under the line of credit. There
was no outstanding borrowing under the line of credit on December 31,
2001.
Securities lending
The Fund may lend securities to certain qualified brokers who pay the
Fund negotiated lender fees. These fees are included in interest income.
The loans are collateralized at all times with cash or securities with a
market value at least equal to the market value of the securities on
loan. As with other extensions of credit, the Fund may bear the risk of
delay of the loaned securities in recovery or even loss of rights in the
collateral, should the borrower of the securities fail financially. At
December 31, 2001, the Fund loaned securities having a market value of
$8,337,500 collateralized by securities in the amount of $8,449,992.
Federal income taxes
The Fund qualifies as a "regulated investment company" by complying with
the applicable provisions of the Internal Revenue Code and will not be
subject to federal income tax on taxable income which is distributed to
shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, at December 31, 2001, the Fund has
$5,209,333 of capital loss carryforward available, to the extent
provided by regulations, to offset future net realized capital gains. If
such carryforward is used by the Fund, no capital gain distribution will
be made. The entire Fund's carryforward expires December 31, 2009.
Dividends, interest and distributions
Dividend income on investment securities is recorded on the ex-dividend
date or, in the case of some foreign securities, on the date thereafter
when the Fund identifies the dividend. Interest income on investment
securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes, which are accrued as applicable.
The Fund records distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations, which may
differ from accounting principles generally accepted in the United
States of America. Distributions paid by the Fund with respect to each
class of shares will be calculated in the same manner, at the same time
and will be in the same amount, except for the effect of expenses that
may be applied differently to each class.
Use of estimates
The preparation of these financial statements, in accordance with
accounting principles generally accepted in the United States of
America, incorporates estimates made by management in determining the
reported amount of assets, liabilities, revenues and expenses of the
Fund. Actual results could differ from these estimates.
NOTE B
Management fee and transactions with affiliates and others
The Fund has an investment management contract with the Adviser. Under
the investment management contract, the Fund pays a monthly management
fee to the Adviser at an annual rate of 0.60% of the Fund's average
daily net asset value.
The Fund has Distribution Plans with John Hancock Funds, LLC ("JH
Funds"), a wholly owned subsidiary of the Adviser. The Fund has adopted
Distribution Plans with respect to Class A, Class B and Class C pursuant
to Rule 12b-1 under the Investment Company Act of 1940 to reimburse JH
Funds for the services it provides as distributor of shares of the Fund.
Accordingly, the Fund makes payments to JH Funds at an annual rate not
to exceed 0.30% of Class A average daily net assets and 1.00% of Class B
and Class C average daily net assets. A maximum of 0.25% of such
payments may be service fees as defined by the Conduct Rules of the
National Association of Securities Dealers. Under the Conduct Rules,
curtailment of a portion of the Fund's 12b-1 payments could occur under
certain circumstances.
Class A and Class C shares are assessed up-front sales charges. During
the year ended December 31, 2001, JH Funds received net up-front sales
charges of $207,885 with regard to sales of Class A shares. Of this
amount, $9,274 was retained and used for printing prospectuses,
advertising, sales literature and other purposes, $167,257 was paid as
sales commissions to unrelated broker-dealers and $31,354 was paid as
sales commissions to sales personnel of Signator Investors, Inc.
("Signator Investors"), a related broker-dealer. The Adviser's indirect
parent, John Hancock Life Insurance Company ("JHLICo"), is the indirect
sole shareholder of Signator Investors. During the year ended December
31, 2000, JH Funds received net up-front sales charges of $18,835 with
regard to sales of Class C shares. Of this amount, $15,818 was paid as
sales commissions to unrelated broker-dealers and $3,017 was paid as
sales commissions to sales personnel of Signator Investors.
Class B shares which are redeemed within six years of purchase are
subject to a contingent deferred sales charge ("CDSC") at declining
rates, beginning at 5.00% of the lesser of the current market value at
the time of redemption or the original purchase cost of the shares being
redeemed. Class C shares which are redeemed within one year of purchase
are subject to a CDSC at a rate of 1.00% of the lesser of the current
market value at the time of redemption or the original purchase cost of
the shares being redeemed. Proceeds from the CDSCs are paid to JH Funds
and are used in whole or in part to defray its expenses for providing
distribution-related services to the Fund in connection with the sale of
Class B and Class C shares. For the year ended December 31, 2001, CDSCs
received by JH Funds amounted to $108,025 for Class B shares and $337
for Class C shares.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc., an indirect subsidiary of JHLICo. The Fund pays a
monthly transfer agent fee based on the number of shareholder accounts,
plus certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax,
accounting and legal services for the Fund. The compensation for the
year was at an annual rate of 0.02% of the average net assets of the
Fund.
Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or
officers of the Adviser and/or its affiliates, as well as Trustees of
the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes
their receipt of this compensation under the John Hancock Group of Funds
Deferred Compensation Plan. The Fund makes investments into other John
Hancock funds, as applicable, to cover its liability for the deferred
compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The
deferred compensation liability and the related other asset are always
equal and are marked to market on a periodic basis to reflect any income
earned by the investment as well as any unrealized gains or losses. The
Deferred Compensation Plan investments had no impact on the operations
of the Fund.
NOTE C
Fund share transactions
This listing illustrates the number of Fund shares sold, reinvested and
repurchased during the last two periods, along with the corresponding
dollar value. The Fund has an unlimited number of shares authorized with
no par value.
YEAR ENDED 12-31-00 YEAR ENDED 12-31-01
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Sold 7,705,808 $103,545,692 5,688,878 $71,521,602
Distributions reinvested 563,483 7,431,015 290,907 3,483,996
Repurchased (6,220,255) (83,359,601) (6,034,634) (76,025,588)
Net increase (decrease) 2,049,036 $27,617,106 (54,849) ($1,019,990)
CLASS B SHARES
Sold 597,586 $7,953,109 740,566 $9,151,824
Distributions reinvested 282,664 3,726,478 81,372 976,274
Repurchased (2,943,304) (38,976,058) (2,855,240) (35,296,289)
Net decrease (2,063,054) ($27,296,471) (2,033,302) ($25,168,191)
CLASS C SHARES
Sold 123,570 $1,665,065 150,792 $1,865,776
Distributions reinvested 4,185 55,081 3,214 38,343
Repurchased (38,054) (517,820) (59,271) (731,470)
Net increase 89,701 $1,202,326 94,735 $1,172,649
NET INCREASE (DECREASE) 75,683 $1,522,961 (1,993,416) ($25,015,532)
NOTE D
Investment transactions
Purchases and proceeds from sales of securities, other than short-term
securities and obligations of the U.S. government, during the year ended
December 31, 2001, aggregated $140,381,880 and $137,887,789,
respectively.
Purchases and proceeds from sales of obligations of the U.S. government,
during the year ended December 31, 2001, aggregated $48,691,719 and
$66,307,242, respectively.
The cost of investments owned at December 31, 2001, including short-term
investments, for federal income tax purposes was $165,023,734. Gross
unrealized appreciation and depreciation of investments aggregated
$25,490,293 and $7,188,671, respectively, resulting in net unrealized
appreciation of $18,301,622. The difference between book basis and tax
basis net unrealized appreciation of investments is attributable
primarily to the tax deferral of losses on wash sales.
NOTE E
Reclassification of accounts
During the year ended December 31, 2001, the Fund has reclassified
amounts to reflect an increase in accumulated net realized loss on
investments of $134,837, a decrease in distributions in excess of net
investment income of $461,897 and a decrease in capital paid-in of
$327,060. This represents the amount necessary to report these balances
on a tax basis, excluding certain temporary difference, as of December
31, 2001. Additional adjustments may be needed in subsequent reporting
periods. These reclassifications, which have no impact on the net asset
value of the Fund, are primarily attributable to the computation of
distributable income and capital gains under federal tax rules versus
accounting principles generally accepted in the United States of
America. The calculation of net investment income (loss) per share in
the financial highlights excludes these adjustments.
NOTE F
Change in accounting principle
Effective January 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies, as revised, and
began amortizing premiums on debt securities. Prior to this date, the
Fund did not amortize premiums on debt securities. The cumulative effect
of this accounting change had no impact on the total net assets of the
Fund, but resulted in a $277,588 reduction in the cost of investments
and a corresponding increase in net unrealized appreciation on
investments, based on securities held as of December 31, 2000.
The effect of this change for the year ended December 31, 2001 was to
decrease net investment income by $106,333, decrease unrealized
appreciation on investments by $30,330 and decrease net realized loss on
investments by $136,663. The statement of changes in net assets and the
financial highlights for prior periods have not been restated to reflect
this change in presentation.
AUDITORS'
REPORT
Report of Ernst &
Young LLP,
Independent
Auditors
To the Board of Trustees and Shareholders of
John Hancock Balanced Fund
We have audited the accompanying statement of assets and liabilities of
the John Hancock Balanced Fund (the "Fund"), one of the portfolios
constituting the John Hancock Investment Trust, including the schedule
of the Fund's investments, as of December 31, 2001, and the related
statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities
owned as of December 31, 2001, by correspondence with the custodian and
brokers, or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of the John Hancock Balanced Fund portfolio of John
Hancock Investment Trust at December 31, 2001, the results of its
operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 8, 2002
TAX
INFORMATION
Unaudited
For federal income tax purposes, the following information is furnished
with respect to the taxable distributions of the Fund during its fiscal
year ended December 31, 2001.
The Fund has designated no distributions to shareholders as a capital
gain dividend.
With respect to the dividends paid by the Fund for the fiscal year ended
December 31, 2001, 67.84% of the distributions qualify for the corporate
dividends-received deduction available to corporations.
Shareholders will be mailed a 2001 U.S. Treasury Department Form
1099-DIV in January of 2002. This will reflect the tax character of all
distributions for calendar year 2001.
TRUSTEES
& OFFICERS
This chart provides information about the Trustees and Officers who
oversee your John Hancock fund. Officers elected by the Trustees manage
the day-to-day operations of the Fund and execute policies formulated by
the Trustees.
INDEPENDENT TRUSTEES
NUMBER OF
NAME, AGE JOHN HANCOCK
PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN
DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE
James F. Carlin 1, Born: 1940 1992 36
Chairman and CEO, Alpha Analytical Laboratories (chemical analysis);
Part Owner and Treasurer, Lawrence Carlin Insurance Agency, Inc. (since
1995); Part Owner and Vice President, Mone Lawrence Carlin Insurance
Agency, Inc. (since 1996); Director/Treasurer, Rizzo Associates (until 2000);
Chairman and CEO, Carlin Consolidated, Inc. (management/investments);
Director/Partner, Proctor Carlin & Co., Inc. (until 1999); Trustee,
Massachusetts Health and Education Tax Exempt Trust; Director of the
following: Uno Restaurant Corp. (until 2001), Arbella Mutual (insurance)
(until 2000), HealthPlan Services, Inc. (until 1999), Flagship Healthcare,
Inc. (until 1999), Carlin Insurance Agency, Inc. (until 1999), Chairman,
Massachusetts Board of Higher Education (until 1999).
William H. Cunningham, Born: 1944 1996 36
Former Chancellor, University of Texas System and former President of the
University of Texas, Austin, Texas; Chairman, IBT Technologies; Director of
the following: The University of Texas Investment Management Company
(until 2000), Hire.com (since 2000), STC Broadcasting, Inc. and Sunrise
Television Corp. (since 2000), Symtx, Inc. (since 2001), Adorno/Rogers
Technology, Inc. (since 2001), Pinnacle Foods Corporation (since 2000),
rateGenius (since 2000); LaQuinta Motor Inns, Inc. (hotel management
company) (until 1998), Jefferson-Pilot Corporation (diversified life insurance
company), New Century Equity Holdings (formerly Billing Concepts) (until
2001), eCertain (until 2001), ClassMap.com (until 2001), Agile Ventures
(until 2001), LBJ Foundation (until 2000), Golfsmith International, Inc. (until
2000), Metamor Worldwide (until 2000); AskRed.com (until 2001), Southwest
Airlines and Introgen; Advisory Director, Q Investments; Advisory Director,
Chase Bank (formerly Texas Commerce Bank - Austin).
Ronald R. Dion, Born: 1946 1998 36
Chairman and Chief Executive Officer, R.M. Bradley & Co., Inc.; Director,
The New England Council and Massachusetts Roundtable; Trustee, North
Shore Medical Center; Director, BJ's Wholesale Club, Inc. and a corporator
of the Eastern Bank; Trustee, Emmanuel College.
Charles L. Ladner, Born: 1938 1992 36
Chairman and Trustee, Dunwoody Village, Inc. (continuing care retire-
ment community); Senior Vice President and Chief Financial Officer, UGI
Corporation (Public Utility Holding Company) (retired 1998); Vice President
and Director for AmeriGas, Inc. (retired 1998); Director of AmeriGas
Partners, L.P. (until 1997)(gas distribution); Director, EnergyNorth, Inc.
(until 1995); Director, Parks and History Association (since 2001).
Steven Pruchansky 1, Born: 1944 1992 36
Chairman and Chief Executive Officer, Mast Holdings, Inc. (since 2000);
Director and President, Mast Holdings, Inc. (until 2000); Managing
Director, JonJames, LLC (real estate) (since 2001); Director, First Signature
Bank & Trust Company (until 1991); Director, Mast Realty Trust (until
1994); President, Maxwell Building Corp. (until 1991).
Norman H. Smith, Born: 1933 1992 36
Lieutenant General, United States Marine Corps; Deputy Chief of 1992
for Manpower and Reserve Affairs, Headquarters Marine Corps;
Commanding General III Marine Expeditionary Force/3rd Marine Division
(retired 1991).
John P. Toolan 1, Born: 1930 1992 36
Director, The Smith Barney Muni Bond Funds, The Smith Barney Tax-Free
Money Funds, Inc., Vantage 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).
INTERESTED TRUSTEES 3
NAME, AGE NUMBER OF
POSITION(S) HELD WITH FUND JOHN HANCOCK
PRINCIPAL OCCUPATION(S) AND OTHER TRUSTEE FUNDS OVERSEEN
DIRECTORSHIPS DURING PAST 5 YEARS SINCE 2 BY TRUSTEE
John M. DeCiccio, Born: 1948 2001 66
Trustee
Executive Vice President and Chief Investment Officer, John Hancock
Financial Services, Inc.; Director, Executive Vice President and Chief
Investment Officer, John Hancock Life Insurance Company; Chairman of
the Committee of Finance of John Hancock Life Insurance Company;
Director, John Hancock Subsidiaries, LLC, Hancock Natural Resource Group,
Independence Investment LLC, Independence Fixed Income LLC, John
Hancock Advisers, LLC (the "Adviser") and The Berkeley Financial Group,
LLC ("The Berkeley Group"), John Hancock Funds, LLC ("John Hancock
Funds"), Massachusetts Business Development Corporation; Director, John
Hancock Insurance Agency, Inc. ("Insurance Agency, Inc.") (until 1999) and
John Hancock Signature Services, Inc.("Signature Services") (until 1997).
Maureen R. Ford, Born: 1955 2000 66
Trustee, Chairman, President and Chief Executive Officer
Executive Vice President, John Hancock Financial Services, Inc., John
Hancock Life Insurance Company; Chairman, Director, President and
Chief Executive Officer, the Advisers and The Berkeley Group; Chairman,
Director and Chief Executive Officer, John Hancock Funds; Chairman,
Director and President, Insurance Agency, Inc.; Chairman, Director and
Chief Executive Officer, Sovereign Asset Management Corporation
("SAMCorp."); Director, Independence Investment LLC, Independence
Fixed Income LLC and Signature Services; Senior Vice President,
MassMutual Insurance Co. (until 1999); Senior Vice President,
Connecticut Mutual Insurance Co. (until 1996).
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NAME, AGE
POSITION(S) HELD WITH FUND
PRINCIPAL OCCUPATION(S) AND OTHER OFFICER
DIRECTORSHIPS DURING PAST 5 YEARS SINCE
William L. Braman, Born: 1953 2000
Executive Vice President and Chief Investment Officer
Executive Vice President and Chief Investment Officer, the Adviser and
each of the John Hancock funds; Director, SAMCorp., Executive Vice
President and Chief Investment Officer, Barring Asset Management, London
U.K. (until 2000).
Richard A. Brown, Born: 1949 2000
Senior Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, the
Adviser, John Hancock Funds, and The Berkeley Group; Second Vice
President and Senior Associate Controller, Corporate Tax Department,
John Hancock Financial Services, Inc. (until 2001).
Thomas H. Connors, Born: 1959 1992
Vice President and Compliance Officer
Vice President and Compliance Officer, the Adviser and each of the John
Hancock funds; Vice President, John Hancock Funds.
William H. King, Born: 1952 1992
Vice President and Treasurer
Vice President and Assistant Treasurer, the Adviser; Vice President and
Treasurer of each of the John Hancock funds; Assistant Treasurer of each
of the John Hancock funds (until 2001).
Susan S. Newton, Born: 1950 1992
Senior Vice President, Secretary and Chief Legal Officer
Senior Vice President, Secretary and Chief Legal Officer, SAMCorp., the
Adviser and each of the John Hancock funds, John Hancock Funds and The
Berkeley Group; Vice President, Signature Services (until 2000),
Director, Senior Vice President and Secretary, NM Capital.
The business address for all Trustees and Officers is 101 Huntington
Avenue, Boston, Massachusetts 02199.
The Statement of Additional Information of the Fund includes additional
information about members of the board of Trustees of the Fund and is
available, without charge, upon request, by calling 1-800-426-5523.
1 Member of Audit Committee
2 Each Trustee serves until resignation, retirement age or until his or
her successor is elected.
3 Interested Trustee holds positions with the Fund's investment adviser,
underwriter and certain other affiliates.
OUR FAMILY
OF FUNDS
- -------------------------------------------------------
Equity Balanced Fund
Core Equity Fund
Core Growth Fund
Core Value Fund
Focused Equity Fund
Growth Trends Fund
Large Cap Equity Fund
Large Cap Growth Fund
Mid Cap Growth Fund
Multi Cap Growth Fund
Small Cap Growth Fund
Small Cap Equity Fund
Sovereign Investors Fund
- -------------------------------------------------------
Sector Biotechnology Fund
Financial Industries Fund
Health Sciences Fund
Real Estate Fund
Regional Bank Fund
Technology Fund
- -------------------------------------------------------
Income Bond Fund
Government Income Fund
High Yield Bond Fund
Investment Grade Bond Fund
Strategic Income Fund
- -------------------------------------------------------
International European Equity Fund
Global Fund
International Fund
Pacific Basin Equities Fund
- -------------------------------------------------------
Tax-Free Income California Tax-Free Income Fund
High Yield Municipal Bond Fund
Massachusetts Tax-Free Income Fund
New York Tax-Free Income Fund
Tax-Free Bond Fund
- -------------------------------------------------------
Money Market Money Market Fund
U.S. Government Cash Reserve
ELECTRONIC
DELIVERY
Now available from
John Hancock Funds
Instead of receiving annual and semiannual reports and
prospectuses through the U.S. mail, we'll notify you by e-mail
when these documents are available for online viewing.
How does electronic delivery benefit you?
* No more waiting for the mail to arrive; you'll receive an
e-mail notification as soon as the document is ready for
online viewing.
* Reduces the amount of paper mail you receive from
John Hancock Funds.
* Reduces costs associated with printing and mailing.
Sign up for electronic delivery today at
www.jhancock.com/funds/edelivery
OUR WEB SITE
Available just a few clicks away--
www.jhfunds.com
Instant access to
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4 & 5 Star Funds
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IRA Information/Calculators
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Annual & Semiannual Reports
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Investment Professionals
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Mutual Fund FAQs
FOR YOUR
INFORMATION
INVESTMENT ADVISER
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, LLC
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
The Bank of New York
One Wall Street
New York, New York 10286
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116-5072
HOW TO
CONTACT US
On the Internet www.jhfunds.com
By regular mail John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
By express mail John Hancock Signature Services, Inc.
Attn: Mutual Fund Image Operations
529 Main Street
Charlestown, MA 02129
Customer service representatives 1-800-225-5291
24-hour automated information 1-800-338-8080
TDD line 1-800-544-6713
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.
A tag line below reads "JOHN HANCOCK FUNDS."]
1-800-225-5291
1-800-544-6713 (TDD)
1-800-338-8080 EASI-Line
www.jhfunds.com
Now available: electronic delivery
www.jhancock.com/funds/edelivery
This report is for the information of
the shareholders of the John Hancock
Balanced Fund.
3600A 12/01
2/02
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
JOHN HANCOCK INDEPENDENCE BALANCED FUND
SPECIAL MEETING OF SHAREHOLDERS - MAY 29, 2002
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) Maureen
R. Ford, Susan S. Newton and William H. King, with full power of substitution in
each, to vote all the shares of beneficial interest of John Hancock Independence
Balanced Fund ("Independence Balanced Fund") which the undersigned is (are)
entitled to vote at the Special Meeting of Shareholders (the "Meeting") of
Independence Balanced Fund to be held at 101 Huntington Avenue, Boston,
Massachusetts, on May 29, 2002 at 9:00 a.m., Boston time, and at any
adjournment(s) of the Meeting. All powers may be exercised by a majority of all
proxy holders or substitutes voting or acting, or, if only one votes and acts,
then by that one. Receipt of the Proxy Statement dated April 15, 2002 is hereby
acknowledged. If not revoked, this proxy shall be voted for the proposal.
Date , 2002
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
--------------------------------------------
--------------------------------------------
Signature(s)
NOTE: Signature(s) should
agree with the name(s)
printed herein. When
signing as attorney,
executor, administrator,
trustee or guardian, please
give your full name as
such. If a corporation,
please sign in full
corporate name by president
or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
THIS PROXY WILL BE VOTED IN FAVOR OF (FOR) PROPOSAL 1 IF NO SPECIFICATION IS
MADE BELOW. AS TO ANY OTHER MATTER, THE PROXY OR PROXIES WILL VOTE IN ACCORDANCE
WITH THEIR BEST JUDGEMENT.
PLEASE VOTE BY FILLING IN THE APPROPRIATE BOX BELOW
(1) To approve an Agreement and Plan of Reorganization between John Hancock
Independence Balanced Fund ("Independence Balanced Fund") and John
Hancock Balanced Fund ("Balanced Fund"). Under this Agreement,
Independence Balanced Fund would transfer all of its assets to Balanced
Fund in exchange for Class I shares of Balanced Fund. These shares will
be distributed proportionately to you and the other shareholders of
Independence Balanced Fund. Balanced Fund will also assume Balanced
Fund's liabilities.
FOR |_| AGAINST |_| ABSTAIN |_|
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD.
---------------
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Proxy Control Number in the area below. Your Internet Voting Control Number is
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Internet Control Number. If you have received multiple voting instruction
cards, each card has its own control number; you will need to login and provide
your voting instructions separately for each such distinct Control Number.
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C 2001 PROXY DIRECT TM - Service of ALAMO Direct Mail Svcs, Inc. All rights
reserved.
John Hancock Institutional Series Trust Proxy PROXY DIRECT TM
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John Hancock
------------------
JOHN HANCOCK FUNDS
i Below is the list of your holdings. Text next to each holding's name
indicates whether you wish to vote as the Board recommends or to submit your
individual instructions. To change between board recommended and individual
instructions, click on the name of the holding; then follow the additional
instructions. Unless you click on the name of the holding and the vote of
your choice, your vote will automatically be recorded on the proposal as
recommended by the Board.
YOU MUST CLICK VOTE NOW! BUTTON TO COMPLETE YOUR SESSION
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List of Your Holdings Voting instructions
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John Hancock Active Bond Fund as recommended by the Board
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John Hancock Core Growth Fund as recommended by the Board
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John Hancock Core Value Fund as recommended by the Board
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John Hancock Dividend Performers Fund as recommended by the Board
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John Hancock Independence Balanced Fund as recommended by the Board
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John Hancock International Equity Fund as recommended by the Board
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John Hancock Medium Capitalization Growth Fund as recommended by the Board
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John Hancock Small Cap Equity Fund Y as recommended by the Board
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Shareholder: John P. Sample
ALAMO Direct Mail Services,
Inc.
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Someoldtown, TS 12345-
6789
Acount: ALAMO-TST01 / 271-XXXX- John Hancock
XXXX-123 ------------------
JOHN HANCOCK FUNDS
Previous vote: None-Testing APPS/TR
Setup
John Hancock Independence Balanced Fund
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Applicable Campaign Proposals Mark All For Against Board
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1 A proposal to approve an agreement and ( ) For ( ) Against ( ) Board
Plan of Reorganization between John Hancock
Independend Balanced Fund ("Independence Balanced Fund")
and John Hancock Balanced Fund ("Balanced Fund"). Under
this Agreement, your fund would transfer all
of its assets to Balanced Fund in exchange for
Class I shares of Balanced Fund. These shares
would be distributed proportionately to you
and the other shareholders of Independence Balanced
Fund. Balanced Fund would also assume Independence
Balanced Fund's liabilities.
- --------------------------------------------------------------------------------
Any other business that may properly come before the meeting.
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Voting Instructions
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recommendations. Please change responses as appropriate
before submission.
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JOHN HANCOCK FUNDS
Thank you. Your voting instructions have been submitted for processing.
If necessary, you can revisit Internet Voting site any time before the Meeting
Date on Wednesday, May 29, 2002 at 9:00 AM [ET] to submit new voting
instructions.
This is the summary of your voting instructions delivered to John Hancock Funds.
It is not a receipt or vote confirmation. You may print this page for your
records.
Instructions submitted on _________, 2002
Transaction Code: __________________
John Hancock Independence Balanced Fund
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1 Approve an Agreement and Plan of Reorganization Voted For
If you wish to vote another card, please click here.
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Part B
Statement of Additional Information
JOHN HANCOCK BALANCED FUND
(the "Acquiring Fund", and a series of John Hancock Investment Trust)
JOHN HANCOCK INDEPENDENCE BALANCED
FUND (the "Acquired Fund", and a series of John
Hancock Institutional Series)
101 Huntington Avenue
Boston, MA 02199
1-800-225-5291
April 15, 2002
This Statement of Additional Information provides additional information and is
not a prospectus. It should be read in conjunction with the related proxy
statement and prospectus that is also dated April 15, 2002. This Statement of
Additional Information provides additional information about John Hancock
Balanced Fund and the Fund that it is acquiring, John Hancock Independence
Balanced Fund. Please retain this Statement of Additional Information for future
reference. A copy of the proxy statement and prospectus can be obtained free of
charge by calling John Hancock Signature Services, Inc., at 1-800-225-5291.
Table Of Contents
Page
Introduction 3
Note Regarding Pro Forma Financial Information 3
Additional Information about the Acquiring Fund 3
General Information and History 3
Investment Objective and Policies 3
Management of the Acquiring Fund 3
Control Persons and Principal Holders of Shares 3
Investment Advisory and Other Services 3
Brokerage Allocation 3
Capital Stock and Other Securities 3
Purchase, Redemption and Pricing of Acquiring Fund Shares 4
Tax Status 4
Underwriters 4
Calculation of Performance Data 4
Financial Statements 4
Additional Information about the Acquired Fund 4
General Information and History 4
Investment Objective and Policies 4
Management of the Acquired Fund 4
Investment Advisory and Other Services 4
Brokerage Allocation 4
Capital Stock and Other Securities 4
Purchase, Redemption and Pricing of Acquired Fund Shares 5
Tax Status 5
Underwriters 5
Calculation of Performance Data 5
Financial Statements 5
Exhibits
A - Statement of Additional Information, dated March 1, 2002, of the
Acquiring Fund including audited financial statements as of December 31,
2001.
B - Statement of Additional Information, dated July 1, 2001, of the
Acquired Fund including audited financial statements as of February 28,
2001 and unaudited financial statements as of August 30, 2001.
2
INTRODUCTION
This Statement of Additional Information ("SAI") is intended to supplement the
information provided in a proxy statement and prospectus dated April 15, 2002.
The proxy statement and prospectus has been sent to the shareholders of the
Acquired Fund in connection with the solicitation by the Trustees of the
Acquired Fund of proxies to be voted at the Special Meeting of Shareholders of
the Acquired Fund to be held on May 29, 2002. This Statement of Additional
Information incorporates by reference the Statement of Additional Information of
the Acquiring Fund, dated March 1, 2002, and the Statement of Additional
Information of the Acquired Fund, dated July 1, 2001. The SAI for the Acquiring
Fund and the SAI for the Acquired Fund are included with this Statement of
Additional Information.
NOTE REGARDING PRO FORMA FINANCIAL INFORMATION
In accordance with Item 14(a)(2) of Form N-14, pro forma financial statements
were not prepared for the proposed reorganization of the Acquired Fund into the
Acquiring Fund, since the net asset value of the Acquired Fund did not exceed
ten percent of the net asset value of the Acquiring Fund on February 12, 2002.
Additional Information About the Acquiring Fund
-----------------------------------------------
General Information and History
- -------------------------------
For additional information about the Acquiring Fund generally and its history,
see "Organization of the Fund" in the Acquiring Fund SAI attached hereto as
Exhibit A.
Investment Objective and Policies
- ---------------------------------
For additional information about the Acquiring Fund's investment objective,
policies and restrictions, see "Investment Objective and Policies" and
"Investment Restrictions" in the Acquiring Fund SAI attached hereto as Exhibit
A.
Management of the Acquiring Fund
- --------------------------------
For additional information about the Acquiring Fund's Board of Trustees,
officers and management personnel, see "Those Responsible for Management" in the
Acquiring Fund SAI attached hereto as Exhibit A.
Control Persons and Principal Holders of Shares
- -----------------------------------------------
For additional information about control persons of the Acquiring Fund and
principal holders of shares of the Acquiring Fund, see "Those Responsible for
Management" in the Acquiring Fund SAI attached hereto as Exhibit A.
Investment Advisory and Other Services
- --------------------------------------
For additional information about the Acquiring Fund's investment adviser,
custodian, transfer agent and independent accounts, see "Investment Advisory and
Other Services", "Distribution Contracts", "Transfer Agent Services", "Custody
of Portfolio", and "Independent Auditors" in the Acquiring Fund SAI attached
hereto as Exhibit A.
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about the Acquiring Fund's brokerage allocation
practices, see "Brokerage Allocation" in the Acquiring Fund SAI attached hereto
as Exhibit A.
Capital Stock and Other Securities
- ----------------------------------
For additional information about the voting rights and other characteristics of
the Acquiring Funds' shares of beneficial interest, see "Description of the
Fund's Shares" in the Acquiring Fund SAI attached hereto as Exhibit A.
Purchase, Redemption and Pricing of Acquiring Fund Shares
- ---------------------------------------------------------
For additional information about the purchase, redemption and pricing of the
Acquiring Fund's shares, see "Net Asset Value", "Sales Compensation", "Special
Redemptions", "Additional Services and Programs", and "Purchase and Redemptions
through Third Parties" in the Acquiring Fund SAI attached hereto as Exhibit A.
Tax Status
- ----------
For additional information about the tax status of the Acquiring Fund, see "Tax
Status" in the Acquiring Fund SAI, attached hereto as Exhibit A.
Underwriters
- ------------
For additional information about the Acquiring Fund's principal underwriter and
the distribution contract between the principal underwriter and the Acquiring
Fund, see "Distribution Contracts" in the Acquiring Fund SAI attached hereto as
Exhibit A.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of the Acquiring
Fund, see "Calculation of Performance" in the Acquiring Fund SAI attached hereto
as Exhibit A.
Financial Statements
- --------------------
Audited annual financial statements of the Acquiring Fund at December 31, 2001
are attached to the Acquiring Fund SAI, which is attached hereto as Exhibit A.
Additional Information About the Acquired Fund
----------------------------------------------
General Information and History
- -------------------------------
For additional information about the Acquired Fund generally and its history,
see "Organization of the Fund" in the Acquired Fund SAI attached hereto as
Exhibit B.
Investment Objective and Policies
- ---------------------------------
For additional information about the Acquired Fund's investment objectives,
policies and restrictions, see "Investment Objective and Policies" and
"Investment Restrictions" in the Acquired Fund SAI attached hereto as Exhibit B.
Management of Acquired Fund
- ---------------------------
For additional information about the Acquired Fund's Board of Trustees, officers
and management personnel, see "Those Responsible for Management" in the Acquired
Fund SAI attached hereto as Exhibit B.
Investment Advisory and Other Services
- --------------------------------------
For additional information about the Acquired Fund's investment adviser,
custodian, transfer agent and independent accountants, see "Investment Advisory
and Other Services", "Distribution Contracts", "Transfer Agent Services",
"Custody of Portfolio" and "Independent Auditors" in the Acquired Fund SAI
attached hereto as Exhibit B.
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about the Acquired Fund's brokerage allocation
practices, see "Brokerage Allocation" in the Acquired Fund SAI attached hereto
as Exhibit B.
Capital Stock and Other Securities
- ----------------------------------
For additional information about the voting rights and other characteristics of
the Acquired Fund's shares of beneficial interest, see "Description of the
Fund's Shares" in the Acquired Fund SAI attached hereto as Exhibit B.
2
Purchase, Redemption and Pricing of Acquired Fund Shares
- --------------------------------------------------------
For additional information about the purchase, redemption and pricing of the
Acquired Fund's shares, see "Net Asset Value", "Sales Compensation", "Additional
Services and Programs", "Special Redemptions" and "Purchases and Redemptions
Through Third Parties" in the Acquired Fund SAI attached hereto as Exhibit B.
Tax Status
- ----------
For additional information about the tax status of the Acquired Fund, see "Tax
Status" in the Acquired Fund SAI attached hereto as Exhibit B.
Underwriters
- ------------
For additional information about the Acquired Fund's principal underwriter and
the distribution contract between the principal underwriter and the Acquired
Fund, see "Distribution Contracts" in the Acquired Fund SAI attached hereto as
Exhibit B.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of the Acquired
Fund, see "Calculation of Performance" in the Acquired Fund SAI attached hereto
as Exhibit B.
Financial Statements
- --------------------
Audited annual financial statements of the Acquired Fund at February 28, 2001
and unaudited semi-annual financial statements as of August 31, 2001 are
attached to the Acquired Fund SAI, which is attached hereto as Exhibit B.
3
JOHN HANCOCK BALANCED FUND
Class I Shares
Statement of Additional Information
March 1, 2002
This Statement of Additional Information provides information about John Hancock
Balanced Fund (the "Fund") in addition to the information in the Fund's current
Prospectus for Class I shares (the "Prospectus"). The Fund is a diversified
series of John Hancock Investment Trust (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1001
Boston, Massachusetts 02217-1001
1-(888)-972-8696
TABLE OF CONTENTS
Page
Organization of the Fund .................................................. 2
Investment Objective and Policies ......................................... 2
Investment Restrictions ................................................... 17
Those Responsible for Management .......................................... 19
Investment Advisory and Other Services .................................... 27
Distribution Contracts .................................................... 30
Sales Compensation ........................................................ 30
Net Asset Value ........................................................... 30
Special Redemptions ....................................................... 31
Additional Services and Programs .......................................... 31
Purchase and Redemptions through Third Parties ............................ 32
Description of the Fund's Shares .......................................... 32
Tax Status ................................................................ 34
Calculation of Performance ................................................ 39
Brokerage Allocation ...................................................... 41
Transfer Agent Services ................................................... 43
Custody of Portfolio ...................................................... 43
Independent Auditors ...................................................... 44
Appendix A- Description of Investment Risk ................................ A-1
Appendix B-Description of Bond Ratings .................................... B-1
Financial Statements ...................................................... F-1
1
ORGANIZATION OF FUND
The Fund is a series of the Trust, an open-end investment management company
organized as a Massachusetts business trust under the laws of The Commonwealth
of Massachusetts. Prior to December 2, 1996, the Fund was a diversified series
of John Hancock Sovereign Investors Fund, Inc. Prior to May 1, 1999, the Fund
was called John Hancock Sovereign Balanced Fund.
John Hancock Advisers, LLC (prior to February 1, 2002, John Hancock Advisers,
Inc.) (the "Adviser") is the Fund's investment adviser. The Adviser is an
indirect, wholly-owned subsidiary of John Hancock Life Insurance Company
(formerly John Hancock Mutual Life Insurance Company)(the "Life Company"), a
Massachusetts life insurance company chartered in 1862, with national
headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is
wholly owned by John Hancock Financial Services, Inc., a Delaware corporation
organized in February, 2000.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. Appendix A contains further
information describing investment risks. The investment objective of the Fund is
non-fundamental. There is no assurance that the Fund will achieve its investment
objective.
The investment objectives of the Fund are to provide current income, long-term
growth of capital and income and preservation of capital without assuming what
the Adviser believes to be undue market risks. At times, however, because of
market conditions, the Fund may invest primarily for current income. The Fund
will allocate its investments among different types and classes of securities in
accordance with the Adviser's appraisal of economic and market conditions.
Shareholder approval is not required to effect changes in the Fund's investment
objectives.
The Fund may invest in any type or class of security. The Fund normally invests
at least 25% of assets in equity securities and at least 25% of the value of the
Fund's total assets will be invested in fixed income senior securities. Fixed
income securities may include both convertible and non-convertible debt
securities and preferred stock, and only that portion of their value attributed
to their fixed income characteristics, as determined by the Adviser, can be used
in applying the 25% test. The balance of the Fund's total assets may consist of
cash or (i) equity securities of established companies, (ii) equity and fixed
income securities of foreign corporations, governments or other issuers meeting
applicable quality standards as determined by the Fund's investment adviser,
(iii) foreign currencies, (iv) securities that are issued or guaranteed as to
interest and principal by the U.S. Government, its agencies, authorities or
instrumentalities, (v) obligations and equity securities of banks or savings and
loan associations (including certificates of deposit and bankers' acceptances);
and (vi) to the extent available and permissible, options and futures contracts
on securities, currencies and indices. Each of these investments is more fully
described below. The Fund's portfolio securities are selected mainly for their
investment character based upon generally accepted elements of intrinsic value,
including industry position, management, financial strength, earning power,
marketability and prospects for future growth. The distribution or mix of
various types of investments is based on general market conditions, the level of
interest rates, business and economic conditions and the availability of
investments in the equity or fixed income markets.
Equity securities, for purposes of the Fund's investment policy, are limited to
common stocks,
2
preferred stocks, investment grade convertible securities and warrants. At least
80% of the fund's common stock investments are "dividend performers". These are
companies that have typically increased their dividend payments over time, or
which managers believe demonstrate the potential for above-average stability of
growth of earnings and dividends.
The Fund's total investments in fixed income securities (other than commercial
paper) will be rated primarily within the four highest grades as determined by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A or Baa) or Standard &
Poor's Ratings Group ("S&P") (AAA, AA, A or BBB). Fixed income securities rated
Baa or BBB are considered medium grade obligations with speculative
characteristics; and adverse economic conditions or changing circumstances may
weaken their issuers' capacity to pay interest and repay principal.
Up to 20% of the Fund's assets may be in high yielding, fixed income securities
(junk bonds) rated as low as C by Moody's or S&P. These lower rated securities
are speculative to a high degree and often have very poor prospects of attaining
real investment standing.
The Fund diversifies its investments among a number of industry groups without
concentrating more than 25% of its assets in any particular industry. The Fund's
investments are subject to market fluctuation and the risks inherent in all
securities.
Assuming relatively stable economic conditions, it is anticipated that the
annual portfolio turnover rate will not usually exceed 100%. However, under
certain economic conditions, a higher turnover may be advisable to achieve the
Fund's objectives.
Investment in Foreign Securities. The Fund may invest up to 35% of its total
assets in securities of foreign companies. The Fund may invest directly in the
securities of foreign issuers as well as in the form of sponsored and
unsponsored American Depository Receipts ("ADRs"). European Depository Receipts
("EDRs") or other securities convertible into securities of foreign issuers.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by a United
States bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Issuers of
unsponsored ADRs are not required to disclose material information in the United
States. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs, in bearer form, are designed for use in European
securities markets.
Foreign Currency Transactions. The Fund's foreign currency transactions may be
conducted on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market.
The Fund may also enter into forward foreign currency exchange contracts to
hedge against fluctuations in currency exchange rates affecting a particular
transaction or portfolio position. Forward contracts are agreements to purchase
or sell a specified currency at a specified future date and price set at the
time of the contract. Transaction hedging is the purchase or sale of forward
foreign currency contracts with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities quoted or denominated in the same or related foreign currencies.
Portfolio hedging is the use of forward foreign currency contracts to offset
portfolio security positions denominated or quoted in the same or related
foreign currencies. The Fund may elect to hedge less than all of its foreign
portfolio positions as deemed appropriate by the Adviser and Sub-Adviser.
3
If the Fund purchases a forward contract, the Fund will segregate cash or liquid
securities in a separate account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of such forward contract.
The assets in the segregated account will be valued at market daily and if the
value of the securities in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
be equal the amount of the Fund's commitment with respect to such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
Risks of Foreign Securities. Investments in foreign securities may involve a
greater degree of risk than those in domestic securities. There is generally
less publicly available information about foreign companies in the form of
reports and ratings similar to those that are published about issuers in the
United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly, so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market whether
through over-the-counter markets or exchanges located in the countries where
principal offices of the issuers are located. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges. although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation, limitation on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends, in some cases capital gains and interest payable on certain of
the Fund's foreign portfolio securities may be subject to foreign withholding or
other foreign taxes, thus reducing
4
the net amount of income or gains available for distribution to the Fund's
shareholders.
These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. The Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
Repurchase Agreements. In a repurchase agreement the Fund buys a security for a
relatively short period (usually not more than 7 days) subject to the obligation
to sell it back to the issuer at a fixed time and price plus accrued interest.
The Fund will enter into repurchase agreements only with member banks of the
Federal Reserve System and with "primary dealers" in U.S. Government securities.
The Adviser will continuously monitor the creditworthiness of the parties with
whom it enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in or be
prevented from liquidating the underlying securities and could experience
losses, including the possible decline in the value of the underlying securities
during the period while the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and decline in value of the underlining securities or
of access to income during this period as well as expense of enforcing its
rights.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. To minimize
various risks associated with reverse repurchase agreements, the Fund will
establish a separate account consisting of liquid securities, of any type or
maturity in an amount at least equal to the repurchase prices of these
securities (plus any accrued interest thereon) under such agreements. The Fund
will also continue to be subject to the risk of a decline in the market value of
the securities sold under the agreements because it
5
will reacquire those securities upon effecting their repurchase. In addition,
the Fund will not enter into reverse repurchase agreements and other borrowings
exceeding in the aggregate 33% of the market value of its total assets. The Fund
will enter into reverse repurchase agreements only with federally insured banks
which are approved in advance as being creditworthy by the Trustees. Under
procedures established by the Trustees, the Adviser will monitor the
creditworthiness of the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. The Fund will not invest more than 15% of its net
assets on illiquid investments. If the Trustees determines, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments. The Trustees have adopted guidelines and delegated to
the Advisers the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Options on Securities, Securities Indices and Currency. The Fund may purchase
and write (sell) call and put options on any securities in which it may invest,
on any securities index based on securities in which it may invest or on any
currency in which Fund investments may be denominated. These options may be
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. The Fund may write covered put and
call options and purchase put and call options to enhance total return, as a
substitute for the purchase or sale of securities or currency, or to protect
against declines in the value of portfolio securities and against increases in
the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency written by the
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by the Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive the Fund of the opportunity to profit from an increase in the market
price of the securities or foreign currency assets in its portfolio. Writing
covered put options may deprive the Fund of the opportunity to profit from a
decrease in the market price of the securities or foreign currency assets to be
acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account with a value at least equal to the Fund's obligation under the option,
(ii) entering into an offsetting forward commitment and/or (iii) purchasing an
offsetting option or any other option which, by virtue of its exercise price or
6
otherwise, reduces the Fund's net exposure on its written option position. A
written call option on securities is typically covered by maintaining the
securities that are subject to the option in a segregated account. The Fund may
cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. The Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by
the Fund for the purpose of affirmatively benefiting from a decline in the price
of securities or currencies which it does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities or currency decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect
7
to options it has purchased, it would have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, the Fund may purchase and
sell interest rate futures contracts, and purchase and write call and put
options on these futures contracts. The Fund may also enter into closing
purchase and sale transactions with respect to any of these contracts and
options. The futures contracts may be based on various securities (such as U.S.
Government securities) and securities indices. All futures contracts entered
into by the Fund are traded on U.S. or foreign exchanges or boards of trade that
are licensed, regulated or approved by the Commodity Futures Trading Commission
("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
8
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that the Fund proposes to acquire. When
securities prices are falling, the Fund can seek to offset a decline in the
value of its current portfolio securities through the sale of futures contracts.
When securities prices are rising, the Fund, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases. The Fund may seek
to offset anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are quoted or denominated
by purchasing and selling futures contracts on such currencies.
The Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated decline
in market prices or foreign currency rates that would adversely affect the
dollar value of the Funds portfolio securities. Such futures contracts may
include contracts for the future delivery of securities held by the Fund or
securities with characteristics similar to those of the Fund's portfolio
securities. Similarly, the Fund may sell futures contracts on any currencies in
which its portfolio securities are quoted or denominated or in one currency to
hedge against fluctuations in the value of securities denominated in a different
currency if there is an established historical pattern of correlation between
the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities or foreign currency, to
alter the investment characteristics of or currency exposure associated with
portfolio securities or to gain or increase its exposure to a particular market
or currency.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
9
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities (or the currency in which
quoted or denominated) that the Fund owns or futures contracts will be purchased
to protect the Fund against an increase in the price of securities (or the
currency in which quoted or denominated) it intends to purchase. The Fund will
determine that the price fluctuations in the futures contracts and options on
futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or securities or instruments which
it expects to purchase. As evidence of its hedging intent, the Fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities (or assets denominated in the related currency) in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Fund than if
it had not entered into any futures contracts or options transactions.
10
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and a portfolio position which is intended to be protected,
the desired protection may not be obtained and the Fund may be exposed to risk
of loss. In addition, it is not possible to hedge fully or protect against
currency fluctuations affecting the value of securities denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuation.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Government Securities. Certain U.S. Government securities, including U.S.
Treasury bills, notes and bonds, and Government National Mortgage Association
certificates ("Ginnie Maes"), are supported by the full faith and credit of the
United States. Certain other U.S. Government securities, issued or guaranteed by
Federal agencies or government sponsored enterprises, are not supported by the
full faith and credit of the United States, but may be supported by the right of
the issuer to borrow from the U.S. Treasury. These securities include
obligations of the Federal Home Loan Mortgage Corporation ("Freddie Macs"), and
obligations supported by the credit of the instrumentality, such as Federal
National Mortgage Association Bonds ("Fannie Maes"). No assurance can be given
that the U.S. Government will provide financial support to such Federal
agencies, authorities, instrumentalities and government sponsored enterprises in
the future.
Ginnie Maes, Freddie Macs and Fannie Maes are mortgage-backed securities which
provide monthly payments which are, in effect, a "pass-through" of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans. Collateralized mortgage
obligations ("CMOs") in which the Fund may invest are securities issued by a
U.S. Government instrumentality that are collateralized by a portfolio of
mortgages or mortgage-backed securities. Mortgage-backed securities may be less
effective than traditional debt obligations of similar maturity at maintaining
yields during periods of declining interest rates. The Fund will not invest more
than 50% of its assets in mortgage-backed securities.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Funds as initial criteria for the selection of debt securities. Among the
factors which will be considered are the long-term ability of the issuer to pay
principal and interest and general economic trends. Appendix B contains further
information concerning the rating of Moody's and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund.
Lower Rated High Yield "High Risk" Securities. Lower rated securities are
generally referred to as junk bonds. Ratings are based largely on the historical
financial condition of the issuer.
11
Securities rated lower than Baa by Moody's or BBB by Standard & Poor's are
sometimes referred to as junk bonds. See the Appendix attached to this Statement
of Additional Information which describes the characteristics of the securities
in the various ratings categories. The Fund is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings. The credit ratings of Moody's and Standard &
Poor's such as those ratings described here, may not be changed by Moody's and
Standard & Poor's in a timely fashion to reflect subsequent economic events. The
credit ratings of securities do not reflect an evaluation of market risk. Debt
obligations rated in the lower ratings categories, or which are unrated, involve
greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the issuer's ability to make payments of interest
and principal. The market price and liquidity of lower rated fixed income
securities generally respond more to short-term corporate and market
developments than do those of higher rated securities, because these
developments are perceived to have a more direct relationship to the ability of
an issuer of lower rated securities to meet its ongoing debt obligations. The
Adviser seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions.
Reduced volume and liquidity in the high yield high risk bond market, or the
reduced availability of market quotations, will make it more difficult to
dispose of the bonds and to value accurately the Fund's assets. The reduced
availability of reliable, objective data may increase the Fund's reliance on
management's judgment in valuing high yield high risk bonds. In addition, the
Fund's investments in high yield high risk securities may be susceptible to
adverse publicity and investor perceptions, whether or not justified by
fundamental factors. The Fund's investments, and consequently its net asset
value, will be subject to the market fluctuations and risk inherent in all
securities. Increasing rate note securities are typically refinanced by the
issuers within a short period of time.
The market value of debt securities which carry no equity participation usually
reflects yields generally available on securities of similar quality and type.
When such yields decline, the market value of a portfolio already invested at
higher yields can be expected to rise if such securities are protected against
early call. In general, in selecting securities for its portfolio, the Fund
intends to seek protection against early call. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline. The Fund's portfolio may include debt securities which
sell at substantial discounts from par. These securities are low coupon bonds
which, during periods of high interest rates, because of their lower acquisition
cost tend to sell on a yield basis approximating current interest rates.
Investments in corporate fixed income securities may be in bonds, convertible
debentures and convertible or non-convertible preferred stock. The value of
convertible securities, while influenced by the level of interest rates, is also
affected by the changing value of the underlying common stock into which the
securities are convertible. The value of fixed income securities varies
inversely with interest rates.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior
12
security and will be excluded from the calculation of the Fund's borrowing and
other senior securities. For financial reporting and tax purposes, the Fund
treats mortgage dollar rolls as two separate transactions; one involving the
purchase of a security and a separate transaction involving a sale. The Fund
does not currently intend to enter into mortgage dollar roll transactions that
are accounted for as a financing.
Asset-Backed Securities. The Fund may invest a portion of its assets in
asset-backed securities. Asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, the Fund's ability to
maintain positions in these securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan services to retain possession of the underlying obligations. If the service
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the loaned securities. As a result, the Fund may
incur a loss or in the event of the borrower's bankruptcy may be delayed in or
prevented from liquidating the collateral. It is a fundamental policy of the
Fund not to lend portfolio securities having a total value in excess of 33% of
its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's
Fundamental Investment Restriction. Generally, warrants and stock purchase
rights do not carry with them the right to receive dividends or exercise voting
rights with respect to the underlying securities, and they do not represent any
rights in the assets of the issuer. As a result, an investment in warrants and
rights may be considered to entail greater investment risk than certain other
types of investments. In addition, the value of warrants and rights does not
necessarily change with the value of the underlying securities, and they cease
to have value if they are not exercised on or prior to their expiration date.
Investment in warrants and rights increases the potential profit or loss to be
realized from the investment of a given amount of the Fund's assets as compared
with investing the same amount in the underlying stock.
Short-Sales. The Fund may engage in short sales against the Box. In a short sale
against the
13
box, the Fund agrees to sell at a future date a security that it either
contemporaneously owns or has the right to acquire at no extra cost. If the
price of the security has declined at the time the Fund is required to deliver
the security, the Fund will benefit from the difference in the price. If the
price of the security has increased, the Fund will be required to pay the
difference.
Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the Fund to gain exposure to the benchmark market while fixing the
maximum loss that the Fund may experience in the event that market does not
perform as expected. Depending on the terms of the note, the Fund may forego all
or part of the interest and principal that would be payable on a comparable
conventional note; the Fund's loss cannot exceed this foregone interest and/or
principal. An investment in structured or hybrid notes involves risks similar to
those associated with a direct investment in the benchmark asset.
Swaps, Caps, Floor and Collars. As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps, and other types of swap agreements such as caps, collars and floors. In a
typical interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specified period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterpart's ability to perform, and may decline in value if the counterpart's
credit worthiness deteriorates. The Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account with its
custodian, cash or liquid, high grade debt securities equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlement with
respect to swap, cap, collar or floor transactions.
14
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests are subject to its 15% limitation on investments in
liquid securities.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a grater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Tax Status."
Brady Bonds. The Fund may invest in Brady Bonds and other sovereign debt
securities of countries that have restructured or are in the process of
restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt
securities issued by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness (generally, commercial bank debt). In restructuring its external
debt under the Brady Plan framework, a debtor nation negotiates with its
existing bank lenders as well as multilateral institutions such as the World
Bank and the International Monetary Fund (the "IMF"). The Brady Plan facilitates
the exchange of commercial bank debt for newly issued bonds known as Brady
Bonds. The World Bank and the IMF provide funds pursuant to loan agreements or
other arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to repurchase outstanding bank debt at a discount. Under these
arrangements IMF, debtor nations are required to agree implement domestic
monetary and fiscal reforms. These reforms have included the liberalization of
trade and foreign investment, the privatization of state-owned enterprises and
the setting of targets for public spending and borrowing. These policies and
programs promote the debtor country's ability to service its external
obligations and promote its economic growth and development. The Brady Plan only
sets forth general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case basis between
debtor nations and their creditors. The Adviser believes that economic reforms
undertaken by countries in connection with the issuance of Brady Bonds make the
debt of countries which have issued or have announced plans to issue Brady Bonds
an attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, Costa
Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest portion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt, bonds
issued at a discount of face value of such debt, bonds bearing an interest rate
15
which increases over time and bonds issued in exchange for the advancement of
new money by existing lenders. Certain Brady Bonds have been collateralized as
to principal due at maturity by U.S. Treasury zero coupon bonds with a maturity
equal to the final maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, the World Bank and the debtor nations'
reserves. In addition, the first two or three interest payments on certain types
of Brady Bonds may be collateralized by cash or securities agreed upon by
creditors. Although Brady Bonds may be collateralized by U.S. Government
securities, repayment of principal and interest is not guaranteed by the U.S.
Government.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities of any type or maturity equal in value to the
Fund's commitment. These assets will be valued daily at market, and additional
cash or securities will be segregated in a separate account to the extent that
the total value of the assets in the account declines below the amount of the
when-issued commitments. Alternatively, the Fund may enter into offsetting
contracts for the forward sale of other securities that it owns.
Short Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments, or to take advantage of yield disparities between various fixed
income securities in order to realize capital gains or improve income. Short
term trading may have the effect of increasing portfolio turnover rate. A high
rate of portfolio turnover (100% or greater) involves correspondingly greater
brokerage expenses. The Fund's portfolio turnover rate is set forth in the table
under the caption "Financial Highlights" in the Prospectus.
Defensive Investments. For temporary defensive purposes, the Fund may invest
some or all of its assets in investment grade short-term securities.
16
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means the approval by the lesser of (1) the holders of
67% or more of the Fund's shares represented at a meeting if more than 50% of
the Fund's outstanding shares are present in person or by proxy at that meeting
or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
(1) Issue senior securities, except as permitted by paragraph (2) below.
For purposes of this restriction, the issuance of shares in multiple
classes or series, the purchase or sale of options, futures
contracts and options on futures contracts, forward foreign currency
exchange contracts, forward commitments and repurchase agreements
entered into in accordance with the Fund's investment policies, and
the pledge, mortgage or hypothecation of the Fund's assets within
the meaning of paragraph (3) below, are not deemed to be senior
securities.
(2) Borrow money in amounts exceeding 33% of the Fund's total assets
(including the amount borrowed) taken at market value. Interest paid
on borrowings will reduce income available to shareholders.
(3) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if the
assets subject to such pledging, mortgaging or hypothecation do not
exceed 33% of the Fund's total assets taken at market value.
(4) Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, the Fund may be deemed to
be an underwriter for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate or any interest therein, including real
estate limited partnerships, except that the Fund may invest in
securities of corporate or governmental entities secured by real
estate or marketable interests therein or securities issued by
companies that invest in real estate or interests therein.
(6) Make loans, except for collateralized loans of portfolio securities
in accordance with the Fund's investment policies. The Fund does
not, for this purpose, consider the purchase of all or a portion of
an issue of bonds, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities, to be
the making of a loan.
(7) Buy or sell commodities, commodity contracts, puts, calls or
combinations thereof, except futures contracts and options on
securities, securities indices, currency and other financial
instruments, options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, interest rate or
currency swaps, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment
policies.
17
(8) Purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after such
purchase, the value of its investments in such industry would exceed
25% of its total assets taken at market value at the time of each
investment. This limitation does not apply to investments in
obligations of the U.S. Government or any of its agencies or
instrumentalities.
(9) Purchase securities of an issuer (other than the U.S. Government,
its agencies or instrumentalities), if, with respect to 75% of the
Fund's total assets,
(i) more than 5% of the Fund's total assets taken at market value
would be invested in the securities of such issuer, or,
(ii) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the
Fund.
In connection with the lending of portfolio securities under item (6) above,
such loans must at all times be fully collateralized and the Fund's custodian
must take possession of the collateral either physically or in book entry form.
Securities used as collateral must be marked to market daily.
Non-fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholders' approval.
The Fund may not:
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the management
of the Adviser to save commissions or to average prices among them is not
deemed to result in a joint securities trading account.
(b) Purchase securities on margin (except that it may obtain such short-term
credits as may be necessary for the clearance of transactions in
securities and forward foreign currency exchange contracts and may make
margin payments in connection with transactions in futures contracts and
options on futures) or make short sales of securities unless by virtue of
its ownership of other securities, the Fund has the right to obtain,
without the payment of any additional consideration, securities equivalent
in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions.
(c) Purchase 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/Trustees, purchase securities of other investment companies
within the John Hancock Group of Funds.
(d) Invest for the purpose of exercising control over or management of any
company.
18
(e) Invest more than 15% of its net assets in illiquid securities.
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.
The Funds will invest only in countries on the Adviser's Approved Country
Listing. The Approved Country Listing is a list maintained by the Adviser's
investment department that outlines all countries, including the United States,
that have been approved for investment by Funds managed by the Adviser.
In addition, no Fund may invest either directly or indirectly in any Russian
equity. Only certain funds can invest in certain types of Russian debt. These
funds are: Active Bond, Income, Investors, High Income, Bond, High Yield Bond,
Strategic Income and VA Strategic Income. Each of these funds may invest only up
to 5% of total assets in; (1) Sovereign Russian Debt and Municipal Fixed Income
Securities; (2) that are NOT ruble-denominated; (3) that are held physically
outside of Russia; and (4) have Euroclear settlement.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees, who elect officers who are
responsible for the day-to-day operations of the Fund and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Fund are
also officers or Directors of the Adviser, or officers and Directors of the
Fund's principal distributor, John Hancock Funds, LLC (prior to February 1,
2002, John Hancock Funds, Inc.) ("John Hancock Funds").
19
- -----------------------------------------------------------------------------------------------------------------------
Number of John
Position(s) Trustee/ Hancock Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- -----------------------------------------------------------------------------------------------------------------------
Independent Trustees
- -----------------------------------------------------------------------------------------------------------------------
James F. Carlin Trustee 1994 Chairman and CEO, Alpha Analytical 36
Born: 1940 Laboratories (chemical analysis); Part Owner
and Treasurer, Lawrence Carlin Insurance
Agency, Inc. (since 1995); Part Owner and
Vice President, Mone Lawrence Carlin
Insurance Agency, Inc. (since 1996);
Director/Treasurer, Rizzo Associates (until
2000); Chairman and CEO, Carlin
Consolidated, Inc. (management/investments);
Director/Partner, Proctor Carlin & Co., Inc.
(until 1999); Trustee, Massachusetts Health
and Education Tax Exempt Trust; Director of
the following: Uno Restaurant Corp. (until
2001), Arbella Mutual (insurance) (until
2000), HealthPlan Services, Inc. (until
1999), Flagship Healthcare, Inc. (until
1999), Carlin Insurance Agency, Inc. (until
1999), Chairman, Massachusetts Board of
Higher Education (until 1999).
- -----------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02119.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
20
- -----------------------------------------------------------------------------------------------------------------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
William H. Cunningham Trustee 1996 Former Chancellor, University of Texas 36
Born: 1944 System and former President of the
University of Texas, Austin, Texas;
Chairman, IBT Technologies; Director of the
following: The University of Texas
Investment Management Company (until 2000),
Hire.com (since 2000), STC Broadcasting,
Inc. and Sunrise Television Corp. (since
2000), Symtx, Inc. (since 2001),
Adorno/Rogers Technology, Inc. (since 2001),
Pinnacle Foods Corporation (since 2000),
rateGenius (since 2000), LaQuinta Motor
Inns, Inc. (hotel management company) (until
1998), Jefferson-Pilot Corporation
(diversified life insurance company), New
Century Equity Holdings (formerly Billing
Concepts) (until 2001), eCertain (until
2001), ClassMap.com (until 2001), Agile
Ventures (until 2001), LBJ Foundation (until
2000), LBJ Foundation (until 2000),
Golfsmith International, Inc. (until 2000),
Metamor Worldwide (until 2000), AskRed.com
(until 2001), Southwest Airlines and
Introgen; Advisory Director, Q Investments;
Advisory Director, Chase Bank (formerly
Texas Commerce Bank - Austin).
- -----------------------------------------------------------------------------------------------------------------------
Ronald R. Dion Trustee 1998 Chairman and Chief Executive Officer, R.M. 36
Born: 1946 Bradley & Co., Inc.; Director, The New
England Council and Massachusetts Roundtable;
Trustee, North Shore Medical Center;
Director, BJ's Wholesale Club, Inc. and a
corporator of the Eastern Bank; Trustee,
Emmanuel College.
- -----------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02119.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
21
- -----------------------------------------------------------------------------------------------------------------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Charles L. Ladner Trustee 1992 Chairman and Trustee, Dunwoody Village, Inc. 36
Born: 1938 (continuing care retirement community);
Senior Vice President and Chief Financial
Officer, UGI Corporation (Public Utility
Holding Company) (retired 1998); Vice
President and Director for AmeriGas, Inc.
(retired 1998); Director of AmeriGas
Partners, L.P. (until 1997)(gas
distribution); Director, EnergyNorth, Inc.
(until 1995); Director, Parks and History
Association (since 2001).
- -----------------------------------------------------------------------------------------------------------------------
Steven Pruchansky Trustee 1992 Chairman and Chief Executive Officer, Mast 36
Born: 1944 Holdings, Inc. (since 2000); Director and
President, Mast Holdings, Inc. (until 2000);
Managing Director, JonJames, LLC (real
estate)(since 2001); Director, First
Signature Bank & Trust Company (until 1991);
Director, Mast Realty Trust (until 1994);
President, Maxwell Building Corp. (until
1991).
- -----------------------------------------------------------------------------------------------------------------------
Norman H. Smith Trustee 1992 Lieutenant General, United States Marine 36
Born: 1933 Corps; Deputy Chief of Staff for Manpower
and Reserve Affairs, Headquarters Marine
Corps; Commanding General III Marine
Expeditionary Force/3rd Marine Division
(retired 1991).
- -----------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02119.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
22
- -----------------------------------------------------------------------------------------------------------------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
John P. Toolan Trustee 1992 Director, The Smith Barney Muni Bond Funds, The 36
Born: 1930 Smith Barney Tax-Free Money Funds, Inc.,
Vantage 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).
- -----------------------------------------------------------------------------------------------------------------------
Interested Trustees
- -----------------------------------------------------------------------------------------------------------------------
John M. DeCiccio (3) Trustee 2001 Executive Vice President and Chief 66
Born: 1948 Investment Officer, John Hancock Financial
Services, Inc.; Director, Executive Vice
President and Chief Investment Officer, John
Hancock Life Insurance Company; Chairman of
the Committee of Finance of John Hancock
Life Insurance Company; Director, John
Hancock Subsidiaries, LLC, Hancock Natural
Resource Group, Independence Investment LLC,
Independence Fixed Income LLC, John Hancock
Advisers, LLC (the "Adviser") and The
Berkeley Financial Group, LLC ("The Berkeley
Group"), John Hancock Funds, LLC ("John
Hancock Funds"), Massachusetts Business
Development Corporation; Director, Insurance
Agency, Inc. (until 1999) and John Hancock
Signature Services, Inc.("Signature
Services") (until 1997).
- -----------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02119.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
23
- ----------------------------------------------------------------------------------------------------------------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Maureen R. Ford (3) Trustee, 2000 Executive Vice President, John Hancock 66
Born: 1955 Chairman, Financial Services, Inc., John Hancock Life
President Insurance Company; Chairman, Director,
and Chief President and Chief Executive Officer, the
Executive Advisers and The Berkeley Group; Chairman,
Officer Director and Chief Executive Officer, John
Hancock Funds, Chairman, Director and
President, Insurance Agency, Inc; Chairman,
Director and Chief Executive Officer,
Sovereign Asset Management Corporation
("SAMCorp."); Director, Independence
Investment LLC, Independence Fixed Income LLC
and Signature Services, Inc.; Senior Vice
President, MassMutual Insurance Co. (until
1999); Senior Vice President, Connecticut
Mutual Insurance Co. (until 1996).
- ----------------------------------------------------------------------------------------------------------------------
Principal Officers who
are not Trustees
- ----------------------------------------------------------------------------------------------------------------------
William L. Braman Executive 2000 Executive Vice President and Chief Investment
Born: 1953 Vice Officer, the Adviser and each of the John
President Hancock funds; Director, SAMCorp., Executive
and Chief Vice President and Chief Investment Officer,
Investment Baring Asset Management, London U.K. (until
Officer 2000).
- ----------------------------------------------------------------------------------------------------------------------
Richard A. Brown Senior Vice 2000 Senior Vice President, Chief Financial Officer
Born: 1949 President and Treasurer, the Adviser, John Hancock
and Chief Funds, and The Berkeley Group; Second Vice
Financial President and Senior Associate Controller,
Officer Corporate Tax Department, John Hancock
Financial Services, Inc. (until 2001).
- ----------------------------------------------------------------------------------------------------------------------
Thomas H. Connors Vice 1991 Vice President and Compliance Officer, the
Born: 1959 President Adviser and each of the John Hancock funds;
and Vice President, John Hancock Funds.
Compliance
Officer
- ----------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02119.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
24
- ---------------------------------------------------------------------------------------------------------------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- ---------------------------------------------------------------------------------------------------------------------
William H. King Vice 1992 Vice President and Assistant Treasurer, the
Born: 1952 President Adviser; Vice President and Treasurer of
and each of the John Hancock funds; Assistant
Treasurer Treasurer of each of the John Hancock funds
(until 2001).
- ---------------------------------------------------------------------------------------------------------------------
Susan S. Newton Senior Vice 1984 Senior Vice President, Secretary and Chief
Born: 1950 President, Legal Officer, SAMCorp., the Adviser and
Secretary each of the John Hancock funds, John
and Chief Hancock Funds and The Berkeley Group; Vice
Legal Officer President, Signature Services (until
2000), Director, Senior Vice President and
Secretary, NM Capital.
- ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02119.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
The Fund's Board of Trustees currently has five standing Committees: the Audit
Committee, the Administration Committee, the Contracts/Operations Committee, the
Investment Performance Committee and the Coordinating Committee. Each Committee
is comprised of Independent Trustees who are not "interested persons". The Audit
Committee members are Messrs. Carlin, Ladner and Toolan. The Audit Committee
recommends to the full board auditors for the Fund, monitors and oversees the
audits of the Fund, communicates with both independent auditors and internal
auditors on a regular basis and provides a forum for the auditors to report and
discuss any matters they deem appropriate at any time. The Audit Committee held
four meetings during the fiscal year ended December 31, 2001.
The Administration Committee's members are all of the Independent Trustees of
the Fund. The Administration Committee reviews the activities of the other four
standing committees and makes the final selection and nomination of candidates
to serve as Independent Trustees. The Administration Committee will consider
nominees recommended by shareholders to serve as Independent Trustees, provided
that shareholders submit recommendations in compliance with all of the pertinent
provisions of Rule 14a-8 under the Securities Exchange Act of 1934. The
Administration Committee also works with al Trustees on the selection and
election of officers of the Fund. The Administration Committee held four
meetings during the fiscal year ended December 31, 2001.
The Contracts/Operations Committee members are Messrs. Cunninghan and
Pruchansky. The Contracts/Operations Committee oversees the initiation,
operation, and renewal of contracts
25
between the Fund and other entities. These contracts include advisory and
subadvisory agreements, custodial and transfer agency agreements and
arrangements with other service providers. The Contracts/Operations Committee
held five meetings during the fiscal year ended December 31, 2001.
The Investment Performance Committee consists of Messrs. Dion and Smith. The
Investment Performance Committee monitors and analyzes the performance of the
Fund generally, consults with the adviser as necessary if the Fund requires
special attention, and reviews peer groups and other comparative standards as
necessary. The Investment Performance Committee held four meetings during the
fiscal year ended December 31, 2001.
The Coordinating Committee members are the chairpersons of the other four
standing committees. The Coordinating Committee assures consistency of action
among committees, reviews Trustee compensation, evaluates Trustee performance
and considers committee membership rotations as well as relevant corporate
governance issues.
The following table provides a dollar range indicating each Trustee's ownership
of equity securities of the Fund, as well as aggregate holdings of shares of
equity securities of all John Hancock Funds overseen by the Trustee, as of
December 31, 2001.
- -------------------------------------------------------------------------------------------------------------
Aggregate Dollar Range of
Dollar Range of Fund shares Owned holdings in John Hancock funds
Name of Trustee by Trustee overseen by Trustee
- -------------------------------------------------------------------------------------------------------------
Independent Trustees
- -------------------------------------------------------------------------------------------------------------
James F. Carlin $1-$10,000 $10,001-$50,000
- -------------------------------------------------------------------------------------------------------------
William H. Cunningham None $10,001-$50,000
- -------------------------------------------------------------------------------------------------------------
Ronald R. Dion $1-$10,000 Over $100,000
- -------------------------------------------------------------------------------------------------------------
Charles L. Ladner $10,001-$50,000 Over $100,000
- -------------------------------------------------------------------------------------------------------------
Steven R. Pruchansky None Over $100,000
- -------------------------------------------------------------------------------------------------------------
Norman H. Smith $10,001-$50,000 Over $100,000
- -------------------------------------------------------------------------------------------------------------
John P. Toolan $1-$10,000 $50,001-$100,000
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Interested Trustees
- -------------------------------------------------------------------------------------------------------------
John M. DeCiccio None Over $100,000
- -------------------------------------------------------------------------------------------------------------
Maureen R. Ford $1-$10,000 Over $100,000
- -------------------------------------------------------------------------------------------------------------
The following table provides information regarding the compensation paid by the
Fund and the other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Mr. DeCiccio and Ms. Ford, each a
non-independent Trustee, and each of the officers of the Fund who are interested
persons of the Adviser, and/or affiliates are compensated by the Adviser and
receive no compensation from the Fund for their services.
26
Aggregate Total Compensation from all Funds
Compensation in John Hancock Fund Complex to
Trustees From the Fund(1) Trustees (2)
- -------- ---------------- ---------------------------------
James F. Carlin $1,265 $ 75,000
William H. Cunningham* 1,216 72,100
Ronald R. Dion* 1,265 75,000
Charles L. Ladner 1,267 75,100
Steven R. Pruchansky* 1,215 72,000
Norman H. Smith* 1,316 78,000
John P. Toolan* 1,215 72,000
------ --------
Total $8,759 519,200
(1) Compensation is for fiscal period ended December 31, 2001.
(2) Total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is for the calendar year ended December 31,
2001. As of that date, there were sixty-six funds in the John
Hancock Fund Complex, with each of these Independent Trustees
serving on thirty-six funds.
(*) As of December 31, 2001 the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock fund complex for Mr.
Cunningham was $540,844, for Mr. Dion was $5,636, for Ms. McCarter
was $147,567 (resigned as of October 1, 1998), for Mr. Pruchansky
was $117,545, for Mr. Smith was $202,737 and for Mr. Toolan was
$621,800 under the John Hancock Deferred Compensation Plan for
Independent Trustees (the "Plan").
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.
The officers and Trustees of the Fund as a group beneficially owned less than 1%
of the outstanding shares of the Fund and no shareholders of record beneficially
owned 5% or more of the outstanding Class I shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has approximately $30 billion in assets under
management in its capacity as investment adviser to the Fund and other funds in
the John Hancock group of funds, as well as retail and institutional privately
managed accounts. 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 approximately $100 billion, the Life Company is one
of the ten largest life insurance companies in the United States, and carries a
high rating from Standard & Poor's and A.M. Best. Founded in 1862, the Life
Company has been serving clients for over 130 years.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser, which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments
27
should be purchased, held, sold or exchanged, and (b) provide supervision over
all aspects of the Fund's operations except those which are delegated to a
custodian, transfer agent or other agent.
The Fund bears all costs of its organization and operation, including but not
limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies; expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses of redeeming shares;
brokerage and other expenses connected with the execution of portfolio
securities transactions; expenses pursuant to the Fund's plan of distribution;
fees and expenses of custodians including those for keeping books and accounts,
maintaining a committed line of credit and calculating the net asset value of
shares; fees and expenses of transfer agents and dividend disbursing agents;
legal, accounting, financial, management, tax and auditing fees and expense of
the Fund (including an allocable portion of the cost of the Adviser's employees
rendering such services to the Fund; the compensation and expenses of Trustees
who are not otherwise affiliated with the Trust, the Adviser or any of their
affiliates; expenses of Trustees' and shareholders' meetings; trade association
membership; insurance premiums; and any extraordinary expenses.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee which is based on an annual rate of 0.60% of the average
of the daily net assets of the Fund.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average net assets. The
Adviser retains the right to re-impose a fee and recover other payments to the
extent that, at the end of any fiscal year, the Fund's actual expenses at year
end fall below this limit.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or any affiliate provides investment
advice. Because of different investment objectives or other factors, a
particular security may be bought for one or more funds or clients when one or
more are selling the same security. If opportunities for purchase or sale of
securities by the Adviser for the Fund or for other funds or clients for which
the Adviser renders investment advice arise for consideration at or about the
same time, transactions in such securities will be made, insofar as feasible,
for the respective funds or clients in a manner deemed equitable to all of them.
To the extent that transactions on behalf of more than one client of the Adviser
or affiliates may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory Agreement, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its duties or from reckless disregard of its
obligations and duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any
28
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 Fund's Board of Trustees is responsible for overseeing the performance of
the Fund's investment adviser and determining whether to approve and renew the
Fund's Advisory Agreement. The Board has a standing request that the Adviser
provide the Board with certain information the Board has deemed important to
evaluating the short- and long-term performance of the Adviser. This information
includes periodic performance analysis and status reports from the Adviser and
quarterly Portfolio and Investment Performance Reports. The Fund's portfolio
managers meet with the Board from time to time to discuss the management and
performance of the Fund and respond to the Board's questions concerning the
performance of the Adviser. When the Board considers whether to renew an
investment advisory contract, the Board takes into account numerous factors,
including: (1) the nature, extent and quality of the services provided by the
Adviser; (2) the investment performance of the Fund's assets managed by the
adviser; (3) the fair market value of the services provided by the adviser; (4)
a comparative analysis of expense ratios of, and advisory fees paid by, similar
funds; (5) the extent to which the adviser has realized or will realize
economies of scale as the Fund grows; (6) other sources of revenue to the
Adviser or its affiliates from its relationship with the Fund and intangible or
"fall-out" benefits that accrue to the adviser and its affiliates, if relevant;
and (7) the Adviser's control of the operating expenses of the fund, such as
transaction costs, including ways in which portfolio transactions for the fund
are conducted and brokers are selected.
The primary factors underlying the Board's decision to renew the Fund's Advisory
Agreement were as follows:
o The Board determined that the performance results of the Fund and the
Adviser's responsive actions were reasonable, as compared with relevant
performance standards, including the performance results of comparable
balanced funds derived from data provided by Lipper Inc. and appropriate
market indexes.
o The Board decided that the advisory fee paid by the Fund was reasonable
based on the average advisory fee for comparable funds.
o The Board evaluated the Adviser's investment staff and portfolio
management process, and reviewed the composition and overall performance
of the Fund's portfolio on both a short-term and long-term basis. The
Board considered whether the Fund should obtain alternative portfolio
management services and concluded that, under all the circumstances and
based on its informed business judgement, the most appropriate course of
action in the best interest of the Fund's shareholders was to renew the
agreement with the Adviser.
The continuation of the Advisory Agreement and Distribution Agreement (discussed
below) was approved by all Trustees. The Advisory Agreement, and the
Distribution Agreement will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both Agreements may be terminated on 60 days
written notice by any party or by a vote of a majority of the outstanding voting
securities of the Fund and will terminate automatically if assigned.
For the fiscal years ended December 31, 1999, 2000 and 2001, the Fund paid the
Adviser fees of $1,403,318, $1,313,863 and $1,209,354, respectively.
29
Accounting and Legal Services Agreement. The Trust on behalf of the Fund, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this Agreement the Adviser provides the Fund with certain tax, accounting and
legal services. For the fiscal years ending December 31, 1999, 2000 and 2001,
the Fund paid the Adviser $41,436, $41,165 and $40,932, respectively, for
services under this Agreement.
Personnel of the Adviser and its affiliates may trade securities for their
personal accounts. The Fund also may hold, or may be buying or selling, the same
securities. To prevent the Fund from being disadvantaged, the Adviser(s) and
principal underwriter and the Fund have adopted a code of ethics which restricts
the trading activity of those personnel.
DISTRIBUTION CONTRACTS
The Fund has a Distribution Agreement with John Hancock Funds. Under the
Agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each 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. These Selling Brokers are authorized to designate other
intermediaries to receive purchase and redemption orders on behalf of the Fund.
John Hancock Funds accepts orders for the purchase of the shares of the Funds
which are continually offered at net asset value next determined.
SALES COMPENSATION
As part of its business strategy, John Hancock Funds may pay compensation to
financial services firms that sell the Fund's shares. These firms typically pass
along a portion of this compensation to your broker or financial representative.
John Hancock Funds may make a one-time payment at the time of initial purchase
out of its own resources to a Selling Broker who sells shares of the Fund. This
payment may not exceed 0.15% of the amount invested.
In addition, from time to time, John Hancock Funds, at its expense, may provide
significant additional compensation to financial services firms in connection
with their promotion of the Fund or sale of shares of the Fund. Such
compensation provided by John Hancock Funds may include, for example, financial
assistance to financial services firms in connection with their marketing and
sales development programs for their registered representatives and other
employees, as well as payment for travel expenses, including lodging, incurred
by registered representatives and other employees for such marketing and sales
development programs, as well as assistance for seminars for the public,
advertising and sales campaigns regarding one or more Funds, and other financial
services firms-sponsored events or activities. From time to time, John Hancock
Funds may provide expense reimbursements for special training of a financial
services firm's registered representatives and other employees in group
meetings. Other compensation, such as asset retention fees, finder's fees and
reimbursement for wire transfer fees may be offered to the extent not prohibited
by law or any self-regulatory agency, such as the NASD.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
30
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Trustees believe accurately reflects fair value.
The NAV for each fund and class is determined each business day at the close of
regular trading on the New York Stock Exchange (typically 4:00 p.m. Eastern
Time) by dividing a class's net assets by the number of its shares outstanding.
On any day an international market is closed and the New York Stock Exchange is
open, any foreign securities will be valued at the prior day's close with the
current day's exchange rate. Trading of foreign securities may take place on
Saturdays and U.S. business holidays on which a Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a Fund
for shares of the same class in any other John Hancock fund offering that class.
Investors may also exchange between the institutional funds and the Class I
shares.
31
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
PURCHASES AND REDEMPTIONS THROUGH THIRD PARTIES
Shares of the Fund may be purchased or redeemed through certain broker-dealers
or Service Agents ("Brokers"). Brokers may charge for their services or place
limitations on the extent to which you may use the services of the Fund. The
Fund will be deemed to have received a purchase or redemption order when an
authorized broker, or if applicable, a broker's authorized designee, receives
the order. If a broker is an agent or designee of the Fund, orders are processed
at the NAV next calculated after the broker receives the order. The broker must
segregate any orders it receives after the close of regular trading on the New
York Stock Exchange and transmit those orders to the Fund for execution at NAV
next determined. Some brokers that maintain nominee accounts with the Fund for
their clients charge an annual fee on the average net assets held in such
accounts for accounting, servicing, and distribution services they provide with
respect to the underlying Fund shares. The Adviser, the Fund and/or John Hancock
Funds, LLC (the Fund's principal distributor), share in the expense of these
fees.
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund, without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series and
classes, without further action by shareholders. As of the date of this
Statement of Additional Information, the Trustees have authorized shares of the
Fund and four other series. The Trustees have also authorized the issuance of
four classes of shares of the Fund, designated as Class A, Class B, Class C and
Class I. Class A, Class B and Class C shares are discussed in a separate
Statement of Additional Information.
The shares of each class of the Fund represent an equal proportionate interest
in the aggregate net assets attributable to that class of the Fund. Holders of
each class of shares have certain exclusive voting rights on matters relating to
their respective distribution plans. The different classes of the Fund may bear
different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time and on the same day and will be
in the same amount, except for differences resulting from the facts that (i) the
distribution and service fees relating to each class of shares will be borne
exclusively by that class; (ii) Class B and Class C shares will pay higher
distribution and service fees than Class A shares, and (iii) each class of
shares will bear any other class expenses properly allocable to that class of
shares, subject to the conditions the Internal Revenue Service imposes with
respect to the multiple-class structures. Similarly, the net asset value per
share may vary depending on which class of shares are purchased. No interest
will be paid on uncashed dividend or redemption checks.
32
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, Declaration of Trust contains an express disclaimer of
shareholder liability for acts, obligations and affairs of the Fund. The
Declaration of Trust also provides for indemnification out of the Fund's assets
for all losses and expenses of any shareholder held personally liable by reason
of being or having been a shareholder. The Declaration of Trust also provides
that no series of the Trust shall be liable for the liabilities of any other
series. Furthermore, no fund included in the Fund's prospectus shall be liable
for any other John Hancock fund. Liability is therefore limited to circumstances
in which the Fund itself would be unable to meet its obligations, and the
possibility of this occurrence is remote.
The Fund reserves the right to reject any application which conflicts with the
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested at net
asset value in the fund or funds from which a redemption was made or dividend
paid. Information provided on the account application may be used by the Fund to
verify the accuracy of the information or for background or financial history
purposes. A joint account will be administered as a joint tenancy with right of
survivorship, unless the joint owners notify Signature Services of a different
intent. A shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions, the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
33
TAX STATUS
The Fund, is treated as a separate entity for accounting and tax purposes, has
qualified and elected to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to continue to qualify for each taxable year. As such and by complying
with the applicable provisions of the Code regarding the sources of its income,
the timing of its distributions and the diversification of its assets, the Fund
will not be subject to Federal income tax on its taxable income (including net
realized capital gains) which is distributed to shareholders in accordance with
the timing requirements of the Code.
The Fund will be subject to a 4% nondeductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as long-term capital gain. (Net
capital gain is the excess (if any) of net long-term capital gain over net
short-term capital loss, and investment company taxable income is all taxable
income and capital gains, other than those gains and losses included in
computing net capital gain, after reduction by deductible expenses.) Some
distributions may be paid in January but may be taxable to shareholders as if
they had been received on December 31 of the previous year. The tax treatment
described above will apply without regard to whether distributions are received
in cash or reinvested in additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
If the Fund invests stock (including an option to acquire stock such as is
inherent in a convertible bond) in certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. An election may be available to ameliorate there
adverse tax consequences, but could require the Fund to recognize taxable income
or gain without the concurrent receipt of cash. These investments could also
result in the treatment of associated capital gains as ordinary income. The Fund
may limit and/or manage its holdings in passive foreign investment companies or
make an available election to minimize its tax liability or maximize its return
from these investments.
34
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency options, foreign currency forward contracts, foreign
currencies, or payables or receivables denominated in a foreign currency are
subject to Section 988 of the Code, which generally causes such gains and losses
to be treated as ordinary income and losses and may affect the amount, timing
and character of distributions to shareholders. Transactions in foreign
currencies that are not directly related to the Fund's investment in stock or
securities, including certain currency positions or could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its gross income for each taxable year. If
the net foreign exchange loss for a year treated as ordinary loss under Section
988 were to exceed the Fund's investment company taxable income computed without
regard to such loss, the resulting overall ordinary loss for such year would not
be deductible by the Fund or its shareholders in future years.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Some tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits or deductions
with respect to foreign income taxes or certain other foreign taxes ("qualified
foreign taxes") paid by the Fund, subject to certain provisions and limitations
contained in the Code, only if, among other things, more than 50% of the value
of the Fund's total assets at the close of any taxable year consists of stock or
securities of foreign corporations. The Fund anticipates that it normally will
not satisfy this 50% requirement and that, consequently, investors will not be
entitled to any foreign tax credits or deductions with respect to their
investments in the Fund.
The amount of the Fund's net realized capital gains, if any, in any given year
will result from sales of securities or transactions in options or futures made
with a view to the maintenance of a portfolio believed by the Fund's management
to be most likely to attain the Fund's objective. Such sales, and any resulting
gains or losses, may therefore vary considerably from year to year. At the time
of an investor's purchase of shares of the Fund, a portion of the purchase price
is often attributable to realized or unrealized appreciation in the Fund's
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions on these shares from such appreciation or income may be taxable to
such investor even if the net asset value of the investor's shares is, as a
result of the distributions, reduced below the investor's cost for such shares
and the distributions in reality represent a return of a portion of the purchase
price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder will ordinarily realize a taxable gain or loss
depending upon the amount of the proceeds and the investor's basis in his
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands 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 shares of the Fund cannot be taken into account for purposes of
determining gain or loss on the redemption or exchange of such shares within 90
days after their purchase to the extent shares of the Fund or another John
Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. This disregarded charge will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30
35
days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long- term capital gain with respect to such shares.
Shareholders should consult their own tax advisers regarding their particular
circumstances to determine whether a disposition of Fund shares is properly
treated as a sale for tax purposes, as is assumed in the foregoing discussion.
Although the Fund's present intention is to distribute, at least annually, all
net capital gain, if any, the Fund reserves the right to retain and reinvest all
or any portion of the excess, as computed for Federal income tax purposes, of
net long-term capital gain over net short-term capital loss in any year. The
Fund will not in any event distribute net capital gain realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as long-term
capital gain in his return for his taxable year in which the last day of the
Fund's taxable year falls, (b) be entitled either to a tax credit on his return
for, or to a refund of, his pro rata share of the taxes paid by the Fund, and
(c) be entitled to increase the adjusted tax basis for his shares by the
difference between his pro rata share of such excess and his pro rata share of
such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset net capital gains, if any, during the eight
years following the year of the loss. To the extent subsequent net capital gains
are offset by such losses, they would not result in Federal income tax liability
to the Fund and as noted above would not be distributed as such to shareholders.
The Fund has $5,209,333 capital loss carryforward available, to the extent
provided by regulations, to offset future net realized capital gains. The entire
amount of the loss carry forward expires October 31, 2009.
For purposes of the dividends received deduction available to corporations,
dividends received by the Fund, if any, from U.S. domestic corporations in
respect of the stock of such corporations held by the Fund, for U.S. Federal
income tax purposes, for at least 46 days (91 days in the case of certain
preferred stock) during a prescribed period extending before and after each such
dividend and distributed and properly designated by the Fund may be treated as
qualifying dividends. Corporate shareholders must meet the holding period
requirement stated above with respect to their shares of the Fund for each
dividend in order to qualify for the deduction and, if they have any debt that
is deemed under the Code directly attributable to such shares, may be denied a
portion of the dividends received deduction. The entire qualifying dividend,
including the otherwise deductible amount, will be included in determining the
excess (if any) of a corporate shareholder's adjusted current earnings over its
alternative minimum taxable income, which may increase its alternative minimum
tax liability, if any. Additionally, any corporate shareholder should consult
its tax adviser regarding the possibility that its basis in its shares may be
reduced, for Federal income tax purposes, by reason of "extraordinary dividends"
received with respect to the shares, and, to the extent such basis would be
reduced below zero, that current recognition of income would be required.
36
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
The Fund is required to accrue income on any debt securities that have more than
a de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market or constructive sale rules applicable to certain options, futures,
forwards, short sales or other transactions may also require the Fund to
recognize income or gain without a concurrent receipt of cash. Additionally,
some countries restrict repatriation which may make it difficult or impossible
for the Fund to obtain cash corresponding to its earnings or assets in those
countries. However, the Fund must distribute to shareholders for each taxable
year substantially all of its net income and net capital gains, including such
income or gain, to qualify as a regulated investment company and avoid liability
for any federal income or excise tax. Therefore, the Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash,
or borrow 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 property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the Fund may in its sole discretion provide relevant
information to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all taxable distributions to shareholders, as well as gross proceeds from the
redemption or exchange of Fund shares, except in the case of certain exempt
recipients, i.e., corporations and certain other investors distributions to
which are exempt from the information reporting provisions of the Code. Under
the backup withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be subject to
backup withholding of federal income tax in the case of non-exempt shareholders
who fail to furnish the Fund with their correct taxpayer identification number
and certain certifications required by the IRS or if the IRS or a broker
notifies the Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding as a result of failure to
report interest or dividend income. The Fund may refuse to accept an application
that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
Investments in debt obligations that are at risk of or in default present
special tax issues for the Fund. Tax rules are not entirely clear about issues
such as when the Fund may cease to accrue interest, original issue discount, or
market discount; when and to what extent deductions may be taken for bad debts
or worthless securities; how payments received on obligations in default should
be allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Fund, in the event
37
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.
Certain options, futures, and forward foreign currency contracts undertaken by
the Fund may cause the Fund to recognize gains or losses from marking to market
even though its positions have not been sold or terminated and affect the
character as long-term or short-term (or, in the case of certain foreign
currency contracts, ordinary income or loss) and timing of some capital gains
and losses realized by the Fund. Additionally, the Fund may be required to
recognize gain, but not loss, it an option, short sales or other transaction is
treated as a constructive sale of an appreciated financial position in the
Fund's portfolio. Also, certain of the Fund's losses on its transactions
involving options, futures or forward contracts and/or offsetting or successor
portfolio positions may be deferred rather than being taken into account
currently in calculating the Fund's taxable income or gains. Certain of these
transactions may also cause the Fund to dispose of investments sooner than would
otherwise have occurred. These transactions may therefore affect the amount,
timing and character of the Fund's distributions to shareholders. The Fund will
take into account the special tax rules (including consideration of any
available elections) applicable to options, futures or forward contracts in
order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain types of
investors, such as tax exempt entities, insurance companies and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of shares of the Fund may
also be subject to state and local taxes. Shareholders should consult their own
tax advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to non-resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from the Fund and, unless an effective IRS Form W-8, Form
W-8BEN or other authorized withholding certificate is on file and to backup
withholding on certain other payments from the Fund. Non-U.S. investors should
consult their tax advisers regarding such treatment and the application of
foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will not be required to pay any
Massachusetts income tax.
38
CALCULATION OF PERFORMANCE
Because Class I shares are new, there is no performance to report. Class A
performance is currently disclosed in the Fund's prospectus for Class I shares.
For the 30-day period ended Decmber 31, 2001, the annualized yields on Class A
was 1.91%, respectively.
As of December 31, 2001, the average annual total returns before taxes of Class
A shares of the Fund for the one, five and since the commencement of operations
on October 5, 1992 were -9.99%, 4.80% and 7.42%, respectively.
The average annual total return before taxes is computed by finding the average
annual compounded rate of return over the 1-year, 5-year, and 10-year periods,
or the period since the commencement of operations, that would equate the
initial amount invested to the ending redeemable value according to the
following formula:
P(1+T)^n = ERV
Where:
P= a hypothetical initial payment of $1,000.
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1-year, 5-year or 10-year periods (or
fractional portion).
The Fund discloses average annual total returns after taxes for Class A shares
for the one, five and 10 year periods ended December 31, 2001 in the prospectus.
After tax returns are computed using the historical highest individual federal
marginal income-tax rates and do not reflect the impact of state and local
taxes. Actual after-tax returns depend on the investor's tax situation and may
differ from those shown. The after-tax returns shown are not relevant to
investors who hold their fund shares through tax-deferred arrangements such as
401(k) plans or individual retirement accounts.
The average annual total return (after taxes on distributions) is computed by
finding the average annual compounded rate of return over the 1-year, 5-year and
10-year periods, or the period since the commencement of operations, that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
P(1+T)^n = ATV(D)
Where:
P= a hypothetical initial payment of $1,000.
T= average annual total return (after taxes on distributions)
n= number of years
ATV(D)= ending value of a hypothetical $1,000 payment made at
the beginning of the 1-year, 5-year, or 10-year
periods (or fractional portion) after taxes on fund
distributions but not after taxes on redemption.
39
The average annual total return (after taxes on distributions and redemption) is
computed by finding the average annual compounded rate of return over the
1-year, 5-year, and 10-year periods, or the period since the commencement of
operations, that would equate the initial amount invested to the ending
redeemable value according to the following formula:
P(1+T)^n = ATV(DR)
Where:
P= a hypothetical initial payment of $1,000.
T= average annual total return (after taxes on distributions and
redemption)
n= number of years
ATV(DR)= ending value of a hypothetical $1,000 payment made at the
beginning of the 1-year, 5-year or 10-year periods (or
fractional portion), after taxes on fund distributions
and redemption.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, these calculations
assume the maximum sales charge is included in the initial investment or the
CDSC is applied at the end of the period. These calculations assume that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
into account. Excluding the Fund's sales charge on Class A and from a total
return calculation produces a higher total return figure.
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share on the
last day of the period, according to the following standard formula:
Yield = 2 ( [ ( a-b/cd ) + 1 ] ^6 - 1)
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.
40
From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper-Fund Performance
Analysis," a publication which tracks mutual fund net assets, total return, and
yield. Comparisons may also be made to bank certificates of deposit ("CDs"),
which differ from mutual funds, such as the Fund, in several ways. The interest
rate established by the sponsoring bank is fixed for the term of a CD, there are
penalties for early withdrawal from CDs, and the principal on a CD is insured.
Performance rankings and ratings reported periodically in, and excerpts from,
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.
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 are made by
the Adviser pursuant to recommendations made by an investment committee of the
Adviser, which consists of directors of the Adviser and officers and Trustees
who are interested persons of the Fund. Orders for purchases and sales of
securities are placed in a manner, which, in the opinion of the 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 these transactions.
In the U.S. Government securities market, securities are generally traded on a
"net" basis with dealers acting as principal for their own account without a
stated commission, although the price of the security usually includes a profit
to the dealer. On occasion, certain money market instruments and agency
securities may be purchased directly from the issuer, in which case no
commissions or premiums are paid. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Conduct Rules of the National Association of Securities Dealers, Inc. and other
41
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Fund as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and in the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and, conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitment to allocate portfolio transactions upon any
prescribed basis. While the Adviser will be primarily responsible for the
allocation of the Fund's brokerage business, the policies and practices of the
Adviser in this regard must be consistent with the foregoing and will at all
times be subject to review by the Trustees. For the fiscal years ended December
31, 1999, 2000 and 2001, the Fund paid brokerage commissions in the amount of
$110,841, $326,123 and $244,469, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to these policies as the Board
may adopt from time to time. For the fiscal year ended December 31, 2001, the
Fund paid $26,817 in commissions to compensate brokers for research services
such as industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Pursuant
to procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through the Affiliated Broker. For the fiscal years ended December 31, 1999,
2000 and 2001, the Fund paid no brokerage commissions to any Affiliated Broker.
Signator may act as broker for the Fund on securities or commodities exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the Investment
Company Act. Commissions paid to an Affiliated Broker must be at least as
favorable as those which the Board believes to be contemporaneously charged by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold. A transaction would not be placed with an
Affiliated Broker if the Fund would have to pay a commission rate less favorable
than the Affiliated Broker's contemporaneous charges for comparable transactions
for its other most favored, but unaffiliated, customers, except for accounts for
which the Affiliated Broker acts as clearing broker for another brokerage firm,
and any customers of the Affiliated Broker not comparable to the Fund as
determined by a majority of the Trustees who are not interested persons (as
defined in the Investment Company Act) of the Trust, the Adviser or the
Affiliated Broker. Any such transactions would be subject to a good faith
determination by the Trustees that the compensation paid to the Affiliated
Broker is fair and reasonable. Because the Adviser, which is affiliated with
42
the Affiliated Broker, has, as an investment adviser to the Fund, the obligation
to provide investment management services, which includes elements of research
and related investment skills, such research and related skills will not be used
by the Affiliated Broker as a basis for negotiating commissions at a rate higher
than that determined in accordance with the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. Because of
this, client accounts in a particular style may sometimes not sell or acquire
securities as quickly or at the same prices as they might if each were managed
and traded individually.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each account pro rata based on the order
size. For high demand issues (for example, initial public offerings), shares
will be allocated pro rata by account size as well as on the basis of account
objective, account size ( a small account's allocation may be increased to
provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, strategies, duration benchmarks and credit and sector exposure. For
example, value funds will likely not participate in initial public offerings s
frequently as growth funds. In some instances, this investment procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtainable for it. On the other hand, to the extent permitted by law,
the Adviser may aggregate securities to be sold or purchased for the Fund with
those to be sold or purchased for other clients managed by it in order to obtain
best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., John Hancock Way, Suite 1001, Boston, MA
02217-1001, a wholly-owned indirect subsidiary of the Life Company is the
transfer and dividend paying agent for each Fund. The Fund pays Signature
Services a fee of 0.05% of its average daily net assets attributable to Class I
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 The Bank of New York, One Wall Street, New York, New York
10286. Under the custodian agreement, The Bank of New York is performing
custody, portfolio, Foreign Custody Manager and fund accounting services.
43
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has been
selected as the independent auditors of the Fund. The financial statements of
the Fund included in the Prospectus and this Statement of Additional Information
have been audited by Ernst & Young LLP for the periods indicated in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
44
APPENDIX-A
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of the fund's
risk profile in the prospectus.
A fund is permitted to utilize -- within limits established by the trustees --
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them, with examples of related securities and
investment practices included in brackets. See the "Investment Objectives and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the fund will earn income or
show a positive total return over any period of time -- days, months or years.
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). (e.g. short sales, financial
futures and options; securities and index options, currency contracts).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. (e.g. Borrowing; reverse repurchase agreements, repurchase
agreements, securities lending, non-investment-grade debt securities, financial
futures and options; securities and index options).
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. (e.g. Foreign
securities, financial futures and options; securities and index options,
currency contracts).
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Information risk The risk that key information about a security or market is
inaccurate or unavailable. (e.g. non-investment-grade debt securities, foreign
securities).
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values. (e.g.
Non investment-grade debt securities, financial futures and options; securities
and index options).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
Borrowing; reverse repurchase agreements, short-sales, when-issued securities
and forward commitments; financial futures and options; securities and index
options, currency contracts).
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that
the fund also holds, any loss generated by the
A-1
derivative should be substantially offset by gains on the hedged
investment, and vice versa. While hedging can reduce or eliminate losses,
it can also reduce or eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses
from speculative positions in a derivative may be substantially greater
than the derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. (e.g. short sales,
non-investment-grade debt securities; restricted and illiquid securities,
financial futures and options; securities and index options, currency
contracts).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Common to all stocks and bonds and the
mutual funds that invest in them. (e.g. Short sales, short-term trading,
when-issued securities and forward commitments, non-investment-grade securities,
foreign securities, financial futures and options; securities and index options,
restricted and illiquid securities).
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events. (e.g. Foreign securities).
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments. (e.g. Short sales, when -issued securities and forward commitments,
financial futures and options; securities and index options, currency
contracts).
Political risk The risk of losses directly attributable to government or
political actions of any sort. (e.g. Foreign securities)
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, reducing the value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for. (e.g. Non-investment-grade debt
securities, restricted and illiquid securities).
A-2
APPENDIX B
Moody's describes its ratings for fixed income securities as follows:
Fixed income securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Fixed income securities which are rated "Aa" are judged to be of high quality by
all standards. Together with the Aaa group they are generally referred to as
"high grade" obligations. They are rated lower than the best fixed income
securities because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
Fixed income securities which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Fixed income securities which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such fixed income securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Fixed income securities which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes fixed income securities in this class.
Fixed income securities which are rated "B" generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Fixed income securities which are rated "Caa" are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Fixed income securities which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
Fixed income securities which are rated "C" are the lowest rated class of fixed
income securities and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
S&P describes its ratings for fixed income securities as follows:
Fixed income securities rated "AAA" have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
Fixed income securities rated "AA" have a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.
Fixed income securities rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances
B-1
and economic conditions than fixed income securities in higher rated categories.
Fixed income securities rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas such securities normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for fixed income securities in this category than in higher
rated categories.
Fixed income securities rated "BB," "B," "CCC," "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. "BB" indicates the lowest degree of speculation and "C" the highest
degree of speculation. While such fixed income securities will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Moody's describes its three highest ratings for commercial paper as follows:
Issuers rated "P-1" (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. "P-1" repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well-established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protections; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
and (5) well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated "P-2" (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Issuers rated "P-3" (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P describes its three highest ratings for commercial paper as follows:
"A-1." This designation indicates that the degree of safety regarding timely
payment is very strong.
"A-2." Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1."
"A-3." Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B-2
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 2000 Annual
Report to Shareholders for the year ended December 31, 2001; (filed
electronically on February 25, 2002, accession number 0000928816-02-000144) and
are included in and incorporated by reference into Part B of the Registration
Statement for John Hancock Balanced Fund (file nos. 811-00560 and 2-10156).
John Hancock Investment Trust
John Hancock Balanced Fund
Statement of Assets and Liabilities as of December 31, 2001.
Statement of Operations for the year ended December 31, 2001.
Statement of Changes in Net Asset for each of the two years ended December
31, 2001.
Notes to Financial Statements.
Financial Highlights for each of the five years in the period ended
December 31, 2001.
Schedule of Investments as of December 31, 2001.
Report of Independent Auditors.
F-1
Supplements to the John Hancock Institutional Funds
Prospectus Dated July 2, 2001
John Hancock Small Cap Equity Fund
- ----------------------------------
On November 20, 2001, the Trustees of the John Hancock Small Cap Equity Fund
voted to change the Fund's name to the John Hancock Small Cap Equity Fund Y,
effective March 1, 2002.
John Hancock Active Bond Fund
- -----------------------------
John Hancock Medium Capitalization Growth Fund
- ----------------------------------------------
John Hancock Small Cap Equity Fund Y
- ------------------------------------
John Hancock International Equity Fund
- --------------------------------------
On February 26, 2002, the Trustees of the John Hancock Institutional Series
Trust (the "Trust") voted to recommend that shareholders of the Series of the
Trust listed below (the "Acquired Funds") approve the following tax-free
reorganizations:
- --------------------------------------------------------------------------------
Acquired Funds Acquiring Funds
- --------------------------------------------------------------------------------
Active Bond Fund Bond Fund
- --------------------------------------------------------------------------------
Medium Capitalization Growth Fund Mid Cap Growth Fund
- --------------------------------------------------------------------------------
Small Cap Equity Fund Y Small Cap Equity Fund
- --------------------------------------------------------------------------------
International Equity Fund International Fund
- --------------------------------------------------------------------------------
Under the terms of each reorganization, subject to shareholder approval at a
shareholder meeting scheduled for May 29, 2002, each Acquired Fund would
transfer all of its assets and liabilities to the corresponding Acquiring Fund
in a tax-free exchange for Class I shares of equal value of the Acquiring Fund.
Further information regarding each proposed reorganization will be contained in
a proxy statement and prospectus scheduled to be mailed to shareholders on or
about April 15, 2002.
Effective March 15, 2002, each Acquired Fund will be closed to all new accounts.
February 27, 2002
John Hancock Medium Capitalization Growth Fund
- ----------------------------------------------
On page 8, the "Portfolio Managers" section for the John Hancock Medium
Capitalization Growth Fund has been changed as follows:
PORTFOLIO MANAGERS
Paul J. Berlinguet
------------------
Vice president of adviser
Joined fund team in 2001
Joined adviser in 2001
U.S. equity investment manager
at Baring America Asset
Management (1989-2001)
Began business career in 1986
Robert J. Uek, CFA
------------------
Vice president of adviser
Joined fund team in 2001
Joined adviser in 1997
Corporate finance manager
at Ernst & Young (1994-1997)
Began business career in 1990
Timothy N. Manning
------------------
Joined fund team in 2000
Joined adviser in 2000
Analyst at State Street Research
(1999-2000)
Equity research associate at
State Street Research (1996-1999)
Began business career in 1993
January 7, 2002
John Hancock Small Cap Equity Fund
- ----------------------------------
On page 10, the "Portfolio Managers" section for the John Hancock Small Cap
Equity Fund has been changed as follows:
PORTFOLIO MANAGERS
James S. Yu, CFA
----------------
Vice president of adviser
Joined fund team in 2000
Joined adviser in 2000
Analyst at Merrill Lynch Asset
Management (1998-2000)
Analyst at Gabelli & Company
(1995-1998)
Began business career in 1991
Roger C. Hamilton
-----------------
Vice president of adviser
Joined fund team in 1999
Joined adviser in 1994
Began business career in 1980
December 10, 2001
John Hancock Institutional Funds
Supplement to the Prospectus and Statement of Additional Information
Dated July 2, 2001
John Hancock Small Capitalization Value Fund
- --------------------------------------------
On September 25, 2001, the Trustees of the John Hancock Small Capitalization
Value Fund voted to change the Fund's name to the John Hancock Small Cap Equity
Fund, effective September 30, 2001.
September 25, 2001
John Hancock
Institutional Funds
Prospectus
July 2, 2001
- --------------------------------------------------------------------------------
Independence Diversified Core Equity Fund II
Independence Medium Capitalization Fund
Independence Balanced Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these funds or determined whether the information in
this prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[LOGO](R)
--------------------
JOHN HANCOCK FUNDS
Contents
- --------------------------------------------------------------------------------
A fund-by-fund Independence Diversified Core Equity Fund II 4
summary of goals,
strategies, risks, Independence Medium Capitalization Fund 6
performance and
expenses. Independence Balanced Fund 8
Policies and Your account
instructions for Who can buy shares 10
opening, maintaining Opening an account 10
and closing an Buying shares 11
account in any Selling shares 12
institutional fund. Transaction policies 14
Dividends and account policies 14
Business structure 15
Further information Financial highlights 16
on the funds.
For more information back cover
Overview
- --------------------------------------------------------------------------------
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
[Clip Art] Goal and strategy The fund's particular investment goals and the
strategies it intends to use in pursuing those goals.
[Clip Art] Main risks The major risk factors associated with the fund.
[Clip Art] Past performance The fund's total return, measured year-by-year and
over time.
[Clip Art] Your expenses The overall costs borne by an investor in the fund,
including annual expenses.
JOHN HANCOCK INSTITUTIONAL FUNDS
These funds offer clearly defined investment strategies, each focusing on a
particular market segment and following a disciplined investment process.
Blended together or selected individually, these funds are designed to meet the
needs of investors seeking risk-managed investment strategies from seasoned
professional portfolio managers.
RISKS OF MUTUAL FUNDS
Mutual funds are not bank deposits and are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Because
you could lose money by investing in these funds, be sure to read all risk
disclosure carefully before investing.
THE MANAGEMENT FIRM
All John Hancock institutional funds are managed by John Hancock Advisers, Inc.
Founded in 1968, John Hancock Advisers is a wholly owned subsidiary of John
Hancock Financial Services, Inc. and manages more than $30 billion in assets.
3
Independence Diversified Core Equity Fund II
GOAL AND STRATEGY
[Clip Art] The fund seeks above-average total return, consisting of capital
appreciation and income. To pursue this goal, the fund invests in a diversified
portfolio of primarily large-capitalization stocks. The portfolio's risk profile
is substantially similar to that of the S&P 500 Index.
The managers select from a menu of stocks of approximately 550 companies that
evolves over time. Approximately 70% to 80% of these companies also are included
in the S&P 500 Index. The subadviser's investment research team is organized by
industry and tracks these companies to develop earnings estimates and five-year
projections for growth. A series of proprietary computer models use this
in-house research to rank the stocks according to their combination of:
o value, meaning they appear to be underpriced
o improving fundamentals, meaning they show potential for strong growth
This process, together with a risk/ return analysis against the S&P 500 Index,
results in a portfolio of approximately 100 to 130 of the stocks from the top
60% of the menu. The fund generally sells stocks that fall into the bottom 20%
of the menu.
In normal market conditions, the fund is almost entirely invested in stocks.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable distributions.
================================================================================
SUBADVISER
Independence Investment LLC
- ----------------------------------
Team responsible for day-to-day
investment management
A subsidiary of John Hancock
Financial Services, Inc.
Founded in 1982
Supervised by the adviser
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. All figures assume dividend reinvestment. Past performance
does not indicate future results.
- --------------------------------------------------------------------------------
Class I year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1996 1997 1998 1999 2000
20.08% 29.49% 30.16% 11.59% -6.88%
2001 total return as of March 31: -10.97%
Best quarter: Q4 '98, 25.14% Worst quarter: Q3 '98, -13.22%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Fund Index
1 year -6.88% -9.10%
5 year 16.03% 18.33%
Life of Class I - began 3/10/95 18.22% 20.91%
Index: Standard &Poor's 500 Index, an unmanaged index of 500 stocks.
4
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to stock
market movements.
Large-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform funds that focus on small- or
medium-capitalization stocks.
The fund's management strategy will influence performance significantly. If the
investment research team's earnings estimates or projections turn out to be
inaccurate, or if the proprietary computer models do not perform as expected,
the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially
inadequate or inaccurate financial information and social or political
instability.
================================================================================
YOUR EXPENSES
[Clip Art] Operating expenses are paid from the fund's assets, and therefore are
paid by shareholders indirectly.
- --------------------------------------------------------------------------------
Annual operating expenses
- --------------------------------------------------------------------------------
Management fee 0.50%
Other expenses 0.17%
Total fund operating expenses (1) 0.67%
The hypothetical example below shows what your expenses would be if you invested
$10,000 over the time frames indicated, assuming you reinvested all
distributions, that the average annual return was 5% and that your shares were
redeemed at the end of the time frame. The example is for comparison only, and
does not represent the fund's actual expenses and returns, either past or
future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
$68 $214 $373 $835
(1) The adviser has agreed to limit the fund's expenses to 0.70% of the fund's
average daily net assets (at least until 6/30/02). However, the fund's
expenses for the last fiscal year end amounted to 0.67%.
FUND CODES
Class I
- -----------------------------
Ticker COREX
CUSIP 410132708
Newspaper IndpCorll
JH fund number 425
5
Independence Medium Capitalization Fund
Goal and Strategy
[Clip Art] The fund seeks above-average total return. To pursue this goal, the
fund normally invests at least 65% of assets in a diversified portfolio of
medium-capitalization stocks. The managers select stocks of
medium-capitalization companies from a broader menu of stocks of approximately
550 companies that evolves over time. The portfolio's risk profile is
substantially similar to that of the S&P MidCap 400 Index.
For the fund, a medium-capitalization company is one whose capitalization is
within the S&P MidCap 400 Index's capitalization range. On May 31, 2001, this
index's range was $200 million to $10.2 billion. Companies whose capitalizations
are outside this index's range after purchase also are considered
medium-capitalization companies.
The subadviser's investment research team is organized by industry and tracks
the companies in the menu to develop earnings estimates and five-year
projections for growth. A series of proprietary computer models use this
in-house research to rank the stocks according to their combination of:
o value, meaning they appear to be underpriced
o improving fundamentals, meaning they show potential for strong growth
This process, together with a risk/return analysis against the S&P MidCap 400
Index, results in a portfolio of approximately 120 to 160 medium-capitalization
stocks from the top 60% of the menu. The fund generally sells stocks that fall
into the bottom 20% of the menu.
In normal market conditions, the fund is almost entirely invested in stocks.
In abnormal market conditions, the fund may temporarily invest more than 35% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable distributions.
================================================================================
SUBADVISER
Independence Investment LLC
- ---------------------------------
Team responsible for day-to-day
investment management
A subsidiary of John Hancock
Financial Services, Inc.
Founded in 1982
Supervised by the adviser
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help provide an indication of
the fund's risks. All figures assume dividend reinvestment. Past performance
does not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1996 1997 1998 1999 2000
17.10% 33.09% 12.25% 11.04% 17.46%
2001 total return as of March 31: -9.66%
Best quarter: Q4 '99, 18.00% Worst quarter: Q3 '98, -17.08%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Fund Index
1 year 17.46% 17.51%
5 year 17.94% 20.41%
Life of fund - began 10/2/95 18.07% 19.67%
Index: Standard & Poor's MidCap 400 Index, an unmanaged index of 400 stocks of
medium-capitalization companies.
6
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to stock
market movements. Medium-capitalization stocks as a group could fall out of
favor with the market, causing the fund to underperform funds that focus on
large-or small-capitalization stocks.
The fund's management strategy will influence performance significantly. If the
investment research team's earnings estimates or projections turn out to be
inaccurate, or if the proprietary computer models do not perform as expected,
the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Foreign investments carry additional risks, including potentially
inadequate or inaccurate financial information and social or political
instability.
================================================================================
YOUR EXPENSES
[Clip Art] Operating expenses are paid from the fund's assets, and therefore are
paid by shareholders indirectly.
- --------------------------------------------------------------------------------
Annual operating expenses
- --------------------------------------------------------------------------------
Management fee 0.80%
Other expenses 0.53%
Total fund operating expenses 1.33%
Expense reimbursement (at least until 6/30/02) 0.33%
Net annual operating expenses 1.00%
The hypothetical example below shows what your expenses would be after the
expense reimbursement (first year only)if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions, that the average
annual return was 5% and that your shares were redeemed at the end of the time
frame. The example is for comparison only, and does not represent the fund's
actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
$102 $389 $697 $1,573
FUND CODES
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Ticker JHMCX
CUSIP 410132872
Newspaper IndpMdCp
JH fund number 410
7
Independence Balanced Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks above-average total return through capital
appreciation and income. To pursue this goal, the fund invests in a diversified
portfolio of investment-grade bonds and primarily large-capitalization stocks.
The bond portfolio's risk profile is substantially similar to that of the Lehman
Brothers Aggregate Bond Index and the stock portfolio's risk profile is
substantially similar to that of the S&P 500 Index. The fund invests at least
25% of assets in senior debt securities and, in normal market conditions, at
least 25% of assets in stocks. The managers adjust the fund's asset mix to
changing market and economic conditions.
In actively managing the bond portfolio, the managers combine market and
individual bond data with management experience to assess the relative value of
particular bond market sectors and bonds. These include U.S. government,
corporate, mortgage-backed and asset-backed bonds and U.S. dollar denominated
foreign bonds. Using this approach, the managers select bonds of any maturity
from among these sectors to develop an investment-grade-quality, diversified
portfolio with a risk profile substantially similar to that of the Lehman
Brothers Aggregate Bond Index.
The fund's bonds will be investment grade, as determined by independent ratings
or the managers. The fund may retain bonds downgraded below investment grade.
In actively managing the stock portfolio, the managers select from a large,
evolving menu of stocks which they track to develop earnings estimates and
growth projections. Using computer models, they rank the stocks by their
combination of value and improving fundamentals. Adding a risk/return analysis
against the S&P 500 Index results in a portfolio of stocks from the top 60% of
the menu. The fund generally sells stocks that fall into the bottom 20% of the
menu.
In normal market conditions, the fund is almost entirely invested in stocks and
bonds.
In abnormal market conditions, the fund may temporarily invest more than 75% of
assets in investment-grade short-term securities. In these and other cases, the
fund might not achieve its goal.
================================================================================
SUBADVISER
Independence Investment LLC
- ---------------------------------
Team responsible for day-to-day
investment management
A subsidiary of John Hancock
Financial Services, Inc.
Founded in 1982
Supervised by the adviser
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with broad-based market
indices for reference). This information may help provide an indication of the
fund's risks. All figures assume dividend reinvestment. Past performance does
not indicate future results.
- --------------------------------------------------------------------------------
Year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1996 1997 1998 1999 2000
10.39% 17.42% 21.43% 7.15% -0.33%
2001 total return as of March 31: -6.00%
Best quarter: Q4 '98, 15.90% Worst quarter: Q3 '98, -6.68%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year -0.33% -9.10% 11.63%
5 year 10.95% 18.33% 6.46%
Life of fund - began 7/6/95 11.71% 19.36% 7.01%
Index 1: Standard & Poor's 500 Index, an unmanaged index of 500 stocks.
Index 2: Lehman Brothers Aggregate Bond Index, an unmanaged index of U.S.
government, corporate, mortgage-backed and asset-backed bonds.
8
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to stock and
bond market movements. Large-capitalization stocks as a group could fall out of
favor with the market, causing the fund to underperform balanced funds that
focus on small- or medium-capitalization stocks for their stock portfolios.
The fund's management strategy has a significant influence on fund performance.
If the investment research team's earnings estimates or projections turn out to
be inaccurate, or if the proprietary computer models do not perform as expected,
the fund could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Bonds could be downgraded in credit rating or go into default. Bond prices
generally fall when interest rates rise and longer maturity will increase
volatility.
o If interest-rate movements cause the fund's mortgage-backed or
asset-backed bonds or other callable securities to be paid off
substantially earlier or later than expected, the fund's share price or
yield could be hurt.
o Foreign investments carry additional risks, including potentially
inadequate or inaccurate financial information and social or political
instability.
The fund may trade securities actively, which may increase its transaction costs
(thus lowering performance) and increase your taxable distributions.
================================================================================
YOUR EXPENSES
[Clip Art] Operating expenses are paid from the fund's assets, and therefore are
paid by shareholders indirectly.
- --------------------------------------------------------------------------------
Annual operating expenses
- --------------------------------------------------------------------------------
Management fee 0.70%
Other expenses 0.22%
Total fund operating expenses 0.92%
Expense reimbursement (at least until 6/30/02) 0.02%
Net annual operating expenses 0.90%
The hypothetical example below shows what your expenses would be after the
expense reimbursement (first year only) if you invested $10,000 over the time
frames indicated, assuming you reinvested all distributions, that the average
annual return was 5% and that your shares were redeemed at the end of the time
frame. The example is for comparison only, and does not represent the fund's
actual expenses and returns, either past or future.
- --------------------------------------------------------------------------------
Expenses Year 1 Year 3 Year 5 Year 10
- --------------------------------------------------------------------------------
$92 $290 $507 $1,129
FUND CODES
- -----------------------------
Ticker JHIBX
CUSIP 410132864
Newspaper IndpBal
JH fund number 436
9
Your account
- --------------------------------------------------------------------------------
WHO CAN BUY SHARES
John Hancock Institutional Funds are offered without any sales charge to certain
types of investors, as noted below:
o Retirement and other benefit plans and their participants
o Rollover assets for participants whose plans are invested in the fund
o Certain trusts, endowment funds and foundations
o Any state, county or city, or its instrumentality, department, authority
or agency
o Insurance companies, trust companies and bank trust departments buying
shares for their own account
o Investment companies not affiliated with the adviser
o Clients of service agents and broker-dealers who have entered into an
agreement with John Hancock Funds, Inc.
o Investors who participate in fee-based, wrap and other investment platform
programs
o Any entity that is considered a corporation for tax purposes
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine if you are eligible, by referring to "Who can buy shares" on the
left.
3 Determine how much you want to invest. The minimum initial investment is
$10,000. There is no minimum investment for retirement plans with at least
350 eligible employees.
4 Complete the appropriate parts of the account application, carefully
following the instructions. By applying for privileges now, you can avoid
the delay and inconvenience of having to file an additional application if
you want to add privileges later. You must submit additional documentation
when opening trust, corporate or power of attorney accounts.
5 Make your initial investment using the table on the next page.
6 If you have questions or need more information, please contact your
financial representative or call Signature Services at 1-888-972-8696.
John Hancock Funds may pay significant compensation out of its own resources to
your financial representative.
Your broker or agent may charge you a fee to effect transactions in fund shares.
10 YOUR ACCOUNT
- --------------------------------------------------------------------------------
Buying shares
- --------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip Art] o Make out a check for the o Make out a check for the
investment amount, payable to investment amount payable to
"John Hancock Signature "John Hancock Signature
Services, Inc." Services, Inc."
o Deliver the check and your o Fill out the detachable
completed application to your investment slip from an
financial representative, or account statement. If no slip
mail them to Signature is available, include a note
Services (address below). specifying the fund name(s),
your share class, your
account number and the
name(s) in which the account
is registered.
o Deliver the check and
investment slip or note to
your financial
representative, or mail them
to Signature Services
(address below).
By exchange
[Clip Art] o Call your financial o Call your financial
representative or Signature representative or Signature
Services to request an Services to request an
exchange. exchange.
o You may only exchange for o You may only exchange for
shares of other institutional shares of other institutional
funds or Class I shares. funds or Class I shares.
By wire
[Clip Art] o Deliver your completed o Instruct your bank to wire
application to your financial the amount of your investment
representative or mail it to to:
Signature Services. First Signature Bank & Trust
Account # 900022260
o Obtain your account number by Routing # 211475000
calling your financial
representative or Signature Specify the fund name(s), your
Services. share class, your account
number and the name(s) in which
o Instruct your bank to wire the account is registered. Your
the amount of your investment bank may charge a fee to wire
to: funds.
First Signature Bank & Trust
Account # 900022260
Routing # 211475000
Specify the fund name(s), the
share class, the new account
number and the name(s) in which
the account is registered. Your
bank may charge a fee to wire
funds.
By phone
[Clip Art] See "By exchange" and "By o Verify that your bank or
wire." credit union is a member of
the Automated Clearing House
(ACH) system.
o Complete the "To Purchase,
Exchange or Redeem Shares via
Telephone" and "Bank
Information" sections on your
account application.
o Call Signature Services to
verify that these features
are in place on your account.
o Call your financial
representative or Signature
Services with the fund
name(s), your share class,
your account number, the
name(s) in which the account
is registered and the amount
of your investment.
- --------------------------------------------------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1001
Boston, MA 02217-1001
Phone Number: 1-888-972-8696
Or contact your financial representative for instructions and assistance.
- --------------------------------------------------------------------------------
YOUR ACCOUNT 11
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip Art] o Sales of any amount; however, o Write a letter of instruction
sales of $5 million or more indicating the fund name,
must be made by letter. your account number, your
share class, the name(s) in
o Certain requests will require which the account is
a Medallion signature registered and the dollar
guarantee. Please refer to value or number of shares you
"Selling shares in writing". wish to sell.
o Include all signatures and
any additional documents that
may be required (see next
page).
o Mail the materials to
Signature Services.
o A check or wire will be sent
according to your letter of
instruction.
By phone
[Clip Art] o Sales of up to $5 million. o To place your request with a
representative at John
Hancock Funds, call Signature
Services between 8 A.M. and 4
P.M. Eastern Time on most
business days.
o Redemption proceeds of up to
$100,000 may be sent by wire
or by check. A check will be
mailed to the exact name(s)
and address on the account.
Redemption proceeds exceeding
$100,000 must be wired to
your designated bank account.
By wire or electronic funds transfer (EFT)
[Clip Art] o Requests by letter to sell o To verify that the telephone
any amount. redemption privilege is in
place on an account, or to
o Requests by phone to sell up request the forms to add it
to $5 million (accounts with to an existing account, call
telephone redemption Signature Services.
privileges).
o Amounts of $5 million or more
will be wired on the next
business day.
o Amounts up to $100,000 may be
sent by EFT or by check.
Funds from EFT transactions
are generally available by
the second business day. Your
bank may charge a fee for
this service.
By exchange
[Clip Art] o Sales of any amount. o Obtain a current prospectus
for the fund into which you
are exchanging by calling
your financial representative
or Signature Services.
o You may only exchange for
shares of other institutional
funds or Class I shares.
o Call your financial
representative or Signature
Services to request an
exchange.
12 YOUR ACCOUNT
Selling shares in writing In certain circumstances, you will need to make your
request to sell shares in writing. You may need to include additional items with
your request, as shown in the table below, unless they were previously provided
to Signature Services and are still accurate. You may also need to include a
Medallion signature guarantee, which protects you against fraudulent orders. You
will need a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares and are requesting
payment by check
o you are selling more than $5 million worth of shares
You will need to obtain your Medallion signature guarantee from a member of the
Signature Guarantee Medallion Program. Most brokers and securities dealers are
members of this program. A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
Seller Requirements for written requests
- --------------------------------------------------------------------------------
[Clip Art]
Owners of individual, joint or o Letter of instruction.
UGMA/UTMA accounts (custodial
accounts for minors). o On the letter, the signatures of
all persons authorized to sign for
the account, exactly as the account
is registered.
o Medallion signature guarantee if
applicable (see above).
Owners of corporate, sole o Letter of instruction.
proprietorship, general partner or
association accounts. o Corporate business/organization
resolution, certified within the
past 12 months, or a John Hancock
Funds business/organization
certification form.
o On the letter and the resolution,
the signature of the person(s)
authorized to sign for the account.
o Medallion signature guarantee if
applicable (see above).
Owners or trustees of retirement o Letter of instruction.
plan, pension trust and trust
accounts. o On the letter, the signature(s) of
the trustee(s).
o Copy of the trust document
certified within the past 12 months
or a John Hancock Funds trust
certification form.
o Medallion signature guarantee if
applicable (see above).
Joint tenancy shareholders with o Letter of instruction signed by
rights of survivorship whose surviving tenant.
co-tenants are deceased.
o Copy of death certificate.
o Medallion signature guarantee if
applicable (see above).
Executors of shareholder estates. o Letter of instruction signed by
executor.
o Copy of order appointing executor,
certified within the past 12
months.
o Medallion signature guarantee if
applicable (see above).
Administrators, conservators, o Call 1-888-972-8696 for
guardians and other sellers or instructions.
account types not listed above.
- --------------------------------------------------------------------------------
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1001
Boston, MA 02217-1001
Phone Number: 1-888-972-8696
Or contact your financial representative for instructions and assistance.
- --------------------------------------------------------------------------------
YOUR ACCOUNT 13
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value (NAV) per share for each fund is
determined each business day at the close of regular trading on the New York
Stock Exchange (typically 4 P.M. Eastern Time). The funds use market prices in
valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable. The funds may also value securities at fair value
if the value of these securities has been materially affected by events
occurring after the close of a foreign market. The funds may trade foreign stock
or other portfolio securities on U.S. holidays and weekends, even though the
funds' shares will not be priced on those days. This may change a fund's NAV on
days when you cannot buy or sell shares.
Buy and sell prices When you buy shares, you pay the NAV. When you sell shares,
you receive the NAV.
Execution of requests Each fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after Signature Services receives your
request in good order.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
Telephone transactions For your protection, telephone requests may be recorded
in order to verify their accuracy. Also for your protection, telephone
redemption transactions are not permitted on accounts whose names or addresses
have changed within the past 30 days. Proceeds from telephone transactions can
only be mailed to the address of record.
Exchanges You may exchange Institutional Fund and Class I shares for shares of
any other Institutional Fund or Class I shares. The registration for both
accounts involved must be identical.
To protect the interests of other investors in the fund, a fund may cancel the
exchange privileges of any parties who, in the opinion of the fund, are using
market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. The funds reserve the right to require that
previously exchanged shares and reinvested dividends be in a fund for 90 days
before a shareholder is permitted a new exchange. A fund may also refuse any
exchange order. A fund may change or cancel its exchange policies at any time,
upon 60 days' notice to its shareholders.
Certificated shares The funds no longer issue share certificates. Shares are
electronically recorded. Any existing certificated shares can only be sold by
returning the certificated shares to Signature Services, along with a letter of
instruction or a stock power and a signature guarantee.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but a fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, at least quarterly
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends Diversified Core Equity Fund II and Balanced Fund declare and pay any
income dividends quarterly. Medium Capitalization Fund declares and pays any
income dividends annually. Capital gains, if any, are distributed annually
Dividend reinvestments Dividends will be reinvested automatically in additional
shares of the same fund on the dividend record date. Alternatively, you can
choose to have your dividends and capital gains sent directly to your bank
account or a check will be sent in the amount of more than $10. However, if the
check is not deliverable or the combined dividend and capital gains amount is
$10 or less, your proceeds will be reinvested. If five or more of your dividend
or capital gains checks remain uncashed after 180 days, all subsequent dividends
and capital gains will be reinvested.
14 YOUR ACCOUNT
Taxability of dividends For investors who are not exempt from federal income
taxes, dividends you receive from a fund, whether reinvested or taken as cash,
are generally considered taxable. Dividends from a fund's short-term capital
gains are taxable as ordinary income. Dividends from a fund's long-term capital
gains are taxable at a lower rate. Whether gains are short-term or long-term
depends on the fund's holding period. Some dividends paid in January may be
taxable as if they had been paid the previous December.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
Taxability of transactions Any time you sell or exchange shares, it is
considered a taxable event for you if you are not exempt from federal income
taxes. Depending on the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or a loss on the transaction. You are
responsible for any tax liabilities generated by your transactions.
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The funds' board of trustees oversees each fund's business activities and
retains the services of the various firms that carry out the fund's operations.
The trustees have the power to change the funds' respective investment goals
without shareholder approval.
The investment adviser John Hancock Advisers, Inc., 101 Huntington Avenue,
Boston, MA 02199-7603.
The subadviser Independence Investment LLC, 53 State Street, Boston, MA 02109.
Management fees The management fees paid to the investment adviser by the funds
last fiscal year are as follows:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
Diversified Core Equity Fund II 0.50%
Medium Capitalization 0.48%
Balanced 0.69%
YOUR ACCOUNT 15
Financial highlights
- --------------------------------------------------------------------------------
These tables detail the performance of each fund's share, including total return
information showing how much an investment in the fund has increased or
decreased each year.
Independence Diversified Core Equity Fund II
Figures audited by Deloitte & Touche LLP.
- --------------------------------------------------------------------------------------------------------------------
Period ended: 2/97 2/98 2/99 2/00(1) 2/01
- --------------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $10.96 $12.76 $15.34 $15.69 $14.23
Net investment income (loss)(2) 0.20 0.17 0.12 0.09 0.09
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 2.23 3.91 2.76 0.34 (0.29)
Total from investment operations 2.43 4.08 2.88 0.43 (0.20)
Less distributions:
Dividends from net investment income (0.19) (0.17) (0.14) (0.09) (0.10)
Distributions from net realized gain on investments sold and
foreign currency transactions (0.44) (1.33) (2.39) (1.80) (5.02)
Total distributions (0.63) (1.50) (2.53) (1.89) (5.12)
Net asset value, end of period $12.76 $15.34 $15.69 $14.23 $8.91
Total investment return(3) (%) 22.63 33.61 18.98 1.99 (2.68)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 320,029 572,093 552,296 425,876 146,995
Ratio of expenses to average net assets (%) 0.67 0.65 0.63 0.64 0.67
Ratio of net investment income to average net assets (%) 1.65 1.12 0.76 0.57 0.61
Portfolio turnover rate (%) 81 76 55 69 56
(1) Effective October 1, 1999 existing shares of the fund were designated
Class I shares.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Total investment return assumes dividend reinvestment.
16 FINANCIAL HIGHLIGHTS
Independence Medium Capitalization Fund
Figures audited by Deloitte & Touche LLP.
- ----------------------------------------------------------------------------------------------------------------
Period ended: 2/97 2/98 2/99 2/00 2/01
- ----------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $9.29 $10.45 $13.30 $12.04 $12.45
Net investment income (loss)(1) 0.12 0.09 0.08 0.06 0.04
Net realized and unrealized gain (loss) on investments 1.45 3.69 0.06 1.58 1.60
Total from investment operations 1.57 3.78 0.14 1.64 1.64
Less distributions:
Dividends from net investment income (0.12) (0.09) (0.09) (0.06) (0.04)
Distributions from net realized gain on investments sold (0.29) (0.84) (1.31) (1.17) (2.28)
Total distributions (0.41) (0.93) (1.40) (1.23) (2.32)
Net asset value, end of period $10.45 $13.30 $12.04 $12.45 $11.77
Total investment return(2,3) (%) 17.19 37.30 0.96 14.18 13.14
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 5,240 9,722 10,407 12,422 14,881
Ratio of expenses to average net assets (%) 1.00 1.00 1.00 1.00 1.00
Ratio of adjusted expenses to average net assets(4) (%) 2.70 1.36 1.60 1.52 1.32
Ratio of net investment income (loss) to average net assets (%) 1.26 0.75 0.59 0.44 0.29
Portfolio turnover rate (%) 78 65 67 136 145
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) The total returns would have been lower had certain expenses not been
reduced during the periods shown.
(4) Does not take into consideration expense reductions during the periods
shown.
================================================================================
The following returns are not audited and are not part of the audited financial
highlights presented above:
Without the expense reductions, returns for the fund for the periods or years
ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001
would have been 15.49%, 36.94%, 0.36%, 13.66% and 12.82%, respectively.
FINANCIAL HIGHLIGHTS 17
Independence Balanced Fund
Figures audited by Deloitte & Touche LLP.
- ---------------------------------------------------------------------------------------------------------------------
Period ended: 2/97 2/98 2/99 2/00 2/01
- ---------------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $9.25 $9.94 $11.42 $11.99 $11.12
Net investment income (loss)(1) 0.38 0.38 0.26 0.27 0.28
Net realized and unrealized gain (loss) on investments 0.73 1.60 1.37 (0.02) 0.10
Total from investment operations 1.11 1.98 1.63 0.25 0.38
Less distributions:
Dividends from net investment income (0.34) (0.35) (0.29) (0.28) (0.30)
Distributions from net realized gain on investments sold (0.08) (0.15) (0.77) (0.84) (1.68)
Total distributions (0.42) (0.50) (1.06) (1.12) (1.98)
Net asset value, end of period $9.94 $11.42 $11.99 $11.12 $9.52
Total investment return(2,3) (%) 12.36 20.44 14.50 1.83 3.13
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 13,093 77,116 82,969 60,649 35,637
Ratio of expenses to average net assets (%) 0.90 0.90 0.90 0.90 0.90
Ratio of adjusted expenses to average net assets(4) (%) 1.64 1.06 0.95 0.96 0.91
Ratio of net investment income (loss) to average net assets (%) 3.96 3.52 2.26 2.26 2.51
Portfolio turnover rate (%) 149 224 158 268 261
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) The total returns would have been lower had certain expenses not been
reduced during the periods shown.
(4) Does not take into consideration expense reductions during the periods
shown.
================================================================================
The following returns are not audited and are not part of the audited financial
highlights presented above:
Without the expense reductions, returns for the fund for the periods or years
ended February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001
would have been 11.62%, 20.28%, 14.45%, 1.77% and 3.12%, respectively.
FINANCIAL HIGHLIGHTS 18
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on the John Hancock
institutional funds:
Annual/Semiannual Report to Shareholders
Includes financial statements, a discussion of the market conditions and
investment strategies that significantly affected performance, as well as the
auditors' report (in annual report only).
Statement of Additional Information (SAI)
The SAI contains more detailed information on all aspects of the funds. The
current annual report is included in the SAI.
A current SAI has been filed with the Securities and Exchange Commission and is
incorporated by reference into (is legally a part of) this prospectus.
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1001
Boston, MA 02217-1001
By phone: 1-888-972-8696
By EASI-Line: 1-800-597-1897
By TDD: 1-800-462-0825
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
In person: at the SEC's Public Reference Room in Washington, DC. For access to
the Reference Room call 1-202-942-8090
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
By electronic request:
publicinfo@sec.gov
(duplicating fee required)
On the Internet: www.sec.gov
SEC file number: 811-8852
[LOGO](R)
John Hancock Funds, Inc.
Member NASD
101 Huntington Avenue
Boston, MA 02199-7603
Mutual Funds
Institutional Services
Private Managed Accounts
Retirement Plans
Insurance Services
(C)2001 JOHN HANCOCK FUNDS, INC. KI0PN 7/01
JOHN HANCOCK INSTITUTIONAL SERIES TRUST
101 Huntington Avenue
Boston, Massachusetts 02199
John Hancock Active Bond Fund
John Hancock Dividend Performers Fund
John Hancock Medium Capitalization Growth Fund
John Hancock Small Capitalization Value Fund
John Hancock Focused Small Cap Growth Fund-Class I
(formerly Small Capitalization Growth Fund)
John Hancock International Equity Fund
John Hancock Independence Diversified Core Equity Fund II-Class I
John Hancock Independence Medium Capitalization Fund
John Hancock Independence Balanced Fund
(each, a "Fund" and collectively, the "Funds")
Statement of Additional Information
July 1, 2001
This Statement of Additional Information provides information about the Funds in
addition to the information that is contained in the John Hancock Series Funds'
current Prospectus and in the Independence Funds' current Prospectus (together,
the "Prospectuses").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Funds' Prospectuses, copies of which can be obtained
free of charge by writing or telephoning:
John Hancock Signature Services, Inc.
John Hancock Way, Suite 1001
Boston, Massachusetts 02217-1001
1-800-755-4371
TABLE OF CONTENTS
Page
Organization of the Funds 2
Investment Objectives and Policies 3
-The John Hancock Series Funds 3
-The Independence Funds 3
Investment Restrictions 16
Those Responsible for Management 19
Investment Advisory and Other Services 29
Distribution Contract 34
Sales Compensation 34
Net Asset Value 34
Additional Services and Programs 35
Purchases and Redemptions Through Third Parties 35
Special Redemptions 36
Description of the Funds' Shares 36
Tax Status 37
Calculation of Performance 42
Brokerage Allocation 44
Transfer Agent Services 46
Custody of Portfolio 46
Independent Auditors 46
Appendix A--Description of Securities Ratings A-1
Financial Statements F-1
ORGANIZATION OF THE FUNDS
Each Fund is a series of John Hancock Institutional Series Trust (the "Trust")
an open-end investment management company organized as a Massachusetts business
trust on October 31, 1994 under the laws of the Commonwealth of Massachusetts.
Focused Small Cap Growth Fund, Dividend Performers Fund, Active Bond Fund,
Medium Capitalization Growth Fund, Small Capitalization Value Fund and
International Equity Fund are sometimes referred to herein collectively as the
"John Hancock Series Funds." Independence Diversified Core Equity Fund II,
Independence Medium Capitalization Fund and Independence Balanced Fund are
sometimes referred to herein collectively as the "Independence Funds." Prior to
July 1, 2001, Focused Small Cap Growth Fund was called Small Capitalization
Growth Fund.
The investment adviser of each Fund is John Hancock Advisers, Inc. (the
"Adviser"). The Adviser is an indirect wholly-owned subsidiary of John Hancock
Life Insurance Company (formerly John Hancock Mutual Life Insurance Company)
(the "Life Company"), a Massachusetts life insurance company chartered in 1862,
with national headquarters at John Hancock Place, Boston, Massachusetts. The
Life Company is wholly owned by John Hancock Financial Services, Inc., a
Delaware corporation organized in February, 2000. The investment sub-adviser of
International Equity Fund is Nicholas-Applegate Capital Management
("Nicholas-Applegate") (the "Sub-Adviser"). The investment sub-adviser of each
Independence Fund is Independence Investment LLC ("Independence") (formerly
Independence Investment Associates, Inc.). Together, Independence and
Nicholas-Applegate are sometimes referred to herein collectively as the
"Sub-Advisers" or, individually, as the "Sub-Adviser." The Sub-Advisers are
responsible for providing investment advice to their respective funds, subject
to the review of the Trustees and overall supervision of the Adviser.
Independence is an affiliate of the Life Company.
2
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's investment
objective and policies as discussed in the Prospectuses. There is no assurance
that any Fund will achieve its investment objective.
Each Fund has adopted certain investment restrictions that are detailed under
"Investment Restrictions" in this Statement of Additional Information where they
are classified as fundamental or nonfundamental. Those restrictions designated
as fundamental may not be changed without shareholder approval. Each Fund's
investment objective, investment policies and nonfundamental restrictions,
however, may be changed by a vote of the Trustees without shareholder approval.
If there is a change in a Fund's investment objective, shareholders should
consider whether the Fund remains an appropriate investment in light of their
then current financial position and needs.
A. The John Hancock Series Funds.
For a further description of the John Hancock Series Funds' investment
objectives, policies and restrictions see "Goal and Strategy" and "Main Risks"
in the John Hancock Series Funds' Prospectus and "Investment Restrictions" in
this Statement of Additional Information. Effective November 15, 2000, existing
shares of Focused Small Cap Growth Fund were designated as "Class I" shares. See
Appendix A to this Statement of Additional Information for a description of the
quality categories of corporate bonds in which certain of the John Hancock
Series Funds may invest.
B. The Independence Funds.
For a further description of the Independence Funds' investment objectives,
policies and restrictions see "Goal and Strategy" and "Main Risks" in their
respective Prospectuses and "Investment Restrictions" in this Statement of
Additional Information. Effective October 1, 1999, existing shares of
Independence Diversified Core Equity Fund II were designated as "Class I"
shares.
Common stocks. Dividend Performers Fund, Medium Capitalization Growth Fund,
International Equity Fund, Small Capitalization Value Fund, Focused Small Cap
Growth Fund and each Independence Fund may invest in common stocks. Common
stocks are shares of a corporation or other entity that entitle the holder to a
pro rata share of the profits of the corporation, if any, without preference
over any other shareholder or class of shareholders, including holders of such
entity's preferred stock and other senior equity. Ownership of common stock
usually carries with it the right to vote and, frequently, an exclusive right to
do so. Common stocks have the potential to outperform fixed-income securities
over the long term. Common stocks provide the most potential for growth, yet are
the more volatile of the two asset classes.
Debt securities. Active Bond Fund and Independence Balanced Fund may regularly
invest in debt obligations. Small Capitalization Value Fund invests primarily in
U.S. stocks, but may invest up to 15% of total assets in a combination of
foreign securities and/or bonds rated as low as CC/Ca and their unrated
equivalents. Under normal conditions, Dividend Performers Fund, Medium
Capitalization Growth Fund, and Focused Small Cap Growth Fund will not invest in
any fixed income securities. However, in abnormal conditions, Dividend
Performers Fund, Medium Capitalization Growth Fund, and Focused Small Cap Growth
Fund may temporarily invest in U.S. Government securities and U.S. Government
agency securities with maturities of up to three years, and may also invest more
than 10% of total assets in cash and/or cash equivalents (including U.S.
Government securities maturing in 90 days or less.) Debt securities of corporate
and governmental issuers in which the Funds may invest are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations (credit risk) and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk).
3
Preferred stocks. Dividend Performers Fund, International Equity Fund, Medium
Capitalization Growth Fund, Small Capitalization Value Fund, Focused Small Cap
Growth Fund and each Independence Fund may invest in preferred stocks. Preferred
stock generally has a preference to dividends and, upon liquidation, over an
issuer's common stock but ranks junior to debt securities in an issuer's capital
structure.
Preferred stock generally pays dividends in cash (or additional shares of
preferred stock) at a defined rate but, unlike interest payments on debt
securities, preferred stock dividends are payable only if declared by the
issuer's board of directors. Dividends on preferred stock may be cumulative,
meaning that, in the event the issuer fails to make one or more dividend
payments on the preferred stock, no dividends may be paid on the issuer's common
stock until all unpaid preferred stock dividends have been paid. Preferred stock
also may be subject to optional or mandatory redemption provisions.
Convertible securities. Small Capitalization Value Fund, International Equity
Fund and Independence Balanced Fund may invest in convertible securities which
may include corporate notes or preferred stock. Active Bond Fund may invest in
convertible debt securities. Dividend Performers Fund, Medium Capitalization
Growth Fund, and Focused Small Cap Growth Fund may invest in convertible
preferred stocks. Investments in convertible securities are not subject to the
rating criteria with respect to non-convertible debt obligations. As with all
debt securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
The market value of convertible securities can also be heavily dependent upon
the changing value of the equity securities into which such securities are
convertible, depending on whether the market price of the underlying security
exceeds the conversion price. Convertible securities generally rank senior to
common stocks in an issuer's capital structure and consequently entail less risk
than the issuer's common stock. However, the extent to which such risk is
reduced depends upon the degree to which the convertible security sells above
its value as a fixed-income security.
Investments in Foreign Securities and Emerging Countries. Each of the Funds may
invest in the securities of foreign issuers to the following extent:
o Each Independence Fund and Dividend Performers Fund may invest in U.S.
dollar denominated securities of foreign issuers and in American Depositary
Receipts. Independence Balanced Fund may also invest in Yankee Bonds.
o Medium Capitalization Growth Fund and Focused Small Cap Growth Fund may
invest up to 10% of total assets in foreign securities. Foreign equities
include but are not limited to common stocks, convertible preferred stocks,
preferred stocks, warrants, American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), and European Depositary Receipts ("EDRs").
o Small Capitalization Value Fund invests primarily in U.S. stocks, but may
invest up to 15% of total assets in a combination of foreign securities
and/or bonds rated as low as CC/Ca and their unrated equivalents.
o Active Bond Fund may invest up to 25% of total assets in Yankee Bonds, U.S.
dollar (excluding U.S. dollar denominated Canadian securities) and foreign
currency denominated securities of foreign issuers.
o International Equity Fund normally invests at least 80% of total assets in
a diversified portfolio of foreign stocks from both developed and emerging
countries. The fund may invest up to 30% of total assets in emerging
markets as classified by Morgan Stanley Capital International ("MSCI").
Foreign equities include but are not limited to common stocks, convertible
preferred stocks, preferred stocks, warrants, ADRs, GDRs and EDRs.
4
Risks of Foreign Securities. Investments in foreign securities may involve a
greater degree of risk than those in domestic securities. There is generally
less publicly available information about foreign companies in the form of
reports and ratings similar to those that are published about issuers in the
United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market, whether
through over-the-counter markets or exchanges located in the countries where
principal offices of the issuers are located. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States' economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends, in some cases capital gains and interest payable on certain of
the Fund's foreign portfolio securities, may be subject to foreign withholding
or other foreign taxes, thus reducing the net amount of income or gains
available for distribution to the Fund's shareholders.
These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. The Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
5
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate.
The Fund's ability and decisions to purchase or sell portfolio securities may be
affected by laws or regulations relating to the convertibility and repatriation
of assets. Because the shares of the Fund are redeemable on a daily basis in
U.S. dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars. Under present conditions,
it is not believed that these considerations will have any significant effect on
its portfolio strategy.
Foreign Currency Transactions. Each John Hancock Series Fund, other than
Dividend Performers Fund, may engage in foreign currency transactions. Foreign
currency transactions may be conducted on a spot (i.e., cash) basis at the spot
rate for purchasing or selling currency prevailing in the foreign exchange
market.
Each John Hancock Series Fund, other than Dividend Performers Fund, may also
enter into forward foreign currency exchange contracts to hedge against
fluctuations in currency exchange rates affecting a particular transaction or
portfolio position. Forward contracts are agreements to purchase or sell a
specified currency at a specified future date and price set at the time of the
contract. Transaction hedging is the purchase or sale of forward foreign
currency contracts with respect to specific receivables or payables of a Fund
accruing in connection with the purchase and sale of its portfolio securities
quoted or denominated in the same or related foreign currencies. Portfolio
hedging is the use of forward foreign currency contracts to offset portfolio
security positions denominated or quoted in the same or related foreign
currencies. A Fund may elect to hedge less than all of its foreign portfolio
positions as deemed appropriate by the Adviser. The Funds will not engage in
speculative forward foreign currency exchange transactions.
If a Fund purchases a forward contract, the Fund will segregate cash or liquid
securities in a separate account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of such forward contract.
The assets in the segregated account will be valued at market daily and if the
value of the securities in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
be equal the amount of the Fund's commitment with respect to such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Funds to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
Repurchase Agreements. Each Fund may enter into repurchase agreements. In a
repurchase agreement the Fund buys a security for a relatively short period
(usually not more than 7 days) subject to the obligation to sell it back to the
issuer at a fixed time and price plus accrued interest. The Fund will enter into
repurchase agreements only with member banks of the Federal Reserve System and
with "primary dealers" in U.S. Government securities. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, decline in
value of the underlying securities or lack of access to income during this
period as well as the expense of enforcing its rights.
6
Reverse Repurchase Agreements and Other Borrowings. Each 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 a 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 a Fund. Reverse
repurchase agreements involve the risk that the market value of securities
purchased by each Fund with proceeds of the transaction may decline below the
repurchase price of the securities sold by a Fund which it is obligated to
repurchase. Each 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 its repurchase. To minimize various
risks associated with reverse repurchase agreements, a Fund will establish a
separate account consisting of liquid securities, of any type or maturity, in an
amount at least equal to the repurchase prices of the securities (plus any
accrued interest thereon) under such agreements.
In addition, a Fund will not enter into reverse repurchase agreements or other
borrowings except from banks temporarily for extraordinary or emergency purposes
(not for leveraging) in amounts not to exceed 33 1/3% of a Fund's total assets
(including the amount borrowed) taken at market value. Each Fund will not use
leverage to attempt to increase income. Each Fund will enter into reverse
repurchase agreements only with federally insured banks which are approved in
advance as being creditworthy by the Trustees. Under the procedures established
by the Trustees, the Adviser will monitor the creditworthiness of the banks
involved.
Restricted Securities. Each Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. Each Fund will not invest more than 15% of its net
assets in illiquid investments. If the Trustees determine, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Options on Securities, Securities Indices and Currency. Active Bond Fund may
purchase and write (sell) call and put options on any securities in which it may
invest or on any securities index based on securities in which it may invest.
International Equity Fund may purchase and write (sell ) call and put options on
any securities in which it may invest, on any securities index based on
securities in which it may invest or on any currency in which Fund investments
may be demoninated. Each of Dividend Performers Fund, Small Capitalization Value
Fund, Focused Small Cap Growth Fund and Medium Capitalization Growth Fund may
purchase and write (sell) call and put options on any securities index based on
securities in which it may invest. These options may be listed on national
domestic securities exchanges or foreign securities exchanges or traded in the
over-the-counter market. Each Fund may write covered put and call options and
purchase put and call options as a substitute for the purchase or sale of
securities (or, with respect to International Equity Fund, currency) or to
protect against declines in the value of portfolio securities and against
increases in the cost of securities to be acquired.
7
Writing Covered Options. A call option on a security or currency written by a
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by a Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive a Fund of the opportunity to profit from an increase in the market price
of the securities or foreign currency assets in its portfolio. Writing covered
put options may deprive a Fund of the opportunity to profit from a decrease in
the market price of the securities or foreign currency assets to be acquired for
its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account with a value at least equal to the Fund's obligation under the option,
(ii) entering into an offsetting forward commitment and/or (iii) purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position. A
written call option on securities is typically covered by maintaining the
securities that are subject to the option in a segregated account. Each Fund may
cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index.
Each Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. A Fund would normally purchase call options in anticipation
of an increase, or put options in anticipation of a decrease ("protective
puts"), in the market value of securities or currencies of the type in which it
may invest. A Fund may also sell call and put options to close out its purchased
options.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. A Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by a
Fund for the purpose of affirmatively benefiting from a decline in the price of
securities or currencies which it does not own. A Fund would ordinarily realize
a gain if, during the option period, the value of the underlying securities or
currency decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of a Fund's
portfolio securities.
Each Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
8
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. International Equity Fund
may purchase and sell futures contracts based on various securities (such as
U.S. Government securities) and securities indices, foreign currencies and any
other financial instruments and indices and purchase and write call and put
options on these futures contracts. Active Bond Fund may purchase and sell
futures contracts based on various securities (such as U.S. Government
securities) and securities indices, and any other financial instruments and
indices and purchase and write call and put options on these futures contracts.
Dividend Performers Fund, Small Capitalization Value Fund, Focused Small Cap
Growth Fund and Medium Capitalization Growth Fund may purchase and sell futures
contracts based on securities indices and purchase and write call and put
options on these futures contracts. Each Fund may purchase and sell futures and
options on futures for hedging or other non-speculative purposes. Each Fund may
also enter into closing purchase and sale transactions with respect to any of
these contracts and options. All futures contracts entered into by a Fund are
traded on U.S. or foreign exchanges or boards of trade that are licensed,
regulated or approved by the Commodity Futures Trading Commission ("CFTC").
9
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments or
currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that a Fund proposes to acquire or the
exchange rate of currencies in which the portfolio securities are quoted or
denominated. When securities prices are falling, a Fund can seek to offset a
decline in the value of its current portfolio securities through the sale of
futures contracts. When securities prices are rising, a Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases. A
Fund may seek to offset anticipated changes in the value of a currency in which
its portfolio securities, or securities that it intends to purchase, are quoted
or denominated by purchasing and selling futures contracts on such currencies.
A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated decline
in market prices or foreign currency rates that would adversely affect the value
of the Fund's portfolio securities. Such futures contracts may include contracts
for the future delivery of securities held by a Fund or securities with
characteristics similar to those of the Fund's portfolio securities. Similarly,
a Fund may sell futures contracts on any currencies in which its portfolio
securities are quoted or denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency rates then available in the applicable market to
be less favorable than prices that are currently available. Subject to the
limitations imposed on the funds, as described above, a Fund may also purchase
futures contracts as a substitute for transactions in securities or foreign
currency, to alter the investment characteristics of or currency exposure
associated with portfolio securities or to gain or increase its exposure to a
particular securities market or currency.
10
Options on Futures Contracts. The purchase of put and call options on futures
contracts will give a Fund the right (but not the obligation) for a specified
price to sell or to purchase, respectively, the underlying futures contract at
any time during the option period. As the purchaser of an option on a futures
contract, a Fund obtains the benefit of the futures position if prices move in a
favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium (upon exercise of
the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
a Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by each Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Other Considerations. Each John Hancock Series Fund will engage in futures and
related options transactions either for bona fide hedging or for other
non-speculative purposes as permitted by the CFTC. These purposes may include
using futures and options on futures as substitute for the purchase or sale of
securities or currencies to increase or reduce exposure to particular markets.
To the extent that a Fund is using futures and related options for hedging
purposes, futures contracts will be sold to protect against a decline in the
price of securities (or the currency in which they are quoted or denominated)
that the Fund owns or futures contracts will be purchased to protect the Fund
against an increase in the price of securities or the currency in which they are
quoted or denominated) it intends to purchase. Each Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that a Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. The Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
11
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and a portfolio position which is intended to be protected,
the desired protection may not be obtained and the Fund may be exposed to risk
of loss. In addition, it is not possible to hedge fully or protect against
currency fluctuations affecting the value of securities denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued Securities. Each 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. A Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at
a future date beyond customary settlement time. When a Fund engages in forward
commitment and when-issued transactions, it relies on the seller to consummate
the transaction. The failure of the issuer or seller to consummate the
transaction may result in the Funds losing the opportunity to obtain a price and
yield considered to be advantageous. The purchase of securities on a when-issued
and forward commitment basis also involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Warrants. Each John Hancock Series Fund may invest in warrants. Warrants entitle
the holder to buy equity securities at a specific price for a specific period of
time. Warrants tend to be more volatile than their underlying securities. Also,
the value of the warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not exercised
prior to the expiration date.
Government Securities. Each Fund may invest in government securities. However,
under normal conditions, Dividend Performers Fund, Focused Small Cap Growth Fund
and Medium Capitalization Growth Fund will not invest in any fixed income
securities, with the exception of cash equivalents (which include U.S.
Government securities maturing in 90 days or less). In abnormal conditions,
these funds may temporarily invest in U.S. Government securities and U.S.
Government agency securities with maturities of up to three years, and may also
invest more than 10% of total assets in cash and/or cash equivalents. Certain
U.S. Government securities, including U.S. Treasury bills, notes and bonds, and
12
Government National Mortgage Association certificates ("GNMA"), 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 ("FHLMC"), and obligations supported by the credit of the
instrumentality, such as Federal National Mortgage Association Bonds ("FNMA").
No assurance can be given that the U.S. Government will provide financial
support to such Federal agencies, authorities, instrumentalities and government
sponsored enterprises in the future.
Mortgage-Backed Securities. Active Bond Fund and each Independence Fund may
invest in mortgage pass-through certificates and multiple-class pass-through
securities, such as real estate mortgage investment conduits ("REMIC")
pass-through certificates, collateralized mortgage obligations ("CMOs") and
stripped mortgage-backed securities ("SMBS"), and other types of
"Mortgage-Backed securities" that may be available in the future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to the GNMA, the FNMA and the FHLMC. GNMA certificates are
guaranteed by the full faith and credit of the U.S. Government for timely
payment of principal and interest on the certificates. FNMA certificates are
guaranteed by FNMA, a federally chartered and privately owned corporation, for
full and timely payment of principal and interest on the certificates. FHLMC
certificates are guaranteed by FHLMC, a corporate instrumentality of the U.S.
Government, for timely payment of interest and the ultimate collection of all
principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
lenders. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also
may be collateralized by other mortgage assets such as whole loans or private
mortgage pass-through securities. Debt service on CMOs is provided from payments
of principal and interest on collateral of mortgaged assets and any reinvestment
income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages primarily secured by interests in real property and
other permitted investments. Investors may purchase "regular" and "residual"
interest shares of beneficial interest in REMIC trusts although the Funds do not
intend to invest in residual interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the SEC
considers privately issued SMBS to be illiquid.
13
Structured or Hybrid Notes. Funds that may invest in mortgage-backed securities
may invest in "structured" or "hybrid" notes. The distinguishing feature of a
structured or hybrid note is that the amount of interest and/or principal
payable on the note is based on the performance of a benchmark asset or market
other than fixed-income securities or interest rates. Examples of these
benchmarks include stock prices, currency exchange rates and physical commodity
prices. Investing in a structured note allows a Fund to gain exposure to the
benchmark market while fixing the maximum loss that the Fund may experience in
the event that market does not perform as expected. Depending on the terms of
the note, a Fund may forego all or part of the interest and principal that would
be payable on a comparable conventional note; a Fund's loss cannot exceed this
foregone interest and/or principal. An investment in structured or hybrid notes
involves risks similar to those associated with a direct investment in the
benchmark asset.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage
pass-through securities and sequential pay CMOs are subject to all of these
risks, but are typically not leveraged. Thus, the magnitude of exposure may be
less than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
14
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
Mortgage-Backed Securities purchased at a discount, leveraged inverse floating
rate securities ("inverse floaters"), principal only debt securities ("POs"),
certain residual or support tranches of CMOs and index amortizing notes. Index
amortizing notes are not Mortgage-Backed Securities, but are subject to
extension risk resulting from the issuer's failure to exercise its option to
call or redeem the notes before their stated maturity date. Leveraged inverse
IOs combine several elements of the Mortgage-Backed Securities described above
and thus present an especially intense combination of prepayment, extension and
interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risk than
other Mortgage-Backed Securities, provided that prepayment rates remain within
expected prepayment ranges or "collars." To the extent that prepayment rates
remain within these prepayment ranges, the residual or support tranches of PAC
and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Funds as initial criteria for the selection of portfolio securities.
Among the factors which will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends. Appendix A
contains further information concerning the rating of Moody's and S&P and their
significance. Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither of these events will require the sale of the
securities by the Fund, but the Adviser will consider the event in its
determination of whether the Fund should continue to hold the securities.
Lower Rated High Yield Debt Obligations. Active Bond Fund and Small
Capitalization Value Fund may invest in high yielding, fixed income securities
rated below investment grade (e.g., rated below Baa by Moody's Investors
Service, Inc. ("Moody's") or below BBB by Standard & Poor's Ratings Group
("S&P")). Active Bond Fund will not invest in securities rated below Ca by
Moody's or CC by S&P. Small Capitalization Value Fund may invest up to 15% of
its net assets in securities rated as low as Ca by Moody's or CC by S & P and
their equivalents.
Ratings are based largely on the historical financial condition of the issuer.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate. See Appendix A to this
Statement of Additional Information which describes the characteristics of
corporate bonds in the various ratings categories. The Funds may invest in
comparable quality unrated securities which, in the opinion of the Adviser or
Subadviser, 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.
15
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.
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 Funds' assets. The reduced availability of
reliable, objective data may increase the Funds' reliance on management's
judgment in valuing high yield bonds. In addition, the Funds' investments in
high yield securities may be susceptible to adverse publicity and investor
perceptions, whether or not justified by fundamental factors. A Fund's
investments, and consequently its net asset value, will be subject to the market
fluctuations and risks inherent in all securities.
Lending of Securities. The Funds may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Funds may reinvest any cash collateral in short-term securities and money market
funds. When a Fund lends portfolio securities, there is a risk that the borrower
may fail to return the securities involved in the transaction. As a result, the
Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund
may be delayed in or prevented from liquidating the collateral. Each Fund can
lend portfolio securities having a total value of 33 1/3% of its total assets.
Short-Term Trading. Each John Hancock Series Fund may engage in short-term
trading. These Funds intend to use short-term trading of securities as a means
of managing their portfolio to achieve their respective investment objective. In
reaching a decision to sell one security and purchase another security at
approximately the same time, the Funds will take into account a number of
factors, for fixed income funds. These include the quality ratings, interest
rates, yields, maturity dates, call prices, and refunding and sinking fund
provisions of the securities under consideration, as well as historical yield
spreads and current economic information. Equity funds may engage in short-term
trading for special situations. These special situations may include arbitrage
opportunities, extraordinary positive or negative earnings surprises, takeover
situations, spin-offs, asset plays, management changes or a reorganization. The
success of short-term trading will depend upon the ability of the Funds to
evaluate particular securities, to anticipate relevant market factors, including
trends of interest rates and earnings and variations from such trends, to obtain
relevant information, to evaluate it promptly, and to take advantage of its
evaluations by completing transactions on a favorable basis. It is expected that
the expenses involved in short-term trading, which would not be incurred by an
investment company which does not use this portfolio technique, will be less
than the profits and other benefits which will accrue to shareholders.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. Each Fund has adopted the following
investment restrictions which may not be changed without the approval of a
majority of the applicable Fund's outstanding voting securities which, as used
in the Prospectuses and this Statement of Additional Information means the
approval by the lesser of (1) the holders of 67% or more of a Fund's shares
represented at a meeting if more than 50% of a Fund's outstanding shares are
present in person or by proxy or (2) more than 50% of the outstanding shares.
16
A Fund may not:
1. Issue senior securities, except as permitted by paragraphs 3, 6 and 7
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in
accordance with the Fund's investment policies or within the meaning of
paragraph 6 below, are not deemed to be senior securities.
2. Purchase securities on margin or make short sales [see non-fundamental
investment restriction (d)], or unless, by virtue of its ownership of
other securities, the Fund has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right
is conditional, the sale is made upon the same conditions, except (i)
in connection with arbitrage transactions, (ii) for hedging the Fund's
exposure to an actual or anticipated market decline in the value of its
securities, (iii) to profit from an anticipated decline in the value of
a security, and (iv) obtaining such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
3. Borrow money, except for the following extraordinary or emergency
purposes: (i) from banks for temporary or short-term purposes or for
the clearance of transactions in amounts not to exceed 33 1/3% of the
value of the Fund's total assets (including the amount borrowed) taken
at market value; (ii) in connection with the redemption of Fund shares
or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets; (iii) in
order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets;
and (iv) in the case of Focused Small Cap Growth Fund, in connection
with entering into reverse repurchase agreements and dollar rolls, but
only if after each such borrowing there is asset coverage of at least
300% as defined in the 1940 Act. A Fund, other than Focused Small Cap
Growth Fund, may not borrow money for the purpose of leveraging the
Funds' assets. For purposes of this investment restriction, the
deferral of Trustees' fees and transactions in short sales, futures
contracts, options on futures contracts, securities or indices and
forward commitment transactions shall not constitute borrowing. Focused
Small Cap Growth Fund has no current intention of entering into reverse
repurchase agreements or dollar rolls.
4. Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purpose of the 1933 Act.
5. Purchase or sell real estate except that the Fund may (i) acquire or
lease office space for its own use, (ii) invest in securities of
issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein,
(iv) purchase and sell mortgage-related securities and (v) hold and
sell real estate acquired by the Fund as a result of the ownership of
securities.
6. Invest in commodities, except the Fund may purchase and sell options on
securities, securities indices and currency, futures contracts on
securities, securities indices and currency and options on such
futures, forward foreign currency exchange contracts, forward
commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment
policies [see non-fundamental investment restriction (f)].
7. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the
Fund's total assets taken at market value, (2) enter into repurchase
agreements, and (3) purchase all or a portion of an issue of 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.
17
8. Purchase the securities of issuers conducting their principal activity
in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets
taken at market value at the time of such investment. This limitation
does not apply to investments in obligations of the U.S. Government or
any of its agencies, instrumentalities or authorities.
9. For each Fund with respect to 75% of total assets [see non-fundamental
investment restriction (e)], purchase securities of an issuer (other
than the U.S. Government, its agencies, instrumentalities or
authorities), if:
(a) such purchase would cause more than 5% of the Fund's total
assets taken at market value to be invested in the securities
of such issuer; or
(b) such purchase would at the time result in more than 10% of
the outstanding voting securities of such issuer being held by
the Fund.
Non-Fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
A Fund may not:
(a) 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.
(b) Invest more than 15% of the net assets of the Fund, taken at market
value, in illiquid securities.
(c) Invest for the purpose of exercising control over or management of any
company.
In addition:
(d) Dividend Performers Fund, International Equity Fund, Medium
Capitalization Growth Fund, Focused Small Cap Growth Fund, and Small
Capitalization Value Fund may not make short sales.
(e) Dividend Performers Fund, International Equity Fund, Medium
Capitalization Growth Fund, Small Capitalization Value Fund, and
Focused Small Cap Growth Fund may not invest more than 5% of total
assets at time of purchase in any one security (other than U.S.
Government securities).
18
(f) Dividend Performers Fund, Medium Capitalization Growth Fund, Small
Capitalization Value Fund, and Focused Small Cap Growth Fund may only
purchase or sell stock index options, stock index futures, and stock
index options on futures.
(g) Under normal conditions, Active Bond Fund, Dividend Performers Fund,
Medium Capitalization Growth Fund, Small Capitalization Value Fund, and
Focused Small Cap Growth Fund may not invest more than 10% of total
assets in cash and/or cash equivalents (except cash segregated in
relation to futures, forward and option contracts).
(h) Under normal conditions Dividend Performers Fund, Medium Capitalization
Growth Fund, and Focused Small Cap Growth Fund will not invest in any
fixed income securities. However, in abnormal conditions, these funds may
temporarily invest in U.S. Government securities and U.S. Government
agency securities with maturities of up to three years, and may also
invest more than 10% of total assets in cash and/or cash equivalents
(including U.S. Government securities maturing in 90 days or less).
(i) International Equity Fund normally invests at least 80% of total assets
in a diversified portfolio of foreign stocks from both developed and
emerging countries. The Fund may invest up to 30% of total assets in
emerging markets as classified by Morgan Stanley Capital International
("MSCI"). Foreign equities include but are not limited to common stocks,
convertible preferred stocks, preferred stocks, warrants, ADRs, GDRs and
EDRs.
(j) Small Capitalization Value Fund invests primarily in U.S. stocks, buy may
invest up to 15% of total assets in a combination of foreign securities
and/or bonds rated as low as CC/Ca and their unrated equivalents.
(k) Medium Capitalization Growth Fund and Focused Small Cap Growth Fund may
invest up to 10% of total assets in foreign securities. Foreign equities
include but are not limited to common stocks, convertible preferred
stocks, preferred stocks, warrants, ADRs, GDRs and EDRs.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the values of a Fund's assets will not be
considered a violation of the restriction.
The Funds will invest only in countries on the Adviser's Approved Country
Listing. The Approved Country Listing is a list maintained by the Adviser's
investment department that outlines all countries, including the United States,
that have been approved for investment by Funds managed by the Adviser.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Funds is managed by the Trustees who elect officers who are
responsible for the day-to-day operations of the Funds and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Funds
are also officers or directors of the Funds' Adviser and/or one or more or the
Subadvisers, or officers and/or directors of the Funds' principal distributor,
John Hancock Funds, Inc. ("John Hancock Funds").
19
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Maureen R. Ford * Trustee, Chairman, President Executive Vice President John
101 Huntington Avenue and Chief Executive Officer Hancock Financial Services, Inc.,
Boston, MA 02199 (1,2) John Hancock Life Insurance
March 1950 Company; Chairman, Director,
President and Chief Executive
Officer, John Hancock Advisers,
Inc. (the "Adviser") and The
Berkeley Financial Group, Inc.
("The Berkeley Group"); Chairman,
Director and Chief Executive
Officer, John Hancock Funds, Inc.
("John Hancock Funds"); Chairman,
Director and President, John
Hancock Insurance Agency, Inc.
("Insurance Agency, Inc.");
Chairman, Director and Chief
Executive Officer, Sovereign Asset
Management Corporation (SAMCorp.);
Director, Independence Investment
LLC and Independence Fixed Income
LLC; Senior Vice President,
MassMutual Insurance Co. (until
1999); Senior Vice President,
Connecticut Mutual Insurance Co.
(until 1996).
John M. DeCiccio* Trustee Executive Vice President and Chief
P.O. Box 111 Investment Officer John Hancock
Boston, MA 02117 Financial Services, Inc.; Director,
July 1948 Executive Vice President and Chief
Investment Officer, John Hancock
Life Insurance Company; Chairman of
the Committee of Finance of John
Hancock Life Insurance Company;
Director, John Hancock
Subsidiaries, Inc., Hancock Natural
Resource Group, Independence
Investment LLC, Independence Fixed
Income LLC, The Berkeley Group, the
Adviser, John Hancock Funds,
Massachusetts Business Development
Corporation; Director, Insurance
Agency Inc. (until 1999) and John
Hancock Signature Services, Inc.
(until 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
20
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
James F. Carlin Trustee Chairman and CEO, Alpha Analytical
101 Huntington Avenue Laboratories (chemical analysis),
Boston, MA 02199 Carlin Consolidated, Inc.
April 1940 (management/investments); Trustee,
Massachusetts Health and Education
Tax Exempt Trust; Director, Uno
Restaurant Corp., Arbella Mutual
(insurance) (until September 2000),
HealthPlan Services, Inc. (until
February 1999), Flagship
Healthcare, Inc. (until November
1999), Carlin Insurance Agency,
Inc. (until April 1999), Chairman,
Massachusetts Board of Higher
Education (until July 1999) and
Trustee of 35 funds managed by the
Adviser.
William H. Cunningham Trustee Former Chancellor, University of
101 Huntington Avenue Texas System and former President
Boston, MA 02199 of the University of Texas, Austin,
January 1944 Texas; James L. Bayless Chair of
Free Enterprise; Director, LaQuinta
Motor Inns, Inc. (hotel management
company) (1985-1998);
Jefferson-Pilot Corporation
(diversified life insurance
company) Billing Concepts,
Southwest Airlines and Introgen ;
Advisory Director, Chase Bank
(formerly Texas Commerce Bank -
Austin).
Ronald R. Dion Trustee Chairman and Chief Executive
101 Huntington Avenue Officer, R.M. Bradley & Co., Inc.;
Boston, MA 02199 Director, The New England Council
March 1946 and Massachusetts Roundtable;
Trustee, North Shore Medical
Center, Director, BJ's Wholesale
Club, Inc. and a corporator of the
Eastern Bank; Trustee, Emmanuel
College.
Charles L. Ladner Trustee Chairman and Trustee, Dunwoody
101 Huntington Avenue Village, Inc.; Senior Vice
Boston, MA 02199 President and Chief Financial
February 1938 Officer, UGI Corporation (Public
Utility Holding Company) (retired
1998); Vice President and Director
for AmeriGas, Inc. (retired 1998);
Vice President of AmeriGas
Partners, L.P. (until 1997);
Director, EnergyNorth, Inc. (until
1995).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
21
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Steven R. Pruchansky Trustee (1) Chairman and Chief Executive
101 Huntington Avenue Officer, Mast Holdings, Inc. (since
Boston, MA 02199 June 1, 2000); Director and
August 1944 President, Mast Holdings, Inc.
(until May 31, 2000); Director,
First Signature Bank & Trust
Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Norman H. Smith Trustee Lieutenant General, United States
101 Huntington Avenue Marine Corps; Deputy Chief of Staff
Boston, MA 02199 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
John P. Toolan Trustee Director, The Smith Barney Muni
101 Huntington Avenue Bond Funds, The Smith Barney
Boston, MA 02199 Tax-Free Money Funds, 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 December,
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).
William L. Braman Executive Vice President and Executive Vice President and Chief
101 Huntington Avenue Chief Investment Officer (2) Investment Officer, the Adviser and
Boston, MA 02199 each of the John Hancock Funds;
December 1953 Executive Vice President and Chief
Investment Officer, Barring Asset
Management, London UK (until May
2000).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
22
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Richard A. Brown Senior Vice President and Senior Vice President and Chief
101 Huntington Avenue Chief Financial Officer (2) Financial Officer of the Adviser,
Boston, MA 02199 John Hancock Funds, and The
April 1949 Berkeley Group; Second Vice
President and Senior Associate
Controller, Corporate Tax
Department, John Hancock Financial
Services, Inc. (until January
2001).
Susan S. Newton Senior Vice President, Senior Vice President and Chief
101 Huntington Avenue Secretary and Chief Legal Legal Officer the Adviser; John
Boston, MA 02199 Officer Hancock Funds; Vice President,
March 1950 Signature Services (until May
2000), The Berkeley Group, NM
Capital and SAMCorp.
Thomas H. Connors Vice President and Compliance Vice President and Compliance
101 Huntington Avenue Officer Officer, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds.
September 1959
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
23
The following table provides information regarding the compensation paid by the
Fund and other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Mr. DeCiccio and Ms. Ford, each a
non-Independent Trustee, and each of the officers of the Fund are interested
persons of the Adviser, and/or affiliates are compensated by the Adviser and
receive no compensation from the Fund for their services.
Total Compensation from all
Aggregate Compensation Funds in John Hancock Fund
Trustees from the Funds(1) Complex to Trustees (2)
- -------- ---------------------- ---------------------------
James F. Carlin $ 2,217 $ 72,000
William H. Cunningham* 2,221 72,100
Ronald R. Dion* 2,217 72,000
Charles L. Ladner 2,333 75,100
Steven R. Pruchansky* 2,329 75,000
Norman H. Smith* 2,440 78,000
John P. Toolan* 2,191 70,250
-------- ----------
Total $15,948 $514,450
(1) Compensation is for the fiscal year ended February 28, 2001.
(2) Total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is for the calendar year ended December 31,
2000 As of that date, there were sixty-nine funds in the John
Hancock Fund Complex, with each of these Independent Trustees
serving on thirty four funds.
(*) As of December 31, 2000, the value of the aggregate accrued
deferred compensation from all Funds in the John Hancock fund
complex for Mr. Cunningham was $514,062, for Mr. Dion was $80,629,
for Ms. McCarter was $179,156 (resigned as of October 1, 1998) for
Mr. Pruchansky was $123,670, for Mr. Smith was $182,867 and for Mr.
Toolan was $623,506 under the John Hancock Deferred Compensation
Plan for Independent Trustees (the "Plan").
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.
As of June 4, 2001, the officers and Trustees of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund. As of
that date, the following shareholders of record beneficially owned 5% or more of
the outstanding shares of the Fund.
24
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
- ------------------------------- ---- -------------------
The Investment Incentive Plan Active Bond 24.36%
101 Huntington Avenue
Boston MA 02199-7603
The Chase Manhattan Bank Active Bond 33.80%
450 West 33rd Street
New York NY 10001
Manistique Papers, Inc. Active Bond 6.65%
453 S Mackinac Avenue
Manistique, MI
Sterling Trust Company Active Bond 9.23%
FBO SIPEX Tax Deferred Savings Plan
1380 Lawrence Street
Denver CO
Sterling Trust Company Active Bond 6.49%
FBO Arden Group 401 (k)
Retirement Savings Plan
1380 Lawrence Street
Denver CO
Gilbane International Equity 44.16%
Gilbane Profit Sharing Plan
7 Jackson Walkway
Providence RI 02902-3623
Sterling Trust Company International Equity 12.45%
FBO Southern Industrial 401(k) Plan
1380 Lawrence Street
Denver CO
The Investment Incentive Plan International Equity 18.65%
101 Huntington Avenue
Boston MA 02199-7603
Sterling Trust Company International Equity 7.63%
FBO Texon USA, Inc.
Savings Plan for Employees of
Texon USA Inc.
1380 Lawrence Street
Denver CO
Miter & Co Independence Diversified Core 7.10%
c/o Marshall & Iisley Trust Co. Equity Fund II-Class I
P.O. Box 2977
Milwaukee WI 53201
25
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
- ------------------------------- ---- -------------------
Northern Trust Independence Diversified Core 10.79%
FBO AM Castle and Co Pension Plan Equity Fund II-Class I
P.O. Box 92956
Chicago IL
NABANK Independence Diversified Core 6.18%
P.O. Box 2180 Equity Fund II-Class I
Tulsa OK 74101
Peter Kamin Independence Diversified Core 5.50%
Knowles Electronics Inc. Equity Fund II-Class I
Pension Trust
1151 Maplewood Drive
Itasca IL
Sterling Trust Company Independence Diversified Core 5.85%
FBO BAO Retirement & Savings Plan Equity Fund II-Class I
1380 Lawrence Street
Denver CO
Independence Investment Associates Independence Medium Capitalization 7.65%
53 State Street
Boston MA 02109-2809
Hancock Investment Subsidiaries Independence Medium Capitalization 14.42%
401K Plan & Trust
Independence Investment Assoc Ttee
53 State Street
Boston MA 02109-2809
Gilbane Independence Medium Capitalization 6.91%
7 Jackson Walkway
Providence RI 02903-323
The Investment Incentive Plan Dividend Performers 56.09%
101 Huntington Avenue
Boston MA 02199-7603
The Chase Manhattan Bank Dividend Performers 11.70%
450 West 33rd Street
New York NY 10001
26
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
- ------------------------------- ---- -------------------
Sterling Trust Company Dividend Performers 11.39%
FBO Texon USA, Inc.
Savings Plan for Employees of
Texon USA Inc.
1380 Lawrence Street
Denver CO
CG Enterprises Inc Dividend Performers 7.95%
12001 Guilford Road
Annapolis Junction MD 20701
Liguori Deferred Savings Plan Dividend Performers 6.81%
Liguori Publications Inc
1 Liguori Drive
Liguori, MO 63057
Gilbane Independence Balanced 16.09%
Gilbane Profit Sharing Plan
7 Jackson Walkway
Providence RI 02902-3623
Sterling Trust Company Independence Balanced 5.78%
FBO ACP-ASIM A
1380 Lawrence Street
Denver CO
Dan River, Inc. Independence Balanced 7.54%
Dan River, Inc.401(K) Plan
917 West Main Street
Danville VA 24541
Sterling Trust Company Independence Balanced 8.57%
FBO BAO Retirement & Savings Plan
1380 Lawrence Street
Denver CO
The Investment Incentive Plan Medium Capitalization Growth 32.49%
101 Huntington Avenue
Boston MA 02199-7603
Sterling Trust Company Medium Capitalization Growth 11.97%
FBO Southern Industrial 401(k) Plan
1380 Lawrence Street
Denver CO
27
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
- ------------------------------- ---- -------------------
Sterling Trust Company Medium Capitalization Growth 7.85%
FBO Texon USA, Inc.
Savings Plan for Employees of
Texon USA Inc.
1380 Lawrence Street
Denver CO
Globe Manufacturing Co Medium Capitalization Growth 6.90%
401K Plan
456 Bedford Street
Fall River MA 02720-4802
Sterling Trust Company Medium Capitalization Growth 7.72%
FBO SIPEX Tax Deferred Savings Plan
1380 Lawrence Street
Denver CO
Sterling Trust Company Medium Capitalization Growth 6.21%
FBO One Color Comm 401(k)
Retirement Plan
1380 Lawrence Street
Denver CO
Gilbane Small Capitalization Value 55.89%%
Gilbane Profit Sharing Plan
7 Jackson Walkway
Providence RI 02902-3623
The Investment Incentive Plan Small Capitalization Value 19.45%
101 Huntington Avenue
Boston MA 02199-7603
Sheldon & Co. Small Capitalization Value 5.37%
c/o National City Bank
P.O. Box 94984
Cleveland OH 44101
Fidelity Investment Institutional Small Capitalization Value 11.60%
Operations Co. As Agent for certain
employee Benefit plans
100 Magellan Way
Covington KY 41015
The Investment Incentive Plan Focused Small Cap Growth Fund- 36.00%
101 Huntington Avenue Class I
Boston MA 02199-7603
28
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
- ------------------------------- ---- -------------------
Cape Ann Local Lodge #2654 Focused Small Cap Growth Fund 14.00%
401K Plan -Class I
c/o Gloucester Engineering
PO Box 900
Gloucester MA 01931-0900
Manistique Papers, Inc. Focused Small Cap Growth Fund 5.64%
453 S. Mackinac Avenue -Class I
Manistique MI. 49854
CG Enterprises Inc Focused Small Cap Growth 5.91%
12001 Guilford Road Fund-Class I
Annapolis Junction MD 20701
Sealol Inc. Retirement and 401(k) Focused Small Cap Growth 5.77%
EG&G Sealol Inc Fund-Class I
15 Pioneer avenue
Warwick, RI
The Chase Manhattan Bank Focused Small Cap Growth 6.63%
450 West 33rd Street Fund-Class I
New York NY 10001
Sterling Trust Company Focused Small Cap Growth 8.73%
FBO ACP-ASIM A Fund-Class I
1380 Lawrence St Ste 1400
Denver CO 80204
Sterling Trust Company Focused Small Cap Growth 7.02%
FBO ARA-Individual Retirement Fund-Class I
1380 Lawrence St Ste 1400
Denver CO 80204
Sterling Trust Company Focused Small Cap Growth 5.80%
FBO ACP-ASIM B Fund-Class I
1380 Lawrence St Ste 1400
Denver CO 80204
Shareholders of a Fund having beneficial ownership of more than 25% of the
shares of a Fund may be deemed for purposes of the Investment Company Act of
1940, as amended, to control that Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Funds and the other funds and
publicly traded investment companies in the John Hancock group of funds as well
as retail and institutional privately managed accounts. 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
29
than $100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating from Standard & Poor's
and A.M. Best. Founded in 1862, the Life Company has been serving clients for
over 130 years. The Small Capitalization Value Fund is managed by Timothy E.
Quinlisk, CFA. Mr. Quinlisk is a Senior Vice President of the Adviser and has
managed the Fund since 1998 except between January and March 2000.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Funds' shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including but not
limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies; expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses or redeeming shares;
brokerage and other expenses connected with the execution of portfolio
securities transactions; expenses pursuant to the Fund's plan of distribution;
fees and expenses of custodians including those for keeping books and accounts,
maintaining a committed line of credit and calculating the net asset value of
shares; fees and expenses of transfer agents and dividend disbursing agents;
legal, accounting, financial, management, tax and auditing fees and expenses of
the Fund (including an allocable portion of the cost of the Adviser's employees
rendering such services to the Fund); the compensation and expenses of Trustees
who are not otherwise affiliated with the Trust, the Adviser or any of their
affiliates; expenses of Trustees' and shareholders, meetings; trade association
membership; insurance premiums; and any extraordinary expenses.
As of December 14, 2000, with respect to International Equity Fund, the Adviser
has entered into a sub-investment management contract (the "Sub-Advisory
Agreement") with Nicholas-Applegate under which, subject to the review of the
Trustees and the overall supervision of the Adviser, Nicholas-Applegate is
responsible for providing the Fund with investment advice. Nicholas-Applegate
will also provide the Fund on a continuous basis with economic, financial and
political information, research and assistance concerning international markets.
Nicholas-Applegate is a California limited partnership, with offices at 600 West
Broadway, 30th Floor, San Diego, California 92101. Nicholas-Applegate was
organized in August 1984 to manage discretionary accounts investing primarily in
publicly traded equity securities and securities convertible into or exercisable
for publicly traded equity securities, with the goal of capital appreciation. On
January 31, 2001, Nicholas-Applegate was acquired by Allianz of America, Inc.
("AZOA"). Allianz AG, the parent of AZOA, is a German Aktiengesellschaft, a
German publicly traded company, which, together with its subsidiaries, comprises
the world's largest insurance group (the "Allianz Group"). Allianz Group
currently has assets under management of approximately $690 billion, and in its
last fiscal year wrote approximately $50 billion in gross insurance premiums.
Allianz AG's address is: Koeniginstrasse 28, D-80802, Munich, Germany.
Until December 14, 2000, the Sub-Adviser to the International Equity Fund was
Indocam International Investment Services ("IIIS"). IIIS is organized under the
laws of France and is a wholly owned subsidiary of Indocam, the asset management
affiliate of Credit Agricole, a French banking group. Indocam is an indirect
subsidiary of certain holding companies of Caisse Nationale de Credit Agricole
("CNCA"), 91-93 Boulevard Pasteur, Paris, France 75015, one of the largest
financial and industrial groups in Europe. The Sub-Advisory Agreement with IIIS
was terminated effective December 14, 2000. Until March 1, 2000, International
Equity Fund had another Sub-Adviser, John Hancock Advisers International Limited
("JHAI"), located at 6th Floor, Duke's Court, 32-36 Duke Street, St. James's,
London SWIY 6DF, England. JHAI is a wholly owned subsidiary of the Adviser
formed in 1987 to provide investment research and advisory services to U.S.
institutional clients. The Sub-Advisory Agreement with JHAI was terminated
effective March 1, 2000.
30
With respect to each Independence Fund, the Adviser has entered into a
Sub-Advisory Agreement with Independence Investment LLC. ("Independence")
(formerly Independence Investment Associates, Inc. Independence, located at 53
State Street, Boston, Massachusetts 02109, and organized in 1982, is a wholly
owned indirect subsidiary of John Hancock Subsidiaries, Inc.
Under each respective Sub-Advisory Agreement, the corresponding Sub-Adviser,
subject to the review of the Trustees and the over-all supervision of the
Adviser, is responsible for managing the investment operations of the
corresponding Fund and the composition of the Fund's portfolio and furnishing
the Fund with advice and recommendations with respect to investments, investment
policies and the purchase and sale of securities.
As compensation for its services under the Advisory Agreement, each Fund pays
the Adviser monthly a fee based on a stated percentage of the average daily net
assets of each Fund.
Funds Rate
- ------ ----
Active Bond Fund .50% of average daily net assets up to $1.5 billion
.45% of such assets in excess of $1.5 billion
Small Capitalization Value Fund .70% of average daily net assets up to $500 million
.65% of such assets in excess of $500 million
Dividend Performers Fund .60% of average daily net assets up to $500 million
.55% of such assets in excess of $500 million
Medium Capitalization Growth Fund .80% of average daily net assets up to $500 million
.75% of such assets in excess of $500 million
Focused Small Cap Growth Fund .80% of average daily net assets
International Equity Fund .90% of average daily net assets up to $500 million
.65% of such assets in excess of $500 million
Balanced Fund .70% of the average daily net assets up to $500 million
.65% of such assets in excess of $500 million
Diversified Core Equity Fund II .50% of the average daily net assets up to $1 billion
.45% of such assets in excess of $1 billion
Medium Capitalization Fund .80% of the average daily net assets up to $500 million
.75% of such assets in excess of $500 million
The advisory fees paid by Focused Small Cap Growth Fund and International Equity
Fund are greater than those paid by most funds. Due to the added complexity of
managing funds with investment strategies similar to these Funds, advisory fees
of similar funds tend to be higher than those paid by most funds. Also, the
advisory fees paid by Medium Capitalization Fund are greater, but they are
comparable to those paid by many investment companies with similar investment
objectives and policies.
Under each Sub-Advisory Agreement, the Adviser (not the Fund) pays a portion of
its fee to the corresponding Sub-Adviser. Sub-Advisory fees are paid at the
following rates: Diversified Core Equity Fund II, 80% of the advisory fee
payable on the Fund's average daily net assets; Medium Capitalization Fund, 55%
of the advisory fee payable on the Fund's average daily net assets and Balanced
Fund, 60% of the advisory fee payable on the Fund's average daily net assets.
With respect to International Equity Fund, the Adviser pays Nicholas-Applegate a
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Sub-Advisory fee quarterly equal on an annual basis to (i) 0.90% of the first
$500,000,000 of the average daily net asset value of the Fund; and (ii) 0.65% of
the average daily net asset value of the Fund in excess of $500,000,000. From
December 14, 2000 until May 11, 2001, the Adviser paid Nicholas-Applegate a
Sub-Advisory fee equal to 55% of the gross management fee received by the
Adviser with respect to the International Equity Fund's average daily net
assets. Until December 14, 2000 with respect to International Equity Fund, the
Adviser paid IIIS a Sub-Advisory fee equal to 55% of the gross management fee
received by the Adviser with respect to the International Equity Fund's average
daily net assets. The Sub-Advisory Agreement with IIIS was terminated effective
December 14, 2000. For International Equity Fund, the Adviser also paid JHAI a
Sub-Advisory fee equal to 70% of the advisory fee payable on the Fund's average
daily net assets up to $500 million and 90% of the advisory fee payable on the
Fund's assets exceeding $500 million. JHAI agreed to waive all but 0.05% of this
fee beginning January 1, 2000. The Sub-Advisory Agreement with JHAI was
terminated effective March 1, 2000.
For the period ended February 28, 1999, the Adviser waived the entire investment
management fee for all Funds except Small Capitalization Value Fund, Dividend
Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified
Core Equity Fund II and Medium Capitalization Fund. For the period ended
February 28, 1999, the Adviser received $3,095, $69,056, $189,004, $511,989,
$2,716,529 and $20,569 after expense limitation from Small Capitalization Value
Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced
Fund, Diversified Core Equity Fund II and Medium Capitalization Fund,
respectively.
For the period ended February 29, 2000, the Adviser waived the entire investment
management fee for all Funds except Small Capitalization Value Fund, Dividend
Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified
Core Equity Fund II and Medium Capitalization Fund. For the period ended
February 29, 2000, the Adviser received $2,775, $42,132, $89,049, $479,968,
$2,710,449 and $31,290 after expense limitation from Small Capitalization Value
Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced
Fund, Diversified Core Equity Fund II and Medium Capitalization Fund,
respectively.
For the period ended February 28, 2001, the Adviser waived the entire investment
management fee for all Funds except Small Capitalization Value Fund, Dividend
Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified
Core Equity Fund II and Medium Capitalization Fund. For the period ended
February 28, 2001, the Adviser received $123,547, $29,197, $154,799, $352,005,
$1,707,364 and $70,479 after expense limitation from Small Capitalization Value
Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced
Fund, Diversified Core Equity Fund II and Medium Capitalization Fund,
respectively.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit. The Adviser has agreed to limit the Funds' expenses as
follows: Active Bond 0.60%; Dividend Performers 0.70%; Medium Capitalization
Growth 0.90%; Small Capitalization Value 0.80%; Focused Small Cap Growth
(excluding transfer agent expenses) 0.85%; International Equity 1.00%;
Diversified Core Equity II 0.70%; Medium Capitalization 1.00% and Balanced Fund
0.90%.
Securities held by the Funds may also be held by other funds or investment
advisory clients for which the Adviser, the Sub-Advisers or their respective
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 or Sub-Adviser for a Fund or for
other funds or clients for which the Adviser or Sub-Advisers render 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, Sub-Advisers or
their respective affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
32
Pursuant to each Advisory Agreement, where applicable, Sub-Advisory Agreement,
the Adviser and Sub-Adviser are not liable for any error of judgment or mistake
of law or for any loss suffered by the Funds in connection with the matters to
which their respective Agreements relate, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser or
Sub-Adviser in the performance of their duties or from their reckless disregard
of the obligations and duties under the applicable Agreement.
Under each Advisory Agreement, each Fund may use the name "John Hancock" or any
name derived from or similar to it only for as long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If a Fund's
Advisory Agreement is no longer in effect, the Fund (to the extent that it
lawfully can) will cease to use such 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.
Under the Sub-Advisory Agreement of each Independence Fund, each Independence
Fund may use the name "Independence" or any name derived from or similar to it
only for as long as the Sub-Advisory Agreement is effect. When the Sub-Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use any name indicating that it is advised by or otherwise
connected with Independence. In addition, Independence or the Life Company may
grant the non-exclusive right to use the name "Independence" or any similar name
to any other corporation or entity, including but not limited to any investment
company of which Independence or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
The continuation of the Advisory Agreement, the Sub-Advisory Agreements and the
Distribution Agreement was approved by all of the Trustees in June of 2001. With
respect to International Equity Fund, on December 12, 2000, the Trustees
approved the termination of IIIS as Sub-Adviser and appointed Nicholas-Applegate
as Sub-Adviser effective December 14, 2000. This appointment was approved by
International Equity Fund's shareholders on April 25, 2001. The Advisory
Agreement, the Sub-Advisory Agreements and the Distribution Agreement will
continue in effect from year to year, provided that its continuance is approved
annually both (i) by the holders of a majority of the outstanding voting
securities of the Trust or by the Trustees, and (ii) by a majority of the
Trustees who are not parties to the Agreement or "interested persons" of any
such parties. Each of these Agreements may be terminated on 60 days written
notice by any party or by vote of a majority of the outstanding voting
securities of the Fund and will terminate automatically if assigned.
Accounting and Legal Services Agreement. The Trust, on behalf of the Funds, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this Agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal years ended February 28, 1999, February 29,
2000 February 28, 2001, the Fund paid the Adviser the following for services
under this Agreement: Balanced Fund $12,152, $13,666 and $10,633, Medium
Capitalization Fund $1,587, $2,048 and $2,759, Diversified Core Equity Fund II
$84,538, $98,578 and $64,547, Active Bond Fund $858, $902 and $1,045, Dividend
Performers Fund $3,109, $3,096 and $2,436, Medium Capitalization Growth Fund
$5,047, $3,853 and $5,315, Small Capitalization Value Fund $1,235, $2,289 and
$5,168, Focused Small Cap Growth Fund $352, $752 and $1,491 and International
Equity Fund $1,324, $1,587 and $1,913.
Personnel of the Adviser and its affiliates may trade securities for their
personal accounts. The Funds also may hold, or may be buying or selling, the
same securities. To prevent the Fund from being disadvantaged, the adviser and
its affiliates and the Fund have adopted a code of ethics which restricts the
trading activity of those personnel.
33
DISTRIBUTION CONTRACT
The Fund has a Distribution Agreement with John Hancock Funds. Under the
Agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each 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. These Selling Brokers are authorized to designate other
intermediaries to receive purchase and redemption orders on behalf of the Fund.
John Hancock Funds accepts orders for the purchase of the shares of the Funds
which are continually offered at net asset value next determined.
SALES COMPENSATION
As part of its business strategy, John Hancock Funds may pay compensation to
financial services firms that sell the Fund's shares. These firms typically pass
along a portion of this compensation to your financial representative.
John Hancock Funds may make a one-time payment at the time of initial purchase
out of its own resources to a Selling Broker who sells shares of the Fund. This
payment may not exceed 0.15% of the amount invested.
In addition, from time to time, John Hancock Funds, at its expense, may provide
significant additional compensation to financial services firms in connection
with the sale of shares of the Fund. Such compensation provided by John Hancock
Funds may include, for example, financial assistance to financial services firms
in connection with their marketing and sales development programs for their
registered representatives and other employees, as well as payment for travel
expenses, including lodging, incurred by registered representatives and other
employees for such marketing and sales development programs, seminars for the
public, advertising and sales campaigns regarding one or more Funds, and/or
other financial services firms-sponsored events or activities. From time to
time, John Hancock Funds may make expense reimbursements for special training of
a financial services firm's registered representatives and other employees in
group meetings. Other compensation, such as asset retention fees, finder's fees
and reimbursement for wire transfer fees, may be offered to the extent not
prohibited by law or any self-regulatory agency, such as the NASD.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's shares, the
following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
34
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Trustees believe accurately reflects fair value.
The NAV for each Fund is determined each business day at the close of regular
trading on the New York Stock Exchange (typically 4 p.m. Eastern Time) by
dividing the net assets by the number of its shares outstanding. On any day an
international market is closed and the New York Stock Exchange is open, any
foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
PURCHASES AND REDEMPTIONS THROUGH THIRD PARTIES
Shares of the Funds may be purchased or redeemed through certain broker-dealers
or Service Agents ("Brokers"). Brokers may charge for their services or place
limitations on the extent to which you may use the services of the Funds. A Fund
will be deemed to have received a purchase or redemption order when an
authorized broker, or if applicable, a broker's authorized designee, receives
the order. If a broker is an agent or designee of the Fund, orders are processed
at the NAV next calculated after the broker receives the order. The broker must
segregate any orders it receives after the close of regular trading on the New
York Stock Exchange and transmit those orders to the Fund for execution at NAV
next determined. Some brokers that maintain nominee accounts with the Funds for
their clients charge an annual fee on the average net assets held in such
accounts for accounting, servicing and/or distribution services they provide
with respect to the underlying Fund shares. John Hancock Funds, Inc. (the Fund's
principal distributor), is responsible for paying these fees.
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. Each Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, each 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 that period.
35
DESCRIPTION OF THE FUNDS' SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Funds. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Funds,
without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have authorized shares of eleven series
of which nine series are described herein. Additional series may be added in the
future. The Declaration of Trust also authorizes the Trustees to classify and
reclassify the shares of the Funds, or any other series of the Trust, into one
or more classes. Effective October 1, 1999, the Trustees authorized the issuance
Class P shares for Independence Diversified Core Equity Fund II. Existing shares
of the Fund were designated "Class I" shares. Class P shares are discussed in a
separate Statement of Additional Information. Effective November 15, 2000, the
Trustees authorized the issuance of Class A, Class B, and Class C shares for
Focused Small Cap Growth Fund. Existing shares of Focused Small Cap Growth Fund
were designated "Class I" shares. Class A, Class B and Class C shares are
discussed in a separate Statement of Additional Information.
Each share of a Fund represents an equal proportionate interest in the assets
belonging to that Fund. When issued, shares are fully paid and nonassessable. In
the event of liquidation of a Fund, shareholders are entitled to share pro rata
in the net assets of the Fund available for distribution to such shareholders.
Shares of the Trust are freely transferable and have no preemptive, subscription
or conversion rights.
In accordance with the provisions of the Declaration of Trust, the Trustees have
initially determined that shares entitle their holders to one vote per share on
any matter on which such shares are entitled to vote. The Trustees may determine
in the future, without the vote or consent of shareholders, that each dollar of
net asset value (number of shares owned times net asset value per share) will be
entitled to one vote on any matter on which such shares are entitled to vote.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Funds have no intention of holding annual meetings of shareholders.
Each Fund's shareholders may remove a Trustee by the affirmative vote of at
least two-thirds of the Trust's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Liability is therefore limited to circumstances in which a
Fund itself would be unable to meet its obligations, and the possibility of this
occurrence is remote.
A Fund reserves the right to reject any application which conflicts with a
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested in the
fund or funds from which a redemption was made or dividend paid. Information
36
provided on the account application may be used by a Fund to verify the accuracy
of the information or for background or financial history purposes. A joint
account will be administered as a joint tenancy with right of survivorship,
unless the joint owners notify Signature Services of a different intent. A
shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions, the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A Foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
TAX STATUS
Each Fund is treated as a separate entity for accounting and tax purposes, has
qualified as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") and intends to continue to qualify
for each taxable year. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, a Fund will not be subject
to Federal income tax on its taxable income (including net realized capital
gains) which is distributed to shareholders in accordance with the timing
requirements of the Code.
Each Fund will be subject to a 4% nondeductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. Each Fund
intends, under normal circumstances, to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from each Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from a Fund's "investment company taxable income,"
they will be taxable as ordinary income; and if they are paid from the Fund's
"net capital gain," they will be taxable as long-term capital gain. (Net capital
gain is the excess (if any) of net long-term capital gain over net short-term
capital loss, and investment company taxable income is all taxable income and
capital gains, other than those gains and losses included in computing net
capital gain, after reduction by deductible expenses.) Some distributions may be
paid in January but may be taxable to shareholders as if they had been received
on December 31 of the previous year. The tax treatment described above will
apply without regard to whether distributions are received in cash or reinvested
in additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt securities, certain
foreign currency options and futures, foreign currency forward contracts,
foreign currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains and
37
losses to be treated as ordinary income and losses and may affect the amount,
timing and character of distributions to shareholders. Transactions in foreign
currencies that are not directly related to a Fund's investment in stock or
securities, including speculative currency positions, could under future
Treasury regulations produce income not among the types of "qualifying income"
from which the Fund must derive at least 90% of its annual gross income for each
taxable year. If the net foreign exchange loss for a year treated as ordinary
loss under Section 988 were to exceed a Fund's investment company taxable income
computed without regard to such loss, the resulting overall ordinary loss for
such year would not be deductible by a Fund or its shareholders in future years.
If a Fund invests (either directly or through depository receipts such as ADRs,
GDRs or EDRs) in stock (including an option to acquire stock such as is inherent
in a convertible bond) of certain foreign corporations that receive at least 75%
of their annual gross income from passive sources (such as interest, dividends,
certain rents and royalties, or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to Federal income tax and additional
interest charges on "excess distributions" received from these passive foreign
investment companies or gain from the sale of stock in such companies, even if
all income or gain actually received by the Fund is timely distributed to its
shareholders. The Funds would not be able to pass through to their respective
shareholders any credit or deduction for such a tax. An election may be
available to ameliorate these adverse tax consequences, but could require the
Funds to recognize taxable income or gain without the concurrent receipt of
cash. These investments could also result in the treatment of associated capital
gains as ordinary income. Each Fund may limit and/or manage its investments in
passive foreign investment companies to minimize its tax liability or maximize
its return from these investments.
The amount of a Fund's net realized capital gains, if any, in any given year
will vary depending upon the current investment strategy of the Adviser and
Subadvisers and whether the Adviser and the Subadvisers believes it to be in the
best interest of the Funds to dispose of portfolio securities and/or engage in
options, futures or forward transactions that will generate capital gains. At
the time of an investor's purchase of Fund shares, a portion of the purchase
price is often attributable to realized or unrealized appreciation in a Fund's
portfolio or undistributed taxable income of a Fund. Consequently, subsequent
distributions on those shares from such appreciation or income may be taxable to
such investor even if the net asset value of the investor's shares is, as a
result of the distributions, reduced below the investor's cost for such shares,
and the distributions in reality represent a return of a portion of the purchase
price.
Upon a redemption or other disposition of shares of a Fund (including by
exercise of the exchange privilege), in a transaction that is treated as a sale
for tax purposes, a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. Any loss realized on a redemption or exchange
may be disallowed to the extent the shares disposed of are replaced with other
shares of the same Fund within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of, such as pursuant to the
automatic dividend reinvestments. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
Also, any loss realized upon the redemption of shares with a tax holding period
of six months or less will be treated as a long-term capital loss to the extent
of any amounts treated as distributions of long-term capital gain with respect
to such shares. Shareholders should consult their own tax advisers regarding
their particular circumstances to determine whether a disposition of Fund shares
is properly treated as a sale for tax purposes, as is assumed in the foregoing
discussion.
The Funds reserve the right to retain and reinvest all or any portion of the
excess, as computed for Federal income tax purposes, of net long-term capital
gain over net short-term capital loss in any year. Although each Fund's present
intention is to distribute all net capital gains, if any, the Fund will not in
any event distribute net capital gains 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
38
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 such Fund had distributed
to him on the last day of its taxable year his pro rata share of such excess,
and he had paid his pro rata share of the taxes paid by such Fund and reinvested
the remainder in the Fund. Accordingly, each shareholder would (a) include his
pro rata share of such excess as long-term capital gain in his return for his
taxable year in which the last day of the Fund's taxable year falls, (b) be
entitled either to a tax credit on his return for, or a refund of, his pro rata
share of the taxes paid by the Fund, and (c) be entitled to increase the
adjusted tax basis for his Fund shares by the difference between his pro rata
share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, each Fund is permitted to carry forward a net
realized capital loss in any year to offset net capital gains of that Fund, 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 a Fund and, as noted above, would not be
distributed as such to shareholders. As of February 28, 2001, Active Bond Fund
had a capital loss carryforwards of $49,819 and $79,391 which will expire in
2008 and 2009, respectively. Focused Small Cap Growth Fund had a capital loss
carryforwards of $332,423 which will expire in 2009. International Fund had a
capital loss carryforwards of $636,448 which will expire in 2009. The remaining
Funds do not have any capital loss carryforwards.
For purposes of dividends received deduction available to corporations,
dividends received by a Fund, if any, from U.S. domestic corporations in respect
of any share of stock held by the Fund, for U.S. Federal income tax purposes,
for at least 46 days (91 days in the case of certain preferred stock) during a
prescribed period extending before and after such dividend and distributed and
properly designated by the Fund may be treated as qualifying dividends.
Corporate shareholders must meet the holding period requirements stated above
with respect to their shares of the applicable Fund for each dividend in order
to qualify for the deduction and, if they have any debt that is deemed under the
Code directly attributable to such shares, may be denied a portion of the
dividends-received deduction. The entire qualifying dividend, including the
otherwise deductible amount, will be included in determining alternative minimum
tax liability, if any. Additionally, any corporate shareholder should consult
its tax adviser regarding the possibility that its tax basis in its shares may
be reduced, for Federal income tax purposes, by reason of "extraordinary
dividends" received with respect to the shares and, to the extent such basis
would be reduced below zero, that current recognition of income would be
required.
Each Fund that invests in securities of foreign issuers may be subject to
withholding and other taxes imposed by foreign countries with respect to its
investments in foreign securities. Some tax conventions between certain
countries and the United States may reduce or eliminate such taxes. With respect
to each Fund, other than International Equity Fund, because more than 50% of the
Fund's total assets at the close of any taxable year will not consist of stock
or securities of foreign corporations, the Funds will not be able to pass such
taxes through to their shareholders, who in consequence will not include any
portion of such taxes in their incomes and will not be entitled to tax credits
or deductions with respect to such taxes. However, such Funds will be entitled
to deduct such taxes in determining the amounts they must distribute in order to
avoid Federal income tax. If more than 50% of the value of the total assets of
International Equity Fund at the close of any taxable year consists of stock or
securities of foreign corporations, the International Equity Fund may file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to (i) include in ordinary gross income (in addition to
taxable dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received, and
(ii) treat such respective pro rata portions as foreign taxes paid by them.
39
If the election is made, shareholders of the International Equity Fund may then
deduct such pro rata portions of qualified foreign taxes in computing their
taxable incomes, or, alternatively, use them as foreign tax credits, subject to
holding period requirements and other limitations, against their U.S. federal
income taxes. Shareholders who do not itemize deductions for Federal income tax
purposes will not, however, be able to deduct their pro rata portion of
qualified foreign taxes paid by International Equity Fund, although such
shareholders will be required to include their shares of such taxes in gross
income. Shareholders who claim a foreign tax credit for such foreign taxes may
be required to treat a portion of dividends received from International Equity
Fund as a separate category of income for purposes of computing the limitations
on the foreign tax credit. Tax-exempt shareholders will ordinarily not benefit
from this election. Each year (if any) that International Equity Fund files the
election described above, its shareholders will be notified of the amount of (i)
each shareholder's pro rata share of qualified foreign taxes paid by the Fund
and (ii) the portion of Fund dividends which represents income from each foreign
country. If the Fund cannot or does not make this election, the Fund will deduct
the foreign taxes it pays in determining the amount it has available for
distribution to shareholders, and shareholders will not include these foreign
taxes in their income, nor will they be entitled to any tax deductions or
credits with respect to such taxes.
Each Fund that invests in zero coupon securities or certain PIK or increasing
rate securities and any other securities with original issue discount (or with
market discount if the Fund elects to include market discount in income
currently) accrues income on such securities prior to the receipt of the
corresponding cash payments. The mark to market or constructive sale rules
applicable to certain options, futures, forwards, short sales or other
transactions, may also require the Fund to recognize income or gain without a
concurrent receipt of cash. Additionally, some countries restrict repatriation
which may make it difficult or impossible for the Fund to obtain cash
corresponding to its earnings or assets in those countries. Each Fund must
distribute, at least annually, all or substantially all of its net income and
net capital gains, including such accrued income or gain, to shareholders to
qualify as a regulated investment company under the Code and avoid Federal
income and excise taxes. Therefore, a Fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash, or may have to
borrow cash, to satisfy these distribution requirements.
Active Bond Fund and Small Capitalization Value Fund may invest in debt
obligations that are in the lower rating categories or are unrated, including
debt obligations of issuers not currently paying interest as well as issuers who
are in default. Investments in debt obligations that are at risk of or in
default present special tax issues for the Funds. Tax rules are not entirely
clear about issues such as when the Funds 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 Active Bond Fund and Small Capitalization
Value Fund in the event they invest in such securities, in order to seek to
ensure that they distribute sufficient income to preserve their status as
regulated investment companies and to avoid becoming subject to Federal income
or excise tax.
The Federal income tax rules applicable to certain structured or hybrid
securities, currency swaps, interest rate swaps, caps, floors and collars, and
possibly other investments or transactions are or may be unclear in certain
respects, and each Fund will account for these investments or transactions in a
manner intended to preserve its qualification as a regulated investment company
and avoid material tax liability.
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.
40
With respect to each Fund that may enter into foreign currency positions,
forwards, futures and options transactions, limitations imposed by the Code on
regulated investment companies may restrict the Funds' ability to enter into
options, futures, foreign currency positions, and forward foreign currency
contracts.
Certain options, futures and forward foreign currency contracts undertaken by a
Fund may cause the Fund to recognize gains or losses from marking to market even
though its positions have not been sold or terminated and affect their character
as long-term or short-term (or in the case of certain foreign currency
contracts, as ordinary income or loss) and timing of some capital gains and
losses realized by the Fund. Additionally, the Fund may be required to recognize
gain, but not loss, if an option, futures contract, short sale or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. Also, certain of a Fund's losses on its
transactions involving options, futures or forward contracts and/or offsetting
or successor portfolio positions may be deferred rather than being taken into
account currently in calculating the Fund's taxable income or gains. Certain of
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 Funds' distributions to shareholders. A Fund
will also take into account the special tax rules (including consideration of
available elections) applicable to options, futures and forward contracts in
order to minimize any potential adverse tax consequence.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) a Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Funds will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although a Fund may in its sole discretion provide relevant
information to shareholders.
Each Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions to shareholders, as well as gross proceeds from the redemption
or exchange of Fund shares, except in the case of certain exempt recipients,
i.e., corporations and certain other investors distributions to which are exempt
from the information reporting provisions of the Code. Under the backup
withholding provisions of Code Section 3406 and applicable Treasury regulations,
all such reportable distributions and proceeds may be subject to backup
withholding of federal income tax at the rate of 31% in the case of non-exempt
shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Funds may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain types of
investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
41
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Funds 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 a non-resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from a Fund and unless an effective IRS Form W-8, Form
W-8BEN, or other authorized withholding certificate on file, to 31% back up
withholding on certain other payments from the Fund. Non U.S. investors should
consult their tax advisers regarding such treatment and the application of
foreign taxes to an investment in the Funds.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
The Funds anticipate that, provided that the Funds qualify as regulated
investment companies under the Code, they will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
Yield
- -----
For the 30-day period ended February 28, 2001, the yield of Active Bond Fund was
5.93%.
A Fund's yield is computed by dividing its net investment income per share
determined for a 30-day period by the maximum offering price per share on the
last day of the period, according to the following standard formula:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV).
Total Return
- ------------
The average annual total return for the 1 year and life of that Fund for the
period ended February 28, 2001 is as follows:
One Year Ended Commencement of Operations
February 28, 2001 to February 28, 2001
----------------- --------------------------
Active Bond Fund 13.11% 7.83% (c)
Small Capitalization Value Fund -10.14% 21.93% (d)
Dividend Performers Fund 2.94% 15.42% (c)
Medium Capitalization Growth Fund -38.23% 12.87% (e)
Focused Small Cap Growth Fund -50.27% 11.63% (b)
International Equity Fund -34.85% 2.01% (c)
Balanced Fund 3.13% 10.93% (f)
Diversified Core Equity Fund II -2.68% 16.76% (a)
Medium Capitalization Fund 13.14% 16.67% (g)
42
(a) Commencement of operations, March 10, 1995.
(b) From commencement of operations, May 2, 1996.
(c) Commencement of operations, March 30, 1995.
(d) Commencement of operations April 19, 1995.
(e) Commencement of operations, April 11, 1995.
(f) Commencement of operations, July 6, 1995.
(g) From commencement of operations, October 2, 1995.
A Fund's total return is computed by finding the average annual compounded rate
of return over the indicated period 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 one year and life of
fund periods.
This calculation assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period.
In addition to average annual total returns, the Funds may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period.
From time to time, in reports and promotional literature, a Fund's total return
will be ranked or compared to indices of mutual funds and bank deposit vehicles.
Such indices may include Lipper Analytical Services, Inc.'s "Lipper-Mutual
Performance Analysis," a monthly publication which tracks net assets and total
return on equity mutual funds in the United States, as well as those published
by Frank Russell, Callan Associates, Wilshire Associates and SEI.
Performance rankings and ratings reported periodically in, and excerpts from,
national financial publications such as Money magazine, Forbes, Business Week,
The Wall Street Journal, Micropal, Inc., Morningstar, Stanger's, and Barron's,
Pensions & Investments and Institutional Investor may also be utilized. The
Funds' promotional and sales literature may make reference to a 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.
43
The performance of the Funds is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of any Fund for
any period in the future. The performance of a Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease a
Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of the Funds
are made by officers of the Adviser pursuant to recommendations made by an
investment policy committee of the Adviser, which consists of officers and
directors of the Adviser, corresponding Subadviser (if applicable), officers and
Trustees who are interested persons of the Trust. Orders for purchases and sales
of securities are placed in a manner, which, in the opinion of the officers of
the Trust, will offer the best price and market for the execution of each such
transaction. Purchases from underwriters of portfolio securities may include a
commission or commissions paid by the issuer and transactions with dealers
serving as market makers reflect a "spread." Debt securities are generally
traded on a net basis through dealers acting for their own account as principals
and not as brokers; no brokerage commissions are payable on such transactions.
Each Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Funds as a factor in the selection of broker-dealers to
execute a Fund's portfolio transactions.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser and corresponding
Subadviser (if applicable) of the Funds. 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
corresponding Subadviser (if applicable). The receipt of research information is
not expected to reduce significantly the expenses of the Adviser and Subadviser.
The research information and statistical assistance furnished by brokers and
dealers may benefit the Life Company or other advisory clients of the Adviser,
and, conversely, brokerage commissions and spreads paid by other advisory
clients of the Adviser may result in research information and statistical
assistance beneficial to the Funds. Similarly, research information and
assistance provided to a Subadviser by brokers and dealers may benefit other
advisory clients or affiliates of such Subadviser. The Funds will not make any
commitment to allocate portfolio transactions upon any prescribed basis. While
the Adviser, in connection with the corresponding Subadviser (if applicable),
will be primarily responsible for the allocation of the Funds' brokerage
business, the policies and practices of the Adviser in this regard must be
consistent with the foregoing and will, at all times, be subject to review by
the Trustees. For the fiscal years ended on February 28, 1999, February 29, 2000
and February 28, 2001, the Funds paid negotiated brokerage commissions in the
amount as follows: Independence Diversified Core Equity Fund II $559,111,
$711,968 and $472,331, Independence Medium Capitalization Fund $8,985, $16,377
and $26,148, Independence Balanced Fund $49,743, $51,745 and $47,389, Dividend
Performers Fund $32,953, $22,210 and $24,294, Medium Capitalization Growth Fund
$96,224, $51,580 and $54,895, Small Capitalization Value Fund $39,784, $42,422
and $82,735, International Equity $38,053, $62,440 and $98,834, Focused Small
Cap Growth Fund $5,313, $9,166 and $16,301. Active Bond Fund had no negotiated
brokerage commissions.
44
As permitted by Section 28(e) of the Securities Exchange Act of 1934, each Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the fiscal year ended February 28,
2001, Dividend Performers Fund, Medium Capitalization Growth Fund, Small
Capitalization Value Fund, Focused Small Cap Growth and Diversified Core Equity
Fund II directed commissions in the amount of $750, $24,730, $20,734, $3,582 and
$74,236, respectively to compensate brokers for research services such as
industry, economics and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Credit
Agricole, IIIS parent, has several affiliates engaged in the brokerage business
in Europe and Asia: Credit Agricole Indosuez Cheuvreux; CPR Action (ex-Schelcher
Prince Cheuvreux de Virieu International Ltd), London; Cheuvreux de Virieu,
Nordic AB, Stockholm, Cheuvreux de Virieu, Espana, Madrid, Credit Agricole
Indosuez Cheuvreux Deutschland GMBH, Frankfourt/ Main; Caboto Sim in Italy; Carr
Securities; Carr Futures SNC. (Paris) and Carr Futures PTE, Singapore (all
"Affiliated Brokers"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. During the
fiscal years ending February 28, 1999, February 29, 2000 and from the period
from March 1, 2000 to December 12, 2000, the Fund did not execute any portfolio
transactions with Affiliated Brokers.
Signator may act as broker for the Funds on securities or commodities exchange
transactions, subject, however, to the general policy of the Funds set forth
above and the procedures adopted by the Trustees pursuant to the Investment
Company Act. Commissions paid to an Affiliated Broker must be at least as
favorable as those which the Trustees believe to be contemporaneously charged by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold. A transaction would not be placed with an
Affiliated Broker if a Fund would have to pay a commission rate less favorable
than the Affiliated Broker's contemporaneous charges for comparable transactions
for its other most favored, but unaffiliated, customers except for accounts for
which the Affiliated Broker acts as clearing broker for another brokerage firm,
and any customers of the Affiliated Broker not comparable to the Fund as
determined by a majority of the Trustees who are not interested persons (as
defined in the Investment Company Act) of the Funds, the Adviser, the
corresponding Subadviser (if applicable) or the Affiliated Broker. Because the
Adviser, which is affiliated with the Affiliated Broker, and the corresponding
Subadviser (if applicable), have, as investment advisers to the Funds, the
obligation to provide investment management services, which includes elements of
research and related investment skills, such research and related skills will
not be used by the Affiliated Broker as a basis for negotiating commissions at a
rate higher than that determined in accordance with the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Funds. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for the Funds with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each account pro rata based on the order
size. For high demand issues (for example, initial public offerings), shares
will be allocated pro rata by account size as well as on the basis of account
objective, account size ( a small account's allocation may be increased to
provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
45
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, duration benchmarks and credit and sector exposure. For example,
value funds will likely not participate in initial public offerings s frequently
as growth funds. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtainable for it. On the other hand, to the extent permitted by law, the
Adviser may aggregate securities to be sold or purchased for the Fund with those
to be sold or purchased for other clients managed by it in order to obtain best
execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., John Hancock Way, Suite 1001, Boston, MA
02217-1001, a wholly-owned indirect subsidiary of the Life Company is the
transfer and dividend paying agent for each Fund. Each Fund pays Signature
Services a fee of 0.05% of its average daily net assets plus certain
out-of-pocket expenses.
CUSTODY OF PORTFOLIO
Portfolio securities of International Equity Fund are held pursuant to a Master
Custodian Agreement, as amended, between the Adviser and State Street Bank and
Trust Company, 200 Berkeley Street, Boston, Massachusetts 02116. Portfolio
securities of the other Funds are held pursuant to a Master Custodian Agreement,
as amended, between the Adviser and Investors Bank & Trust Company, 200
Clarendon Street, Boston, Massachusetts 02116. Under the Master Custodian
Agreements, Investors Bank & Trust Company and State Street Bank and Trust
Company perform custody, portfolio and fund accounting services for their
respective Funds.
INDEPENDENT AUDITORS
The independent auditors of the Funds are Deloitte & Touche LLP, 200 Berkeley
Street, Boston, Massachusetts 02116. Deloitte & Touche LLP audits and renders
opinions on the Funds' annual financial statements and reviews the Funds' annual
Federal income tax returns.
46
APPENDIX A
Description of Securities Ratings1
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: 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 other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: 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.
Caa: 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.
The ratings described here are believed to be the most recent ratings available
at the date of this Statement of Additional Information for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise these ratings, they undertake
no obligation to do so, and the ratings indicated do not necessarily represent
those which would be given to these securities on the date of a Fund's fiscal
year-end.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
- --------
1 The ratings described here are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise these ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent those which would be given to these securities on the date
of a Fund's fiscal year-end.
A-1
C: 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.
Absence of Rating: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or
companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is
not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Commercial Paper
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months.
Issuers rated Prime-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-I or P-1
repayment ability will often be evidenced by the following characteristics:
_ Leading market positions in well established industries.
_ High rates of return on funds employed.
_ Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
_ Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
_ Well established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2
Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong ability
for repayment of senior short-term 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, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
A-2
Prime-3
Issuers (or supporting institutions) rated Prime-3 (P-3) 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 Ratings Group
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major 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.
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.
A-3
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 which
is assigned an actual or implied CCC debt 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.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus of minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "P" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is insured by
the Federal Saving & Loan Insurance Corp. or the Federal Deposit Insurance Corp.
and interest is adequately collateralized. In the case of certificates of
deposit the letter "L" indicates that the deposit, combined with other deposits,
being held in the same right and capacity will be honored for principal and
accrued pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the deposit is
assumed by a successor insured institution, upon maturity.
NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Commercial Paper
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.
********
Notes: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. A Portfolio is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
A-4
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 2001 Annual
Report to Shareholders for the year ended February 28, 2001; (filed
electronically on April 30, 2001, accession number 0000928816-01-500082) and are
included in and incorporated by reference into Part B of the Registration
Statement for John Hancock Institutional Series Trust (file nos. 33-86102 and
811-8852).
John Hancock Institutional Series Trust
John Hancock Active Bond Fund
John Hancock Dividend Performers Fund
John Hancock Medium Capitalization Growth Fund
John Hancock Small Capitalization Value Fund
John Hancock Focused Small Cap Growth Fund
John Hancock International Equity Fund
John Hancock Independence Diversified Core Equity Fund II
John Hancock Independence Medium Capitalization Fund
John Hancock Independence Balanced Fund
Statement of Assets and Liabilities as of February 28, 2001 (audited).
Statement of Operations for the year ended February 28, 2001 (audited).
Statement of Changes in Net Asset for each of the two years in the period
ended February 28, 2001 (audited).
Financial Highlights for each of the 5 years in the period ended February
28, 2001 (audited).
Schedule of Investments as of February 28, 2001 (audited).
Notes to Financial Statements.
Report of Independent Auditors.
F-1
The latest report from your
Fund's management team
ANNUAL REPORT
Institutional Series Trust
Independence Balanced Fund
Independence Diversified Core Equity Fund II
Independence Medium Capitalization Fund
FEBRUARY 28, 2001
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS".]
Table of Contents
Page
1) CEO Corner 3
2) Portfolio Manager Commentary
This commentary reflects the views of the portfolio managers or
portfolio management teams through the end of each Fund's period
discussed in this report. Of course, the managers' or teams' views are
subject to change as market and other conditions warrant.
John Hancock Independence Balanced Fund 4
John Hancock Independence Diversified Core Equity Fund II 7
John Hancock Independence Medium Capitalization Fund 10
3) Financial Statements 13
4) Notes to Financial Statements 33
TRUSTEES
Stephen L. Brown
James F. Carlin*
William H. Cunningham
Ronald R. Dion
Maureen R. Ford
Charles L. Ladner
Steven R. Pruchansky*
Lt. Gen. Norman H. Smith, USMC (Ret.)
John P. Toolan*
* Members of Audit Committee
OFFICERS
Stephen L. Brown
Chairman
Maureen R. Ford
Vice Chairman, President and
Chief Executive Officer
William L. Braman
Executive Vice President and
Chief Investment Officer
Richard A. Brown
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Senior Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Vice President and Compliance Officer
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
INVESTMENT SUBADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, MA 02109
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, MA 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116-5022
CEO CORNER
[A 1" x 1" photo of Maureen R. Ford, Vice Chairman and Chief Executive
Officer, flush right next to first paragraph.]
DEAR FELLOW SHAREHOLDERS:
The stock market brought investors back to earth in 2000 after a run of
nine consecutive years of positive stock-market results. The first two
months of 2001 have been equally sobering. Investors have grown
increasingly worried about the slowing economy and declining corporate
earnings. High-priced growth stocks have been the hardest hit.
Technology stocks, which got pounded in 2000, went into another free
fall in February, sending the NASDAQ Composite Index down 54% by the end
of February from its near-high a year ago. While the broad stock market
has remained volatile, and in negative territory year-to-date, bonds
have done well in response to falling interest rates.
The year 2001 finds us with lingering uncertainties, a new U.S.
president and new possibilities. Questions remain about how successful
the Federal Reserve will be in preventing a recession. Even though the
Fed remains a key force impacting financial markets, we are also
watching Washington, D.C. as President George W. Bush attempts to enact
tax cuts.
This market environment serves to highlight the importance of having a
diversified portfolio and maintaining a long-term perspective,
particularly during tempestuous market times, to avoid making emotional,
perhaps costly, investment decisions. Now could be a good time to
connect with your investment professional for some insight and advice.
In addition to reviewing your investments, this is also a good time to
speak to your investment professional about tax-planning strategies. As
you pay this year's taxes and look ahead, there are a variety of options
to consider for minimizing and deferring tax payments -- in an effort to
maximize results. These include focusing on tax-exempt funds,
contributing the maximum to retirement plans, establishing or adding to
IRAs and funding a variable annuity.
Sincerely,
/S/ MAUREEN R. FORD
MAUREEN R. FORD, VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BY JANE A. SHIGLEY AND JAY C. LEU,
FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Independence Balanced Fund
Stock market loses ground as the economy slows; bonds rally
What a difference a year makes. After starting off on a euphoric note,
technology and telecommunications stocks suffered painful losses during
the past 12 months due to their inability to meet inflated expectations
supporting extreme valuations as the economy slowed. As a result, many
under-appreciated and undervalued sectors -- including utility,
health-care and financial stocks -- sprung back to life to become the
market's best performers. That said, even the best performers were
somewhat hampered by worries over the economy. Bonds, meanwhile, got a
lift from expanding optimism that the Federal Reserve would lower
interest rates to veer the economy away from recession. Investors got
what they wanted in January when the Fed lowered interest rates by a
full percentage point. During the period, Treasury securities were far
and away the best performers, thanks to both optimism over interest-rate
cuts and buybacks of outstanding Treasury debt. Corporate bonds lagged
their Treasury counterparts as investors worried about corporate
profitability.
"Expectations
for falling
interest
rates fueled
bonds during
much of the
period..."
[Pie chart at bottom left-hand column with heading "Portfolio
Diversification." The chart is divided into three sections (from top to
left): U.S. Government & Agencies 14%, Corporate Bonds 23% and Common
Stock 63%. A note below the chart reads "As a percentage of net assets
on February 28, 2001."]
Fund performance
For the 12-month period ended February 28, 2001, John Hancock
Independence Balanced Fund posted a total return of 3.13%, at net asset
value, compared with the average balanced fund's 2.29% return, according
to Lipper, Inc. In the same period, a 50/50 blended index combining the
Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index
returned 2.50%. For historical performance information, see page six.
Most of the Fund's outperformance was the result of security selection.
The change in market sentiment rewarded our ongoing commitment to the
stocks of companies selling at reasonable prices and with expectations
for solid earnings growth. Our asset allocation remained neutral
throughout much of the period, with a relatively constant 60% stake in
stocks and 40% in bonds. In late January 2001, we increased our
weighting in equities to around 65% while paring back our stake in
fixed-income investments to 35% in anticipation that past and potential
interest-rate cuts eventually will boost corporate profitability.
[Bar chart at top of left-hand column with heading "Fund Performance."
Under the heading is a note that reads "For the year ended February 28,
2001." The chart is scaled in increments of 1% with 0% at the bottom and
5% at the top. The first bar represents the 3.13% total return for John
Hancock Independence Balanced Fund. The second bar represents the 2.29%
total return for Average balanced fund. The third bar represents the
2.50% total return for 50% S&P 500 Index/50% L.B. Aggregate Bond Index.
A note below the chart reads "The total return for John Hancock
Independence Balanced Fund is at net asset value with all distributions
reinvested. The average balanced fund is tracked by Lipper, Inc. See the
following page for historical performance information."]
Stocks: Leaders and laggards
Several financial stocks were important contributors to the Fund's
performance, with merger participants AXA Financial and J.P. Morgan
Chase among our best performers. Fannie Mae and FleetBoston Financial
also posted strong gains. Within the health-care sector, eye-care
specialist Allergan and drug companies Warner-Lambert and Johnson &
Johnson topped our list. Rising oil and natural gas prices, coupled with
a colder than normal winter, benefited holdings such as El Paso Energy,
Duke Energy and Dominion Resources.
The combination of our disciplined approach to valuation and our
analysts' accurate forecast that personal computer sales would be slower
than expected allowed us to avoid several major blow-ups among computer
companies, notably Gateway and Apple. Despite the fact that the Fund had
a smaller exposure to technology than many of its peers, we weren't able
to completely avoid the sector's downturn, and holdings such as Intel
and Cisco Systems were disappointments. We remained focused exclusively
on companies that have strong growth prospects, a sustainable business
model, superior management and excellent strategic positioning.
"In our view,
the pressure
on U.S.
corporate
earnings will
continue
this year,
but will ease
in 2002."
Bonds soar
Expectations for falling interest rates fueled bonds during much of the
period, while actual interest-rate cuts in January 2001 provided an
added boost for their performance. We continued to maintain a relatively
light stake in Treasuries, focusing instead on higher-yielding corporate
and mortgage bonds. After lagging their Treasury counterparts due to
concerns about the economy and corporate profits, corporate bonds
perked up in January and February. Fortunately, we avoided some of the
poorer performers in the telecommunications group, which was a plus for
performance.
Outlook
In our view, the pressure on U.S. corporate earnings will continue this
year, but will ease in 2002. Our forecast calls for the U.S. economy to
grow at an annual rate of 1.8% in 2001, slowing significantly from the
5% annual pace we enjoyed in 2000. Beyond that, however, we think
economic growth will pick up again thanks to falling interest rates and
lower energy prices. While the U.S. and Asia are slowing significantly,
conditions in Europe look more stable and will provide a much-needed
balance to the global picture. As for the fixed-income markets, we
believe that corporate bonds will outpace their Treasury counterparts
as investors anticipate a strengthening economy and improved
profitability.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE FIVE INCEPTION
YEAR YEAR (7/6/95)
----- ----- -------
Cumulative Total Returns 3.13% 62.70% 79.65%
Average Annual Total Returns(1) 3.13% 10.22% 10.93%
YIELD
As of February 28, 2001
SEC 30-DAY
YIELD
----------
John Hancock Independence Balanced Fund(1) 2.28%
Total return measures the change in value of an investment from the
beginning to the end of a period, assuming all distributions were
reinvested.
All figures represent past performance and are no guarantee of future
results. Keep in mind that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares may
be worth more or less than their original cost, depending on when you
sell them. Please read your prospectus carefully before you invest or
send money.
Note to Performance
(1) The Fund's performance results reflect any applicable expense
reductions, without which the expenses would increase and results would
have been less favorable. These reductions can be terminated in the
future. See the prospectus for details.
WHAT HAPPENED TO
A $250,000 INVESTMENT...
The chart below shows how much a $250,000 investment in John Hancock
Independence Balanced Fund would be worth, assuming all distributions
were reinvested for the period indicated. For comparison, we've shown
the same $250,000 investment in a 50/50 blend of the Standard & Poor's
500 Index and the Lehman Brothers Aggregate Bond Index. The Standard &
Poor's 500 Index is an unmanaged index that includes 500 widely traded
common stocks and is a commonly used measure of stock market
performance. The Lehman Brothers Aggregate Bond Index is an unmanaged
index that includes Treasury issues, agency issues, corporate bond
issues and mortgage-backed securities. It is not possible to invest in
an index.
[Line chart with the heading John Hancock Independence Balanced Fund,
representing the growth of a hypothetical $250,000 investment over the
life of the fund. Within the chart are two lines. The first line
represents the 50/50 blended index of the Standard & Poor's 500 Index
and Lehman Brothers Aggregate Bond Index and is equal to $490,939 as of
February 28, 2001. The second line represents the value of the
hypothetical $250,000 investment made in the John Hancock Independence
Balanced Fund on July 6, 1995 and is equal to $449,126 as of February
28, 2001.]
BY STEPHEN LANZENDORF FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Independence Diversified
Core Equity Fund II
Slowing economy sinks growth stocks
The past year was a difficult one for many investors, as the raging bull
market that made equity investments so rewarding for so long finally
took a sustained break. The tide turned near the beginning of the Fund's
reporting period in March 2000, when valuations in the technology, media
and telecommunications sectors reached excessive proportions amid
continuing hikes in short-term interest rates by the Federal Reserve
Board. A sharp two-month correction was followed by a recovery over the
summer that was driven by still-robust economic growth and a sense that
interest rates had reached a plateau. Sectors with a reputation for
dependable earnings, such as financial services, health care and
consumer staples, came to the fore, as investors began to anticipate
slowing growth due to the Fed's rate increases.
[Table at bottom left-hand column entitled "Top Five Common Stock
Holdings." The first listing is General Electric 5.1%, the second is
Pfizer 3.6%, the third ExxonMobil 3.5%, the fourth Citigroup 3.2% and
the fifth Microsoft 2.9%. A note below the table reads "As a percentage
of net assets on February 28, 2001."]
The last half of the period brought a deluge of bad news about the
economy and corporate earnings. Of particular concern was a sharp drop
in consumer confidence, since consumer spending accounts for roughly
two-thirds of the U.S. economy. The speed of the slowdown appeared to
surprise even Fed Chairman Alan Greenspan. On January 3, 2001, in a rare
move that occurred between its regularly scheduled meetings, the Fed
trimmed interest rates by a half-point. This was followed by a second
half-point cut on the last day of January, and more reductions were
expected in the months to come.
"Financial
stocks were
one area of
strength for
the Fund..."
Performance summary
For the 12 months ended February 28, 2001, John Hancock Independence
Diversified Core Equity Fund II had a total return of --2.68% at net
asset value, compared with --8.19% for the S&P 500 Index. Value stocks
were the place to be during the retrenchment in growth shares. The Fund
incorporates both value and growth elements in its decision process,
seeking undervalued stocks of companies with improving fundamentals.
During the difficult investment environment of the past year, the value
component of our approach proved especially helpful, enabling the Fund
to outperform the S&P 500 Index. On the other hand, the Fund finished
behind the 6.63% return of the average large-cap value fund tracked by
Lipper, Inc. Historical performance can be found on page nine.
[Bar chart at top of left-hand column with heading "Fund Performance."
Under the heading is a note that reads "For the year ended February 28,
2001." The chart is scaled in increments of 3% with -9% at the bottom
and 12% at the top. The first bar represents the -2.68% total return for
John Hancock Independence Diversified Core Equity Fund II. The second
bar represents the 6.63% total return for Average large-cap value fund.
The third bar represents the -8.19% total return for S&P 500 Index. A
note below the chart reads "The total return for John Hancock
Independence Diversified Core Equity Fund II is at net asset value with
all distributions reinvested. The average large-cap value fund is
tracked by Lipper, Inc. See the following page for historical
performance information."]
Financial stocks were one area of strength for the Fund, exemplified by
the performance of Citigroup and Hartford Financial. Citigroup benefited
from its diversified revenue stream, which includes insurance, brokerage
and asset management, as well as traditional banking services. In
addition, the company has an outstanding management team. Hartford
Financial also was a strong performer, buoyed by improving earnings due
to an upturn in prices for property-casualty insurance.
In the consumer staples sector, Philip Morris made the list of most
positive contributors. Although still beset by smoking-related lawsuits,
the company seems to have passed the "peak point of worry" on that
subject and continued to post impressive earnings. The stock of
off-price retailer TJX made a comeback after being beaten down earlier
in the period. As with many other positive contributors this time,
investors liked the company for its solid management and consistent
earnings growth.
"Despite a
slowing
economy and
near-term
earnings
uncertainty,
we are still
finding good
values."
Technology and telecommunications names dominated the list of biggest
detractors. Marquee names like Cisco Systems, Intel and Microsoft were
derailed by a slowing economy and the growth stock meltdown. They remain
great long-term investments, but even great investments have occasional
periods of underperformance, as these stocks clearly did. In the
telecommunications sector, WorldCom was hurt by weak long-distance
pricing as well as the abandonment of its plans to merge with Sprint. We
sold WorldCom before its decline accelerated late in the period.
Outlook
Despite a slowing economy and near-term earnings uncertainty, we are
still finding good values. Looking at the big picture, the Fed's
willingness to lower interest rates and President Bush's tax-cut
initiative should help the economy avoid prolonged stagnation.
Additionally, corporate inventory control systems are much better than
they used to be, and the lack of excessive inventory buildup should help
to keep the slowdown in check.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE FIVE INCEPTION
YEAR YEARS (3/10/95)
----- ----- ---------
Cumulative Total Returns (2.68%) 93.48% 152.45%
Average Annual Total Returns(1) (2.68%) 14.11% 16.76%
Total return measures the change in value of an investment from the
beginning to the end of a period, assuming all distributions were
reinvested.
All figures represent past performance and are no guarantee of future
results. Keep in mind that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares may
be worth more or less than their original cost, depending on when you
sell them. Please read your prospectus carefully before you invest or
send money.
Note to Performance
(1) The Fund's performance results reflect any applicable expense
reductions, without which the expenses would increase and results would
have been less favorable. These reductions can be terminated in the
future. See the prospectus for details.
WHAT HAPPENED TO
A $250,000 INVESTMENT...
The chart below shows how much a $250,000 investment in John Hancock
Independence Diversified Core Equity Fund II would be worth, assuming
all distributions were reinvested for the period indicated. For
comparison, we've shown the same $250,000 investment in the Standard &
Poor's 500 Index -- an unmanaged index that includes 500 widely traded
common stocks and is often used as a measure of stock market
performance. It is not possible to invest in an index.
[Line chart with the heading John Hancock Independence Diversified Core
Equity Fund II, representing the growth of a hypothetical $250,000
investment over the life of the fund. Within the chart are two lines.
The first line represents the Standard & Poor's 500 Index and is equal
to $704,194 as of February 28, 2001. The second line represents the
value of the hypothetical $250,000 investment made in the John Hancock
Independence Diversified Core Equity Fund II on March 10, 1995 and is
equal to $631,115 as of February 28, 2001.]
BY STEPHEN LANZENDORF FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Independence Medium
Capitalization Fund
Economy slows but mid caps buck downtrend
The past 12 months saw an important top in the major stock indexes and
an economy that moved with astonishing speed from robust growth to
virtual stagnation. While most of the popular averages peaked near the
beginning of the period, the economic slowdown began in earnest in the
fall, when industrial production, retail sales, consumer confidence and
other measures of economic activity headed south with a vengeance. At
the same time, a slew of high-profile large-cap companies issued
earnings warnings. By New Year's Day the economy, which turned in a
healthy annual growth rate of roughly 5.0% in the second quarter of
2000, had virtually ground to a halt.
"Financial
services,
health care
and energy
were some
of the
strongest
sectors..."
[Table at bottom left-hand column entitled "Top Five Stock Holdings."
The first listing is Concord EFS 2.0%, the second is DST Systems 1.9%,
the third Noble Drilling 1.9%, the fourth SunGard Data Systems 1.9% and
the fifth Waters 1.9%. A note below the table reads "As a percentage of
net assets on February 28, 2001."]
Fortunately, the Federal Reserve Board responded promptly to the
situation. In December, the Fed moved from a tightening bias to an
easing bias while leaving interest rates unchanged. By early January,
however, the Fed had seen enough, and the central bank lowered
short-term interest rates by a half-point. This move underscored the
urgency of the situation because it came between regularly scheduled
meetings of the Fed's Open Market Committee. At the end of January, the
Fed implemented another half-point decrease, with more expected in the
coming months. Bracketed by these favorable monetary events, many stocks
made mild recoveries in January. After the second rate cut, however,
stocks faltered badly, ending the period on a weak note.
In a reversal of previous periods, value stocks trounced growth shares.
Moreover, mid-cap stocks withstood the forces of economic deceleration
relatively well due to the fact that they represented better values than
stocks of other capitalizations. Another reason for their relative
outperformance was the tendency of fund managers who were selling richly
valued large-cap stocks to rotate money into the mid-cap market.
[Bar chart at top of left-hand column with heading "Fund Performance."
Under the heading is a note that reads "For the year ended February 28,
2001." The chart is scaled in increments of 5% with 0% at the bottom and
20% at the top. The first bar represents the 13.14% total return for
John Hancock Independence Medium Capitalization Fund. The second bar
represents the 18.78% total return for Average multi-cap value fund. The
third bar represents the 8.93% total return for S&P Midcap 400 Index. A
note below the chart reads "The total return for John Hancock
Independence Medium Capitalization Fund is at net asset value with all
distributions reinvested. The average multi-cap value fund is tracked by
Lipper, Inc. See the following page for historical performance information."]
Performance summary
Aided by these favorable factors, the Fund was able to post a
double-digit positive return for the period. For the 12 months ended
February 28, 2001, John Hancock Independence Medium Capitalization Fund
had a total return of 13.14% at net asset value, well ahead of the
Standard & Poor's MidCap 400 Index, which returned 8.93%. On the other
hand, the Fund trailed the 18.78% return of the average multi-cap value
fund monitored by Lipper, Inc. Historical performance can be found on
page 12. Given our core management style, which emphasizes undervalued
stocks of companies with improving fundamentals, we include both growth
and value parameters in our decision process. It is therefore not
surprising that the Fund's returns fell between the value-oriented
Lipper average and the more growth-sensitive S&P 500 Index.
Financial services, health care and energy were some of the strongest
sectors during the period. Washington Mutual, a savings and loan, was
helped by investors' desire for stable earnings growth and the
expectation that interest rates would decline. In health care, Forest
Laboratories merited mention for stronger-than-expected sales of its
antidepressant drug, Celexa. Health Management Associates, Allergan,
Lincare Holdings, Waters Corp., MedImmune and Cardinal Health Systems
were other health-care stocks clustered near the top of our performance
list. Energy stocks Anadarko Petroleum and Apache Corp. both benefited
from their sensitivity to surging natural gas prices. Furthermore,
investors liked Anadarko's recent merger with Union Pacific Resources
because of the potential for lower costs and increased production.
"...the mid-
cap segment
retains its
valuation
advantage
over large
caps."
On the downside, biotechnology holding Biogen collapsed during the
technology meltdown despite its solid fundamentals. Various segments of
technology also were well represented on our list of detractors,
including Vitesse Semiconductor (semiconductors), Adobe Systems, Veritas
Software and Citrix Systems (software), Jabil Circuit (semiconductor
contract manufacturer), and Brocade Communications (network provider).
Outlook
We are cautiously optimistic about the coming year. While the next few
months could be bumpy, as the economy struggles to stabilize itself, the
prospect of improving corporate earnings growth later in the year augurs
well for stocks. Overall, the mid-cap segment retains its valuation
advantage over large caps. Furthermore, aggressive easing of monetary
policy by the Fed and the tax-cut initiative being championed by
President Bush should be additional positive influences. We will
continue to implement our disciplined methodology, searching for stocks
with the optimal combination of reasonable valuations and strong growth
prospects.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE FIVE INCEPTION
YEAR YEARS (10/2/95)
----- ----- ---------
Cumulative Total Returns 13.14% 109.83% 130.20%
Average Annual Total Returns(1) 13.14% 15.98% 16.67%
Total return measures the change in value of an investment from the
beginning to the end of a period, assuming all distributions were
reinvested.
All figures represent past performance and are no guarantee of future
results. Keep in mind that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares may
be worth more or less than their original cost, depending on when you
sell them. Please read your prospectus carefully before you invest or
send money.
Note to Performance
(1) The Fund's performance results reflect any applicable expense
reductions, without which the expenses would increase and results would
have been less favorable. These reductions can be terminated in the
future. See the prospectus for details.
WHAT HAPPENED TO
A $250,000 INVESTMENT...
The chart below shows how much a $250,000 investment in the John Hancock
Independence Medium Capitalization Fund would be worth, assuming all
distributions were reinvested for the period indicated. For comparison,
we've shown the same $250,000 investment in the Standard & Poor's MidCap
400 Index, an unmanaged capitalization-weighted index that measures the
performance of the mid-range sector of the U.S. stock market. It
consists of 400 domestic stocks chosen for market size, liquidity and
industry group representation. It is not possible to invest in an index.
[Line chart with the heading John Hancock Independence Medium
Capitalization Fund, representing the growth of a hypothetical $250,000
investment over the life of the fund. Within the chart are two lines.
The first line represents the Standard & Poor's Midcap 400 Index and is
equal to $618,730 as of February 28, 2001. The second line represents
the value of the hypothetical $250,000 investment made in the John
Hancock Independence Medium Capitalization Fund on October 2, 1995 and
is equal to $575,491 as of February 28, 2001.]
FINANCIAL STATEMENTS
John Hancock Funds -- Institutional Series Trust
Statements of Assets and Liabilities
February 28, 2001
- ------------------------------------------------------------------------------------------------------------
INDEPENDENCE INDEPENDENCE
INDEPENDENCE DIVERSIFIED CORE MEDIUM CAPITALIZATION
BALANCED FUND EQUITY FUND II FUND
----------------- ----------------- -----------------
Assets:
Investments at value -- Note C:
Common stocks (cost -- $19,520,827,
$115,447,422 and $13,485,265,
respectively) $22,532,889 $145,777,134 $14,758,260
Corporate bonds (cost -- $7,880,227,
none and none, respectively) 8,152,803 -- --
U.S. government and agencies securities
(cost -- $5,140,733, none and none,
respectively) 5,176,652 -- --
Joint repurchase agreement (cost --
$2,605,000, $43,000 and $491,000,
respectively) 2,605,000 43,000 491,000
Corporate savings account 1,203 981 901
----------------- ----------------- -----------------
38,468,547 145,821,115 15,250,161
Receivable for investments sold 1,660,580 1,125,628 --
Receivable for shares sold -- 3,745 --
Dividends and interest receivable 178,921 213,436 15,368
Other assets 6,738 49,837 1,170
----------------- ----------------- -----------------
Total Assets 40,314,786 147,213,761 15,266,699
----------------- ----------------- -----------------
Liabilities:
Payable for investments purchased 4,545,491 -- 336,526
Payable for shares repurchased 5,392 11,223 2,868
Dividends payable 82 -- --
Payable to John Hancock Advisers, Inc.
and affiliates 78,450 69,832 10,249
Accounts payable and accrued expenses 48,749 138,010 35,681
----------------- ----------------- -----------------
Total Liabilities 4,678,164 219,065 385,324
----------------- ----------------- -----------------
Net Assets:
Capital paid-in 32,504,739 98,525,826 13,636,250
Accumulated net realized gain (loss) on
investments (325,419) 17,957,802 (31,070)
Net unrealized appreciation of
investments 3,320,557 30,329,712 1,272,995
Undistributed net investment income 136,745 181,356 3,200
----------------- ----------------- -----------------
Net Assets $35,636,622 $146,994,696 $14,881,375
================= ================= =================
Net Asset Value Per Share:
(Based on 3,745,109, 16,501,448 and
1,264,191 shares, respectively, of
beneficial interest outstanding --
unlimited number of shares authorized
with no par value) $9.52 $8.91 $11.77
==========================================================================================================
The Statement of Assets and Liabilities is each Fund's balance sheet and
shows the value of what the Fund owns, is due and owes as of February
28, 2001. You'll also find the net asset value per share as of that date.
See notes to financial statements.
Statement of Operations
Year ended February 28, 2001
- ------------------------------------------------------------------------------------------------------------
INDEPENDENCE INDEPENDENCE
INDEPENDENCE DIVERSIFIED CORE MEDIUM CAPITALIZATION
BALANCED FUND EQUITY FUND II FUND
----------------- ----------------- ---------------------
Investment Income:
Dividends (net of foreign withholding
tax of $1,198, $22,758 and $284,
respectively) $391,928 $4,017,103 $157,152
Interest (including income on
securities loaned of $528, $16,469 and
$231, respectively) 1,366,257 340,928 32,155
----------------- ----------------- -----------------
1,758,185 4,358,031 189,307
----------------- ----------------- -----------------
Expenses:
Investment management fee 360,931 1,707,364 117,265
Custodian fee 35,326 150,362 26,107
Transfer agent fee 25,781 170,736 7,329
Auditing fee 25,225 32,450 17,500
Accounting and legal services fee 10,633 64,547 2,759
Printing 9,574 10,239 6,970
Miscellaneous 3,687 23,141 866
Trustees' fees 1,189 9,057 685
Legal fees 662 3,448 111
Organization expense 647 39 1,017
Registration and filing fees -- 108,497 12,712
Interest expense -- 1,199 166
----------------- ----------------- -----------------
Total Expenses 473,655 2,281,079 193,487
----------------- ----------------- -----------------
Less Expense Reductions (8,926) -- (46,786)
----------------- ----------------- -----------------
Net Expenses 464,729 2,281,079 146,701
----------------- ----------------- -----------------
Net Investment Income 1,293,456 2,076,952 42,606
----------------- ----------------- -----------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold 3,773,845 76,477,429 1,811,066
Change in net unrealized appreciation
(depreciation) of investments (2,214,398) (61,720,858) (232,293)
----------------- ----------------- -----------------
Net Realized and Unrealized Gain on
Investments 1,559,447 14,756,571 1,578,773
----------------- ----------------- -----------------
Net Increase in Net Assets Resulting
from Operations $2,852,903 $16,833,523 $1,621,379
================= ================= =================
The Statement of Operations summarizes, for each of the Funds, the
investment income earned and expenses incurred in operating the Fund. It
also shows net gains for the period stated.
See notes to financial statements.
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
INDEPENDENCE INDEPENDENCE DIVERSIFIED
BALANCED FUND CORE EQUITY FUND II
--------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 2001 FEBRUARY 29, 2000 FEBRUARY 28, 2001
----------------- ----------------- ----------------- -----------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $1,707,102 $1,293,456 $3,100,403 $2,076,952
Net realized gain on investments
sold 4,213,547 3,773,845 66,562,963 76,477,429
Change in net unrealized
appreciation (depreciation) of
investments (4,011,488) (2,214,398) (53,039,312) (61,720,858)
----------------- ----------------- ----------------- -----------------
Net Increase in Net Assets from
Operations 1,909,161 2,852,903 16,624,054 16,833,523
----------------- ----------------- ----------------- -----------------
Distributions to Shareholders:*
Dividends from net investment
income (1,773,614) (1,361,734) (3,143,693) (2,263,269)
Distributions from net realized
gain on investments sold (4,431,308) (5,809,948) (54,986,456) (87,327,788)
----------------- ----------------- ----------------- -----------------
Total Distributions to
Shareholders (6,204,922) (7,171,682) (58,130,149) (89,591,057)
----------------- ----------------- ----------------- -----------------
From Fund Share Transactions: **
Shares sold 17,378,820 16,398,287 138,388,241 95,730,680
Shares issued to shareholders in
reinvestment of distributions 6,205,436 7,176,062 58,111,697 89,504,771
----------------- ----------------- ----------------- -----------------
23,584,256 23,574,349 196,499,938 185,235,451
Less shares repurchased (41,608,218) (44,268,315) (281,414,101) (391,359,218)
----------------- ----------------- ----------------- -----------------
Net Decrease (18,023,962) (20,693,966) (84,914,163) (206,123,767)
----------------- ----------------- ----------------- -----------------
Net Assets:
Beginning of period 82,969,090 60,649,367 552,296,255 425,875,997
----------------- ----------------- ----------------- -----------------
End of period (including
undistributed net investment
income of $204,824, $136,745,
$367,238 and $181,356,
respectively) $60,649,367 $35,636,622 $425,875,997 $146,994,696
================= ================= ================= =================
* Distributions to Shareholders:
Per share dividends from net
investment income $0.2837 $0.3005 $0.0940 $0.0971
----------------- ----------------- ----------------- -----------------
Per share distributions from net
realized gain on investments sold $0.8400 $1.6820 $1.7959 $5.0196
----------------- ----------------- ----------------- -----------------
**Analysis of Fund Share Transactions:
Shares sold 1,435,960 1,426,451 8,579,715 6,422,487
Shares issued to shareholders in
reinvestment of distributions 531,732 722,973 3,810,449 9,626,939
----------------- ----------------- ----------------- -----------------
1,967,692 2,149,424 12,390,164 16,049,426
Less shares repurchased (3,434,169) (3,857,647) (17,676,305) (29,473,073)
----------------- ----------------- ----------------- -----------------
Net Decrease (1,466,477) (1,708,223) (5,286,141) (13,423,647)
================= ================= ================= =================
The Statement of Changes in Net Assets shows how the value of each
Fund's net assets has changed since the end of the previous period. The
difference reflects net investment income, any investment gains and
losses, distributions paid to shareholders and any increase or decrease
in money shareholders invested in each Fund. The footnotes illustrate
the number of Fund shares sold, reinvested and repurchased during the
period, along with the per share amount of distributions made to
shareholders of each Fund for the period indicated.
See notes to financial statements.
Statements of Changes in Net Assets (continued)
- -------------------------------------------------------------------------------
INDEPENDENCE MEDIUM
CAPITALIZATION FUND
---------------------------------------
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 2001
----------------- -----------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $50,075 $42,606
Net realized gain on investments
sold 1,122,181 1,811,066
Change in net unrealized
appreciation (depreciation) of
investments 280,163 (232,293)
----------------- -----------------
Net Increase in Net Assets from
Operations 1,452,419 1,621,379
----------------- -----------------
Distributions to Shareholders:*
Dividends from net investment
income (51,586) (42,957)
Distributions from net realized
gain on investments sold (1,005,020) (2,369,957)
----------------- -----------------
Total Distributions to
Shareholders (1,056,606) (2,412,914)
----------------- -----------------
From Fund Share Transactions: **
Shares sold 3,498,877 7,383,548
Shares issued to shareholders in
reinvestment of distributions 1,056,809 2,412,726
----------------- -----------------
4,555,686 9,796,274
Less shares repurchased (2,936,957) (6,545,189)
----------------- -----------------
Net Increase 1,618,729 3,251,085
----------------- -----------------
Net Assets:
Beginning of period 10,407,283 12,421,825
----------------- -----------------
End of period (including
undistributed net investment
income of $3,567 and $3,200,
respectively) $12,421,825 $14,881,375
================= =================
* Distributions to Shareholders:
Per share dividends from net
investment income $0.0602 $0.0414
----------------- -----------------
Per share distributions from net
realized gain on investments sold $1.1721 $2.2819
----------------- -----------------
**Analysis of Fund Share Transactions:
Shares sold 275,468 545,802
Shares issued to shareholders in
reinvestment of distributions 89,333 204,296
----------------- -----------------
364,801 750,098
Less shares repurchased (231,976) (483,464)
----------------- -----------------
Net Increase 132,825 266,634
================= =================
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Balanced Fund
Financial Highlights
The following tables include selected data for a share outstanding
throughout each period, total investment return, key ratios and
supplemental data.
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED
------------------------------------------------- FEBRUARY 29, FEBRUARY 28,
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
Per Share Operating Performance
Net Asset Value, Beginning
of Period $9.25 $9.94 $11.42 $11.99 $11.12
------------- ------------- ------------- ------------- -------------
Net Investment Income (1) 0.38 0.38 0.26 0.27 0.28
Net Realized and Unrealized
Gain (Loss) on Investments 0.73 1.60 1.37 (0.02) 0.10
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 1.11 1.98 1.63 0.25 0.38
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income (0.34) (0.35) (0.29) (0.28) (0.30)
Distributions from Net
Realized Gain on
Investments Sold (0.08) (0.15) (0.77) (0.84) (1.68)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.42) (0.50) (1.06) (1.12) (1.98)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $9.94 $11.42 $11.99 $11.12 $9.52
============= ============= ============= ============= =============
Total Investment Return
(2,3) 12.36% 20.44% 14.50% 1.83% 3.13%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $13,093 $77,116 $82,969 $60,649 $35,637
Ratio of Expenses to Average
Net Assets 0.90% 0.90% 0.90% 0.90% 0.90%
Ratio of Adjusted Expenses
to Average Net Assets (4) 1.64% 1.06% 0.95% 0.96% 0.91%
Ratio of Net Investment
Income to Average Net
Assets 3.96% 3.52% 2.26% 2.26% 2.51%
Portfolio Turnover Rate 149% 224% 158% 268% 261%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) The total returns would have been lower had certain expenses not
been reduced during the periods shown.
(4) Does not take into consideration expense reductions during the
periods shown.
The Financial Highlights summarizes the impact of the following factors
on a single share for each period indicated: net investment income,
gains (losses), distributions and total investment return of each Fund.
It shows how the Fund's net asset value for a share has changed since
the commencement of operations. Additionally, important rela tionships
between some items presented in the financial statements are expressed
in ratio form.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Diversified Core Equity Fund II
Financial Highlights (continued)
The following tables include selected data for a share outstanding
throughout each period, total investment return, key ratios and
supplemental data.
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED
------------------------------------------------- FEBRUARY 29, FEBRUARY 28,
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
Per Share Operating Performance
Net Asset Value, Beginning
of Period $10.96 $12.76 $15.34 $15.69 $14.23
------------- ------------- ------------- ------------- -------------
Net Investment Income (1) 0.20 0.17 0.12 0.09 0.09
Net Realized and Unrealized
Gain on Investments 2.23 3.91 2.76 0.34 (0.29)
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 2.43 4.08 2.88 0.43 (0.20)
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income (0.19) (0.17) (0.14) (0.09) (0.10)
Distributions from Net
Realized Gains on
Investments Sold (0.44) (1.33) (2.39) (1.80) (5.02)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.63) (1.50) (2.53) (1.89) (5.12)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $12.76 $15.34 $15.69 $14.23 $8.91
============= ============= ============= ============= =============
Total Investment Return (2) 22.63% 33.61% 18.98% 1.99% (2.68%)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $320,029 $572,093 $552,296 $425,876 $146,995
Ratio of Expenses to Average
Net Assets 0.67% 0.65% 0.63% 0.64% 0.67%
Ratio of Net Investment
Income to Average Net
Assets 1.65% 1.12% 0.76% 0.57% 0.61%
Portfolio Turnover Rate 81% 76% 55% 69% 56%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Medium Capitalization Fund
Financial Highlights (continued)
The following tables include selected data for a share outstanding
throughout each period, total investment return, key ratios and
supplemental data.
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED
------------------------------------------------- FEBRUARY 29, FEBRUARY 28,
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
Per Share Operating Performance
Net Asset Value, Beginning
of Period $9.29 $10.45 $13.30 $12.04 $12.45
------------- ------------- ------------- ------------- -------------
Net Investment Income (1) 0.12 0.09 0.08 0.06 0.04
Net Realized and Unrealized
Gain on Investments 1.45 3.69 0.06 1.58 1.60
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 1.57 3.78 0.14 1.64 1.64
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income (0.12) (0.09) (0.09) (0.06) (0.04)
Distributions from Net
Realized Gain on
Investments Sold (0.29) (0.84) (1.31) (1.17) (2.28)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.41) (0.93) (1.40) (1.23) (2.32)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $10.45 $13.30 $12.04 $12.45 $11.77
============= ============= ============= ============= =============
Total Investment Return
(2,3) 17.19% 37.30% 0.96% 14.18% 13.14%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $5,240 $9,722 $10,407 $12,422 $14,881
Ratio of Expenses to Average
Net Assets 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Adjusted Expenses
to Average Net Assets (4) 2.70% 1.36% 1.60% 1.52% 1.32%
Ratio of Net Investment
Income to Average Net
Assets 1.26% 0.75% 0.59% 0.44% 0.29%
Portfolio Turnover Rate 78% 65% 67% 136% 145%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) The total returns would have been lower had certain expenses not
been reduced during the periods shown.
(4) Does not take into consideration expense reductions during the
periods shown.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Balanced Fund
Schedule of Investments
February 28, 2001
- ---------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Independence Balanced Fund on February 28, 2001. It's divided
into four main categories: common stocks, corporate bonds, U.S.
government and agencies securities and short-term investments. The
common stocks and corporate bonds are further broken down by industry
groups. Short-term investments, which represent the Fund's "cash"
position, are listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------------ ------------
COMMON STOCKS
Advertising (0.33%)
Omnicom Group, Inc. 1,300 $117,897
------------
Aerospace (1.00%)
General Dynamics Corp. 2,000 136,360
United Technologies Corp. 2,800 218,148
------------
354,508
------------
Automobile/Trucks (0.93%)
Ford Motor Co. 7,300 203,013
Lear Corp.* 2,300 73,738
Visteon Corp. 3,700 53,280
------------
330,031
------------
Banks -- United States (3.09%)
Bank of America Corp. 5,400 269,730
Bank of New York Co., Inc. (The) 3,700 191,586
Comerica, Inc. 2,600 165,490
FleetBoston Financial Corp. 5,200 214,500
Mellon Financial Corp. 3,100 143,561
U.S. Bancorp 5,000 116,000
------------
1,100,867
------------
Beverages (0.74%)
Anheuser-Busch Cos., Inc. 3,200 139,840
PepsiCo, Inc. 2,700 124,416
------------
264,256
------------
Building (0.72%)
Black & Decker Corp. (The) 3,400 141,134
Danaher Corp. 1,800 114,192
------------
255,326
------------
Chemicals (1.34%)
Air Products & Chemicals, Inc. 3,200 129,760
Dow Chemical Co. 4,200 137,802
Eastman Chemical Co. 1,500 77,175
Praxair, Inc. 3,000 133,800
------------
478,537
------------
Computers (6.88%)
Adobe Systems, Inc. 2,000 58,125
Cisco Systems, Inc.* 17,100 405,056
EMC Corp.* 5,000 198,800
First Data Corp. 4,800 296,448
International Business Machines Corp. 4,000 399,600
Intuit, Inc.* 2,000 82,250
Microsoft Corp.* 8,800 519,200
Oracle Corp.* 6,300 119,700
Siebel Systems, Inc.* 1,600 61,200
Sun Microsystems, Inc.* 7,500 149,063
VERITAS Software Corp.* 2,500 162,344
------------
2,451,786
------------
Cosmetics & Personal Care (0.26%)
Avon Products, Inc. 2,200 93,412
------------
Diversified Operations (1.89%)
Honeywell International, Inc. 1,400 65,394
Illinois Tool Works, Inc. 700 42,385
Minnesota Mining & Manufacturing Co. 2,300 259,325
Tyco International Ltd. 5,600 306,040
------------
673,144
------------
Electronics (6.60%)
Analog Devices, Inc.* 1,700 63,410
Applied Materials, Inc.* 1,800 76,050
General Electric Co. 22,900 1,064,850
Intel Corp. 17,000 485,563
Linear Technology Corp. 2,500 99,063
Maxim Integrated Products, Inc.* 1,300 59,963
Motorola, Inc. 3,700 56,129
QLogic Corp.* 900 33,638
Sanmina Corp.* 3,400 101,363
Solectron Corp.* 5,000 136,250
Tektronix, Inc.* 2,900 71,601
Texas Instruments, Inc. 2,000 59,100
Waters Corp.* 700 46,102
------------
2,353,082
------------
Energy (0.48%)
Calpine Corp.* 3,800 169,062
------------
Finance (3.50%)
Citigroup, Inc. 15,400 757,372
Concord EFS, Inc.* 2,000 92,500
J.P. Morgan Chase & Co. 4,200 195,972
Stilwell Financial, Inc.* 1,100 35,090
Washington Mutual, Inc. 3,200 164,384
------------
1,245,318
------------
Food (1.15%)
Archer Daniels Midland Co. 6,300 94,815
ConAgra, Inc. 7,100 139,728
Sara Lee Corp. 8,000 173,520
------------
408,063
------------
Insurance (2.69%)
American International Group, Inc. 3,500 286,300
Hartford Financial Services Group, Inc. (The) 3,600 229,860
Lincoln National Corp. 3,500 153,545
Marsh & McLennan Cos., Inc. 600 64,200
St. Paul Cos., Inc. (The) 3,000 138,870
Torchmark Corp. 2,500 86,950
------------
959,725
------------
Leisure (0.56%)
Disney (Walt) Co. (The) 6,500 201,175
------------
Machinery (0.29%)
Ingersoll-Rand Co. 2,400 104,040
------------
Media (2.72%)
AOL Time Warner, Inc.* 10,800 475,524
AT&T Corp. -- Liberty Media Corp.* 9,200 135,240
Clear Channel Communications, Inc.* 1,700 97,155
Viacom, Inc. (Class B)* 5,284 262,615
------------
970,534
------------
Medical (8.42%)
Abbott Laboratories 4,700 230,253
Allergan, Inc. 900 78,255
ALZA Corp.* 1,300 51,415
American Home Products Corp. 2,700 166,779
Baxter International, Inc. 1,600 147,344
Bristol-Myers Squibb Co. 5,300 336,073
Invitrogen Corp.* 400 32,200
Johnson & Johnson 3,800 369,854
Merck & Co., Inc. 6,700 537,340
Pfizer, Inc. 16,400 738,000
Pharmacia Corp. 2,100 108,570
Schering-Plough Corp. 2,400 96,600
Tenet Healthcare Corp.* 2,300 106,099
------------
2,998,782
------------
Mortgage Banking (1.07%)
Fannie Mae 4,800 382,560
------------
Office (0.45%)
Avery Dennison Corp. 2,000 106,000
Reynolds & Reynolds Co. (The) (Class A) 2,500 54,950
------------
160,950
------------
Oil & Gas (4.69%)
Anadarko Petroleum Corp. 1,100 68,750
BP Amoco Plc American Depositary Receipt (ADR)
(United Kingdom) 2,400 119,040
Chevron Corp. 1,000 85,660
Conoco Inc. (Class A)* 3,100 87,575
El Paso Energy Corp. 1,900 133,570
Exxon Mobil Corp. 7,500 607,875
Kerr-McGee Corp. 1,100 71,104
Royal Dutch Petroleum Co. (ADR) (Netherlands) 4,400 256,652
Transocean Sedco Forex, Inc. 2,400 115,512
USX -- Marathon Group 4,500 124,290
------------
1,670,028
------------
Paper & Paper Products (0.56%)
Kimberly-Clark Corp. 2,800 200,200
------------
Retail (4.52%)
CVS Corp. 2,600 158,600
Home Depot, Inc. (The) 4,000 170,000
Kohl's Corp.* 3,800 250,458
Limited, Inc. (The) 2,900 51,185
Lowe's Cos., Inc. 3,400 189,992
RadioShack Corp. 4,700 201,160
TJX Cos., Inc. 4,200 128,436
Toys R Us, Inc.* 3,400 83,640
Walgreen Co. 4,700 208,304
Wal-Mart Stores, Inc. 3,400 170,306
------------
1,612,081
------------
Soap & Cleaning Preparations (0.28%)
Colgate-Palmolive Co. 1,700 100,385
------------
Telecommunications (3.47%)
Broadwing, Inc.* 3,600 84,672
Comverse Technology, Inc.* 1,700 127,394
Corning, Inc. 3,600 97,560
QUALCOMM, Inc.* 1,900 104,144
Qwest Communications International, Inc.* 7,700 284,669
Scientific-Atlanta, Inc. 1,400 65,660
Sprint PCS* 5,000 125,900
Verizon Communications 7,000 346,500
------------
1,236,499
------------
Tobacco (0.97%)
Philip Morris Cos., Inc. 7,200 346,896
------------
Transportation (0.28%)
Burlington Northern Santa Fe Corp. 3,300 99,033
------------
Utilities (3.35%)
Allegheny Energy, Inc. 1,700 80,665
BellSouth Corp. 6,000 251,760
Dominion Resources, Inc. 2,700 177,008
Duke Energy Corp. 2,000 81,500
Dynegy, Inc. (Class A) 3,400 159,800
Pinnacle West Capital Corp. 1,700 78,965
Reliant Energy, Inc. 400 16,804
SBC Communications, Inc. 7,300 348,210
------------
1,194,712
------------
TOTAL COMMON STOCKS
(Cost $19,520,827) (63.23%) 22,532,889
------------
INTEREST CREDIT PAR VALUE
ISSUER, DESCRIPTION RATE RATING** (000s OMITTED) VALUE
- ------------------------------------------ --------- ---------- -------------- ----------------
CORPORATE BONDS
Aerospace (1.43%)
Lockheed Martin Corp.,
Bond 12-01-29 8.500% BBB- $70 $80,704
Raytheon Co.,
Sr Note 11-01-03 # 5.700 BBB- 430 427,313
-------------
508,017
-------------
Automobile/Trucks (0.79%)
Ford Motor Co.,
Bond 10-01-28 6.625 A 320 281,805
-------------
Banks -- United States (3.33%)
Bank of America Corp.,
Sub Note 01-15-11 7.400 A 170 177,973
First Union Corp.,
Note 11-01-04 6.950 A 320 329,014
PNC Funding Corp.,
Gtd Sub Note 09-01-03 # 6.125 BBB+ 490 493,063
Wells Fargo Bank N.A.,
Sub Note 06-21-10 7.550 A+ 170 185,042
-------------
1,185,092
-------------
Broker Services (2.79%)
Goldman Sachs Group, Inc.,
Bond 01-15-11 6.875 A+ 170 173,383
Lehman Brothers Holdings, Inc.,
Note 04-01-04 6.625 A 200 203,342
Note 02-05-06 6.625 A 300 305,229
Salomon Inc.,
Sr Note 02-01-04 7.200 A 300 312,339
-------------
994,293
-------------
Finance (4.38%)
Associates Corp. of North America,
Sr Note 11-01-08 6.250 AA- 200 199,332
Citigroup, Inc.,
Note 01-18-11 6.500 AA- 190 190,190
Ford Motor Credit Co.,
Note 02-01-06 6.875 A 200 202,876
General Motors Acceptance Corp.,
Note 07-15-05 7.500 A 200 207,982
Household Finance Corp.,
Note 05-01-04 6.000 A 350 349,605
Note 01-24-06 6.500 A 90 90,767
MBNA Master Credit Card Trust
Note 11-15-04 6.600 AAA 315 321,398
-------------
1,562,150
-------------
Government -- Foreign (0.56%)
Province of Quebec,
Deb (Canada) 09-15-29 7.500 A+ 180 198,036
-------------
Media (0.41%)
News America, Inc.,
Deb 04-08-28 7.125 BBB- 80 70,630
Time Warner, Inc.,
Sr Gtd Note 05-15-29 6.625 BBB+ 80 74,309
-------------
144,939
-------------
Mortgage Banking (5.03%)
ABSC Home Equity Loan Trust,
Pass Thru Ctf Ser 2000-LB1 Class AF2 08-21-31 7.570 Aaa 140 142,773
Bear Stearns Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 2000-WF2 Class A-2 08-15-10 7.320 AAA 70 74,922
Chase Commercial Mortgage Securities Corp.,
Commercial Pass Thru Ctf Ser 1997-1 Class A2
02-19-07 7.370 AAA 140 143,612
Credit Suisse First Boston Mortgage Securities Corp.,
Commercial Mtg Pass Thru Ctf Ser 2000-C1 Class
A-2 04-15-10 # 7.545 AAA 820 886,732
Green Tree Financial Corp.,
Pass Thru Ctf Ser 1996-8 Class A-6 10-15-27 7.600 AAA 190 196,471
LB-UBS Commercial Mortgage Trust,
Pass Thru Ctf Ser 2000-C4 Class A-2 06-15-10 7.370 AAA 300 319,078
Mortgage Capital Funding, Inc.,
Commercial Mtg Pass Thru Ctf Ser 1996-MC2 Class
A1 12-21-26 6.758 N/R 30 29,994
-------------
1,793,582
-------------
Oil & Gas (1.23%)
Phillips Petroleum,
Note 05-25-05 8.500 BBB 400 438,972
-------------
Retail (1.11%)
Target Corp.,
Sr Note 01-15-11 6.350 A 180 181,368
Wal-Mart Stores, Inc.,
Sr Note 02-15-30 7.550 AA 190 214,688
-------------
396,056
-------------
Telecommunications (0.71%)
Deutsche Telekom International Finance B.V.,
Gtd Bond (Netherlands) 06-15-30 8.250 A- 30 30,333
Qwest Capital Funding, Inc.,
Gtd Note 07-15-28 6.875 BBB+ 80 70,590
Sprint Capital Corp.,
Gtd Bond 01-30-11 7.625 BBB+ 120 120,155
Sr Gtd Note 11-15-28 6.875 BBB+ 40 34,007
-------------
255,085
-------------
Tobacco (0.24%)
Philip Morris Cos., Inc.,
Deb 10-15-03 8.250 A 80 84,399
-------------
Utilities (0.87%)
Coastal Corp. (The),
Sr Note 09-15-02 8.125 BBB 300 310,377
-------------
TOTAL CORPORATE BONDS
(Cost $7,880,227) (22.88%) 8,152,803
-------------
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government -- U.S. (1.15%)
United States Treasury,
Bond 08-15-17 8.875 AAA 70 95,943
Note 11-15-05 # 5.750 AAA 300 313,617
-------------
409,560
-------------
Government -- U.S. Agencies (13.38%)
Federal National Mortgage Assn.,
Bond 05-15-30 7.250 AAA 100 115,000
Bond 11-15-30 6.625 AAA 292 313,170
Note 08-15-02 6.750 AAA 50 51,352
Note 11-14-03 4.750 AAA 90 89,493
Note 06-15-09 6.375 AAA 195 204,383
30 Yr Pass Thru Ctf 03-01-29 *** 6.000 AAA 1,000 978,750
30 Yr Pass Thru Ctf 03-01-31 *** 6.500 AAA 654 651,960
30 Yr Pass Thru Ctf 03-01-31 *** 7.000 AAA 836 845,405
30 Yr Pass Thru Ctf 03-01-31 *** 7.500 AAA 950 970,188
Pass Thru Ctf Ser 1999 02-01-09 # 7.000 AAA 541 547,391
-------------
4,767,092
-------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $5,140,733) (14.53%) 5,176,652
-------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (7.31%)
Investment in a joint repurchase
agreement transaction with UBS
Warburg, Inc. -- Dated 02-28-01, due
03-01-01 (Secured by U.S. Treasury
Bonds 7.25% thru 13.25%, due 11-15-09
thru 02-15-19) -- Note A # 5.380% $2,605 $2,605,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account Current
Rate 4.20% 1,203
------------
TOTAL SHORT-TERM INVESTMENTS (7.31%) 2,606,203
--------- ------------
TOTAL INVESTMENTS (107.95%) 38,468,547
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (7.95%) (2,831,925)
--------- ------------
TOTAL NET ASSETS (100.00%) $35,636,622
========= ============
* Non-income-producing security.
** Credit ratings are unaudited and rated by Standard & Poor's where
available, or by Moody's Investors Service or John Hancock Advisers,
Inc. where Standard & Poor's ratings are not available.
*** These securities, having an aggregate value of $3,446,303 or 9.67%
of the Fund's net assets, have been purchased as a forward commitment --
that is, the Fund has agreed on trade date, to take delivery of and to
make payment for these securities on a delayed basis subsequent to the
date of this schedule. The purchase price and interest rate of these
securities is fixed at trade date, although the Fund does not earn any
interest on these securities until settlement date. The Fund has
instructed its custodian bank to segregate assets with a current value
at least equal to the amount of the forward commitments.
# These securities, totaling the market value of $5,273,116, have been
segregated to cover the forward commitments.
Parenthetical disclosure of a foreign country in the security
description represents country of a foreign issuer.
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Diversified Core Equity Fund II
Schedule of Investments
February 28, 2001
- ----------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Independence Diversified Core Equity Fund II on February 28,
2001. It's divided into two main categories: common stocks and
short-term investments. Common stocks are further broken down by
industry group. Short-term investments, which represent the Fund's
"cash" position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------ -----
COMMON STOCK
Advertising (1.46%)
Interpublic Group of Cos., Inc. (The) 10,000 $376,000
Omnicom Group, Inc. 19,500 1,768,455
------------
2,144,455
------------
Aerospace (1.90%)
General Dynamics Corp. 16,800 1,145,424
United Technologies Corp. 21,100 1,643,901
------------
2,789,325
------------
Automobile/Trucks (1.81%)
Borg-Warner Automotive, Inc. 7,100 310,270
Ford Motor Co. 66,000 1,835,460
Lear Corp.* 12,900 413,574
Visteon Corp.* 7,400 106,560
------------
2,665,864
------------
Banks -- United States (5.12%)
Bank of America Corp. 30,400 1,518,480
Bank of New York Co., Inc. (The) 24,800 1,284,144
Comerica, Inc. 16,800 1,069,320
FleetBoston Financial Corp. 34,000 1,402,500
Mellon Financial Corp. 24,700 1,143,857
U.S. Bancorp 47,700 1,106,640
------------
7,524,941
------------
Beverages (0.43%)
Anheuser-Busch Cos., Inc. 14,400 629,280
------------
Building (0.94%)
Black & Decker Corp. (The) 15,700 651,707
Danaher Corp. 11,400 723,216
------------
1,374,923
------------
Chemicals (1.64%)
Air Products & Chemicals, Inc. 18,300 742,065
Dow Chemical Co. 13,200 433,092
Eastman Chemical Co. 8,800 452,760
Praxair, Inc. 17,600 784,960
------------
2,412,877
------------
Computers (11.24%)
Adobe Systems, Inc. 11,900 345,844
Cadence Design Systems, Inc.* 14,000 354,900
Cisco Systems, Inc.* 102,400 2,425,600
DST Systems, Inc.* 7,400 451,400
EMC Corp.* 30,400 1,208,704
First Data Corp. 31,000 1,914,560
International Business Machines Corp. 25,000 2,497,500
Intuit, Inc.* 4,400 180,950
Juniper Networks, Inc.* 1,200 77,475
Microsoft Corp.* 72,000 4,248,000
Oracle Corp.* 40,700 773,300
Siebel Systems, Inc.* 11,200 428,400
Sun Microsystems, Inc.* 42,400 842,700
VERITAS Software Corp.* 12,000 779,250
------------
16,528,583
------------
Cosmetics & Personal Care (0.70%)
Avon Products, Inc. 24,200 1,027,532
------------
Diversified Operations (3.42%)
Honeywell International, Inc. 16,800 784,728
Illinois Tool Works, Inc. 5,500 333,025
Minnesota Mining & Manufacturing Co. 13,700 1,544,675
Tyco International Ltd. 43,200 2,360,880
------------
5,023,308
------------
Electronics (10.51%)
Altera Corp.* 13,800 319,125
Analog Devices, Inc.* 8,200 305,860
Applied Materials, Inc.* 11,000 464,750
General Electric Co. 162,200 7,542,300
Intel Corp. 105,500 3,013,344
Jabil Circuit, Inc.* 11,900 267,512
Linear Technology Corp. 8,800 348,700
Maxim Integrated Products, Inc.* 10,900 502,762
Motorola, Inc. 33,200 503,644
Novellus Systems, Inc.* 10,700 413,287
Sanmina Corp.* 13,800 411,413
Solectron Corp.* 18,000 490,500
Tektronix, Inc.* 7,800 192,582
Waters Corp.* 4,700 309,542
Xilinx, Inc.* 9,500 369,313
------------
15,454,634
------------
Energy (0.59%)
Calpine Corp.* 19,400 863,106
------------
Finance (5.04%)
Citigroup, Inc. 96,400 4,740,952
Concord EFS, Inc.* 7,500 346,875
J.P. Morgan Chase & Co. 19,200 895,872
Stilwell Financial, Inc.* 15,700 500,830
Washington Mutual, Inc. 18,100 929,797
------------
7,414,326
------------
Food (0.89%)
Archer Daniels Midland Co. 34,800 523,740
ConAgra, Inc. 40,200 791,136
------------
1,314,876
------------
Insurance (3.35%)
Allstate Corp. (The) 11,700 466,362
CIGNA Corp. 11,100 1,217,337
Hartford Financial Services Group, Inc. (The) 26,500 1,692,025
Lincoln National Corp. 26,000 1,140,620
Marsh & McLennan Cos., Inc. 3,800 406,600
------------
4,922,944
------------
Leisure (0.66%)
Disney (Walt) Co. (The) 31,200 965,640
------------
Machinery (0.55%)
Ingersoll-Rand Co. 18,600 806,310
------------
Media (4.47%)
AOL Time Warner, Inc.* 68,600 3,020,458
AT&T Corp. -- Liberty Media Group* 45,900 674,730
Clear Channel Communications, Inc.* 16,500 942,975
Viacom, Inc. (Class B)* 38,942 1,935,417
------------
6,573,580
------------
Medical (13.38%)
Abbott Laboratories 35,100 1,719,549
Allergan, Inc. 800 69,560
ALZA Corp.* 15,700 620,935
American Home Products Corp. 20,900 1,290,993
Baxter International, Inc. 12,800 1,178,752
Bristol-Myers Squibb Co. 22,900 1,452,089
Cardinal Health, Inc. 6,200 629,300
Cephalon, Inc. 3,200 176,200
Johnson & Johnson 25,400 2,472,182
Laboratory Corp. of America Holdings* 5,100 818,550
Merck & Co., Inc. 41,200 3,304,240
Pfizer, Inc. 118,000 5,310,000
Pharmacia Corp. 4,400 227,480
Schering-Plough Corp. 10,000 402,500
------------
19,672,330
------------
Mortgage Banking (1.82%)
Fannie Mae 33,500 2,669,950
------------
Office (0.66%)
Avery Dennison Corp. 12,200 646,600
Reynolds & Reynolds Co. (The) (Class A) 14,900 327,502
------------
974,102
------------
Oil & Gas (7.43%)
El Paso Energy Corp. 17,800 1,251,340
Exxon Mobil Corp. 63,300 5,130,465
Kerr-McGee Corp. 11,300 730,432
Royal Dutch Petroleum Co. American Depositary
Receipts (ADR) (Netherlands) 45,700 2,665,681
USX -- Marathon Group 41,500 1,146,230
------------
10,924,148
------------
Paper & Paper Products (1.24%)
Kimberly-Clark Corp. 25,400 1,816,100
------------
Retail (7.39%)
CVS Corp. 11,000 671,000
Home Depot, Inc. (The) 25,100 1,066,750
Kohl's Corp.* 19,800 1,305,018
Limited, Inc. (The) 16,700 294,755
Lowe's Cos., Inc. 18,400 1,028,192
RadioShack Corp. 34,100 1,459,480
TJX Cos., Inc. 34,100 1,042,778
Walgreen Co. 15,500 686,960
Wal-Mart Stores, Inc. 65,900 3,300,931
------------
10,855,864
------------
Soap & Cleaning Preparations (0.16%)
Procter & Gamble Co. (The) 3,400 239,700
------------
Telecommunications (4.79%)
AT&T Wireless Group* 12,500 262,625
Broadwing, Inc.* 23,200 545,664
Comverse Technology, Inc.* 6,900 517,069
Corning, Inc. 21,200 574,520
QUALCOMM, Inc.* 10,200 559,087
Qwest Communications International, Inc.* 43,600 1,611,892
Scientific-Atlanta, Inc. 8,800 412,720
Sprint Corp. (PCS Group)* 33,200 835,976
Verizon Communications 34,800 1,722,600
------------
7,042,153
------------
Tobacco (1.50%)
Philip Morris Cos., Inc. 38,600 1,859,748
UST, Inc. 12,200 351,848
------------
2,211,596
------------
Utilities (6.08%)
Allegheny Energy, Inc. 10,000 474,500
BellSouth Corp. 16,400 688,144
Duke Energy Corp. 51,600 2,102,700
Exelon Corp. 23,700 1,549,269
Pinnacle West Capital Corp. 9,800 455,210
Reliant Energy, Inc. 27,400 1,151,074
SBC Communications, Inc. 52,700 2,513,790
------------
8,934,687
------------
TOTAL COMMON STOCKS
(Cost $115,447,422) 99.17% 145,777,134
--------- ------------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ----------------------------------- --------- -------------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.03%)
Investment in a joint repurchase
agreement transaction with UBS
Warburg, Inc. -- Dated 02-28-01, due
03-01-01 (Secured by U.S. Treasury
Bonds 7.25% thru 13.25%, due 11-15-09
thru 02-15-19) -- Note A 5.38% $43 $43,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company Daily
Interest Savings Account Current Rate
4.20% 981
------------
TOTAL SHORT-TERM INVESTMENTS (0.03%) 43,981
--------- ------------
TOTAL INVESTMENTS (99.20%) 145,821,115
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (0.80%) 1,173,581
--------- ------------
TOTAL NET ASSETS (100.00%) $146,994,696
========= ============
* Non-income-producing security.
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
Parenthetical disclosure of a foreign country in the security
description represents country of a foreign issuer.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Medium Capitalization Fund
Schedule of Investments
February 28, 2001
- ----------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Independence Medium Capitalization Fund on February 28, 2001. It
is divided into two main categories: common stocks and short-term
investments. Common stocks are further broken down by industry groups.
Short-term investments, which represent the Fund's "cash" position, are
listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ------------ ------------
COMMON STOCK
Abrasives (0.69%)
Cabot Microelectronics Corp.* 1,700 $102,956
------------
Advertising (1.28%)
Lamar Advertising Co.* 3,300 136,125
Omnicom Group, Inc. 600 54,414
------------
190,539
------------
Aerospace (1.09%)
General Dynamics Corp. 900 61,362
Precision Castparts Corp. 2,600 100,230
------------
161,592
------------
Automobile/Trucks (2.85%)
Borg-Warner Automotive, Inc. 2,200 96,140
Lear Corp.* 3,800 121,828
Superior Industries International, Inc. 2,600 96,980
Visteon Corp.* 7,600 109,440
------------
424,388
------------
Banks -- United States (2.55%)
Comerica, Inc. 2,200 140,030
Mellon Financial Corp. 900 41,679
SouthTrust Corp. 2,700 114,244
U.S. Bancorp 3,600 83,520
------------
379,473
------------
Building (2.89%)
Black & Decker Corp. (The) 5,000 207,550
Centex Corp. 3,100 127,596
Danaher Corp. 1,500 95,160
------------
430,306
------------
Business Services -- Misc. (0.77%)
Convergys Corp.* 2,700 114,372
------------
Chemicals (1.68%)
Air Products & Chemicals, Inc. 2,100 85,155
Eastman Chemical Co. 1,300 66,885
Praxair, Inc. 2,200 98,120
------------
250,160
------------
Computers (11.67%)
Adobe Systems, Inc. 2,600 75,563
Brocade Communications Systems, Inc.* 2,000 77,625
Cadence Design Systems, Inc.* 9,900 250,965
DST Systems, Inc.* 4,600 280,600
First Data Corp. 2,000 123,520
Fiserv, Inc.* 2,900 143,550
Intuit, Inc.* 3,700 152,162
Mentor Graphics Corp.* 3,200 78,400
NCR Corp. 1,700 74,800
Network Appliance, Inc.* 1,100 32,725
Sabre Holdings Corp.* 2,400 103,488
SunGard Data Systems, Inc.* 5,000 278,500
Sybase, Inc.* 3,300 64,762
------------
1,736,660
------------
Cosmetics & Personal Care (0.23%)
Avon Products, Inc. 800 33,968
------------
Electronics (8.77%)
American Power Conversion Corp. 3,700 45,094
Jabil Circuit, Inc.* 5,000 112,400
Lam Research Corp.* 6,700 144,050
Linear Technology Corp. 2,800 110,950
Maxim Integrated Products, Inc.* 2,000 92,250
Novellus Systems, Inc.* 3,100 119,737
Parker-Hannifin Corp. 1,300 55,939
QLogic Corp.* 900 33,637
Sanmina Corp.* 2,000 59,625
Sawtek, Inc.* 2,600 42,900
Tektronix, Inc.* 3,200 79,008
Vitesse Semiconductor Corp.* 1,200 47,325
Waters Corp.* 4,200 276,612
Xilinx, Inc.* 2,200 85,525
------------
1,305,052
------------
Energy (1.11%)
Calpine Corp.* 1,300 57,837
Massey Energy Co. 5,500 108,020
------------
165,857
------------
Finance (4.01%)
Concord EFS, Inc.* 6,500 300,625
Stilwell Financial, Inc.* 2,500 79,750
Washington Mutual, Inc. 4,200 215,754
------------
596,129
------------
Food (0.98%)
Hormel Foods Corp. 4,300 92,450
Sensient Technologies Corp. 2,500 54,125
------------
146,575
------------
Furniture (0.58%)
Hillenbrand Industries, Inc. 1,700 86,190
------------
Instruments -- Scientific (0.46%)
Millipore Corp. 1,300 68,250
------------
Insurance (5.06%)
Hartford Financial Services Group, Inc. (The) 2,000 127,700
Lincoln National Corp. 4,800 210,576
PartnerRe Ltd. (United Kingdom) 3,200 168,992
St. Paul Cos., Inc. (The) 1,900 87,951
Torchmark Corp. 3,000 104,340
XL Capital Ltd. (Class A) 700 53,207
------------
752,766
------------
Machinery (1.78%)
AK Steel Holding Corp. 15,500 147,715
Ingersoll-Rand Co. 2,700 117,045
------------
264,760
------------
Media (3.41%)
EchoStar Communications Corp.* 1,400 36,575
Knight-Ridder, Inc. 1,000 59,750
Reader's Digest Association, Inc. (Class A) 2,000 64,180
Univision Communications, Inc. (Class A)* 4,400 145,200
Viacom, Inc. (Class B)* 1,243 61,777
Westwood One, Inc.* 6,500 140,010
------------
507,492
------------
Medical (13.51%)
Allergan, Inc. 1,300 113,035
ALZA Corp.* 3,200 126,560
Aviron* 2,700 113,231
Cephalon, Inc. 1,500 82,594
CV Therapeutics, Inc.* 2,500 89,375
Enzon, Inc.* 1,900 120,769
Forest Laboratories, Inc.* 300 20,859
Genzyme Corp.* 1,100 96,731
Health Management Associates, Inc. (Class A)* 6,500 112,450
IDEC Pharmaceuticals Corp.* 2,100 118,388
Inspire Pharmaceuticals, Inc.* 2,700 25,313
Invitrogen Corp.* 1,500 120,750
King Pharmaceuticals, Inc.* 1,300 59,670
Laboratory Corp. of America Holdings* 800 128,400
Lincare Holdings, Inc.* 3,300 194,494
Pall Corp. 1,900 43,453
St. Jude Medical, Inc. * 1,500 84,180
Trigon Healthcare, Inc.* 3,300 198,627
Universal Health Services, Inc. (Class B)* 1,800 161,550
------------
2,010,429
------------
Metal (0.70%)
Worthington Industries, Inc. 10,600 104,410
------------
Office (1.22%)
Avery Dennison Corp. 1,900 100,700
Reynolds & Reynolds Co. (The) (Class A) 3,700 81,326
------------
182,026
------------
Oil & Gas (9.53%)
Amerada Hess Corp. 2,300 165,600
Anadarko Petroleum Corp. 500 31,250
Apache Corp. 1,700 99,790
Baker Hughes, Inc. 1,800 70,560
BJ Services Co.* 2,400 182,400
Conoco Inc. (Class A) 4,600 129,950
Cooper Cameron Corp.* 1,300 77,714
Imperial Oil Ltd. (Canada) 2,700 66,285
Kerr-McGee Corp. 800 51,712
Noble Drilling Corp.* 6,000 279,300
Sunoco, Inc. 3,800 126,312
Transocean Sedco Forex, Inc. 800 38,504
USX -- Marathon Group 3,600 99,432
------------
1,418,809
------------
Paper & Paper Products (0.88%)
Abitibi-Consolidated, Inc. (Canada) 8,900 69,420
Smurfit-Stone Container Corp.* 4,300 62,081
------------
131,501
------------
Printing -- Commercial (0.48%)
Donnelley (R.R.) & Sons 2,400 71,160
------------
Retail (9.14%)
BJ's Wholesale Club, Inc.* 3,100 141,081
Brinker International, Inc.* 4,400 130,064
Darden Restaurants, Inc. 2,400 52,152
Family Dollar Stores, Inc. 8,400 220,584
Kohl's Corp.* 2,000 131,820
Land's End, Inc. 2,400 55,728
Limited, Inc. (The) 2,100 37,065
Lowe's Cos., Inc. 1,400 78,232
RadioShack Corp. 3,800 162,640
Tiffany & Co. 2,000 62,220
TJX Cos., Inc. 4,500 137,610
Toys R Us, Inc.* 3,500 86,100
Wendy's International, Inc. 2,600 64,350
------------
1,359,646
------------
Soap & Cleaning Preparations (0.20%)
Ecolab, Inc. 700 29,365
------------
Telecommunications (3.46%)
Broadwing, Inc.* 7,100 166,992
Comverse Technology, Inc.* 1,200 89,925
Scientific-Atlanta, Inc. 1,700 79,730
Telephone and Data Systems, Inc. 1,900 177,555
------------
514,202
------------
Tobacco (0.85%)
UST, Inc. 4,400 126,896
------------
Transportation (0.65%)
CNF Transportation, Inc. 2,800 96,712
------------
Utilities (6.69%)
Allegheny Energy, Inc. 3,500 166,075
Constellation Energy Group, Inc. 1,300 55,510
Dominion Resources, Inc. 1,200 78,672
Dynegy, Inc. (Class A) 1,200 56,400
Exelon Corp. 3,100 202,647
Pinnacle West Capital Corp. 3,100 143,995
Reliant Energy, Inc. 3,500 147,035
UtiliCorp United, Inc. 4,900 145,285
------------
995,619
------------
TOTAL COMMON STOCK
(Cost $13,485,265) (99.17%) 14,758,260
------------
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- --------- -------------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.30%)
Investment in a joint repurchase
agreement transaction with UBS
Warburg, Inc. -- Dated 02-28-01, due
03-01-01 (Secured by U.S. Treasury
Bonds, 7.25% thru 13.250% due
11-15-09 thru 02-15-19) -- Note A 5.38% $491 $491,000
------------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company Daily
Interest Savings Account Current Rate
4.20% 901
------------
TOTAL SHORT-TERM INVESTMENTS (3.31%) 491,901
--------- ------------
TOTAL INVESTMENTS (102.48%) 15,250,161
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (2.48%) (368,786)
--------- ------------
TOTAL NET ASSETS (100.00%) $14,881,375
========= ============
* Non-income-producing security.
Parenthetical disclosure of a foreign country in the security
description represents country of a foreign issuer.
The percentage shown for each investment category is the total value of
that category as a percentage of the net assets of the Fund.
See notes to financial statements.
NOTE A --
ACCOUNTING POLICIES
John Hancock Independence Balanced Fund ("Independence Balanced Fund"),
John Hancock Independence Diversified Core Equity Fund II ("Independence
Diversified Core Equity Fund II") and John Hancock Independence Medium
Capitalization Fund ("Independence Medium Capitalization Fund") (each, a
"Fund" and collectively, the "Funds"), are separate portfolios of John
Hancock Institutional Series Trust, an open-end management investment
company registered under the Investment Company Act of 1940, organized
as a Massachusetts business trust in 1994. Effective October 1, 1999,
the Board of Trustees authorized the existing shares of Independence
Diversified Core Equity Fund II to be designated Class I shares and the
issuance of Class P shares, which will become available for sale to
individual investors at a later time. The investment objective of
Independence Balanced Fund and Independence Diversified Core Equity Fund
II is to seek above average total return consisting of capital
appreciation and income. The investment objective of Independence Medium
Capitalization Fund is to seek above average total return. Each Fund's
class of shares has equal rights as to voting, redemption, dividends and
liquidation within their respective Fund. The Trustees may authorize the
creation of additional portfolios from time to time to satisfy various
investment objectives.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued
on the basis of market quotations, valuations provided by independent
pricing services or at fair value as determined in good faith in
accordance with procedures approved by the Trustees. Short-term debt
investments maturing within 60 days are valued at amortized cost, which
approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The
Berkeley Financial Group, Inc., may participate in a joint repurchase
agreement transaction. Aggregate cash balances are invested in one or
more large repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's
custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for
ensuring that the agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on
sales of investments are determined on the identified cost basis.
Capital gains realized on some foreign securities are subject to foreign
taxes and are accrued, as applicable. Some securities may be purchased
on a "when-issued" or "forward delivery" basis, which means that the
securities will be delivered to the Fund on a future date, usually
beyond customary settlement date.
DISCOUNT ON SECURITIES The Fund accretes discount from par value on
securities from either the date of issue or the date of purchase over
the life of the security.
EXPENSES The majority of the expenses are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a
specific fund will be allocated in such a manner as deemed equitable,
taking into consideration, among other things, the nature and type of
expense and the relative size of the funds.
ORGANIZATION EXPENSE Expenses incurred in connection with the
organization of the Fund have been capitalized and are being charged to
the Fund's operations ratably over a five-year period that began with
the commencement of the investment operations of the Fund.
BANK BORROWINGS The Funds are permitted to have bank borrowings for
temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of
securities. The Funds have entered into a syndicated line of credit
agreement with various banks. This agreement enables the Funds to
participate with other funds managed by the Adviser in an unsecured line
of credit with banks, which permit borrowings up to $500 million,
collectively. Interest is charged to each fund, based on its borrowing.
In addition, a commitment fee is charged to each fund based on the
average daily unused portion of the line of credit and is allocated
among the participating funds. The Funds had no borrowing activity under
the line of credit during the year ended February 28, 2001.
SECURITIES LENDING The Funds may lend securities to certain qualified
brokers who pay the Funds negotiated lender fees. These fees are
included in interest income. The loans are collateralized at all times
with cash or securities with a market value at least equal to the market
value of the securities on loan. As with other extensions of credit, the
Funds may bear the risk of delay of the loaned securities in recovery or
even loss of rights in the collateral, should the borrower of the
securities fail financially. At February 28, 2001, the Independence
Diversified Core Equity Fund II loaned securities having a market value
of $716,594 collateralized by securities in the amount of $735,297.
FEDERAL INCOME TAXES The Fund qualifies as a "regulated investment
company" by complying with the applicable provisions of the Internal
Revenue Code and will not be subject to federal income tax on taxable
income which is distributed to shareholders. Therefore, no federal
income tax provision is required.
Additionally, the Independence Balanced Fund had net capital losses of
$178,688 attributable to security transactions occurring after October
31, 2000 that are treated as arising on the first day (March 1, 2001) of
the Funds' next taxable year.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment
securities is recorded on the ex-dividend date or, in the case of some
foreign securities, on the date thereafter when the Funds identify the
dividend. Interest income on investment securities is recorded on the
accrual basis. Foreign income may be subject to foreign withholding
taxes, which are accrued as applicable.
The Fund records all dividends and distributions to shareholders from
net investment income and realized gains on the ex-dividend date. Such
distributions are determined in conformity with income tax regulations,
which may differ from generally accepted accounting principles.
USE OF ESTIMATES The preparation of these financial statements in
accordance with accounting principles generally accepted in the United
States of America, incorporates estimates made by management in
determining the reported amount of assets, liabilities, revenues and
expenses of the Funds. Actual results could differ from these estimates.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
The Funds have an investment management contract with the Adviser. Under
the present investment management contract, the Funds pay a monthly
management fee to the Adviser, equivalent, on an annual basis, as
follows:
FUND RATE
- ---- ----
Independence 0.70% of average daily net assets up to $500 million
Balanced Fund 0.65% of such assets in excess of $500 million
Independence
Diversified Core 0.50% of average daily net assets up to $1 billion
Equity Fund II 0.45% of such assets in excess of $1 billion
Independence Medium 0.80% of average daily net assets up to $500 million
Capitalization Fund 0.75% of such assets in excess of $500 million
The Funds and the Adviser have subadvisory contracts with Independence
Investment LLC ("IIL"), formerly Independence Investment Associates,
Inc. IIL is a wholly owned indirect subsidiary of John Hancock Life
Insurance Company ("JHLICo"). The Funds are not responsible for payment
of subadvier's fees.
The Adviser has agreed to limit the Funds' expenses to the following:
0.90% of Independence Balanced Fund's average daily net assets, 0.70% of
Independence Diversified Core Equity Fund II's average daily net assets
and 1.00% of Independence Medium Capitalization Fund's average daily net
assets at least until June 30, 2001. The expense reduction amounted to
$8,926 for Independence Balanced Fund, none for Independence Diversified
Core Equity Fund II and $46,786 for Independence Medium Capitalization
Fund for the year ended February 28, 2001. The Adviser reserves the
right to terminate this limitation in the future.
The Funds have a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly owned subsidiary of the Adviser. For the year
ended February 28, 2001, all sales of shares of beneficial interest were
sold at net asset value. The Funds pay all expenses of printing
prospectuses and other sales literature, all fees and expenses in
connection with qualification as a dealer in various states, and all
other expenses in connection with the sale and offering for sale of
the shares of the Funds which have not been herein specifically
allocated to the Trust.
The Funds have a transfer agent agreement with John Hancock Signature
Services, Inc., an indirect wholly owned subsidiary of JHLICo. The Funds
pay a monthly transfer agent fee equivalent, on an annual basis, to
0.05% of the Funds' average daily net asset value.
The Funds have an agreement with the Adviser to perform necessary tax,
accounting and legal services for the Funds. The compensation for the
year was at an annual rate of less than 0.02% of the average net assets
of the Funds.
Mr. Stephen L. Brown and Ms. Maureen R. Ford are directors and officers
of the Adviser and/or its affiliates, as well as Trustees of the Funds.
The compensation of unaffiliated Trustees is borne by the Funds. The
unaffiliated Trustees may elect to defer, for tax purposes, their
receipt of this compensation under the John Hancock Group of Funds
Deferred Compensation Plan. The Funds make investments into other John
Hancock funds, as applicable, to cover their liabilities for the
deferred compensation. Investments to cover the Funds' deferred
compensation liability are recorded on the Funds' books as other assets.
The deferred compensation liability and the related other assets are
always equal and are marked to market on a periodic basis to reflect any
income earned by the investment as well as any unrealized gains or
losses.
NOTE C --
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding
short- term obligations and obligations of the U.S. government, for the
year ended February 28, 2001 were as follows:
PURCHASES PROCEEDS
----------- -----------
Independence
Balanced Fund
U.S. Government
Securities $8,939,186 $10,281,471
Other Investments 123,272,231 147,375,548
Independence
Diversified Core
Equity Fund II 183,941,478 475,508,346
Independence Medium
Capitalization Fund 21,841,881 20,864,769
At February 28, 2001, the cost (excluding the corporate savings account)
and gross unrealized appreciation and depreciation in value of
investments owned by the Funds, as computed on a federal income tax
basis, were as follows:
NET UNREALIZED
AGGREGATE GROSS UNREALIZED GROSS UNREALIZED APPRECIATION/
COST APPRECIATION DEPRECIATION (DEPRECIATION)
----------- ------------ ------------ ------------
Independence
Balanced
Fund $35,284,883 $5,096,163 $1,913,702 $3,182,461
Independence
Diversified
Core Equity
Fund II 115,781,775 41,819,403 11,781,044 30,038,359
Independence
Medium
Capitalization
Fund 14,060,369 2,333,072 1,144,181 1,188,891
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended February 28, 2001, reclassifications have been
made in each Fund's capital accounts which represent the cumulative
amount necessary to report these balances on a tax basis, excluding
certain temporary differences, as of February 28, 2001. Additional
adjustments may be needed in subsequent reporting periods.
These reclassifications, which have no impact on the net asset value of
the Funds, are primarily attributable to treatment of certain
differences in the computation of distributable income and capital gains
under federal tax rules versus generally accepted accounting principles.
The calculation of net investment income per share in the financial
highlights excludes these adjustments.
UNDISTRIBUTED ACCUMULATED
CAPITAL NET INVESTMENT NET REALIZED
PAID-IN INCOME (LOSS) GAIN (LOSS)
----------- ------------ ------------
Independence
Balanced
Fund ($599) $199 $400
Independence
Diversified
Core Equity
Fund II (4,840) 435 4,405
Independence
Medium
Capitalization
Fund (273) (16) 289
NOTE E --
CHANGE IN ACCOUNTING PRINCIPLE
The Funds adopted the provisions of the AICPA Audit and Accounting Guide
for Investment Companies, as revised, effective for fiscal years
beginning after December 15, 2000. As required, the Funds will begin
amortizing premiums on debt securities effective March 1, 2001. Prior to
this date, the Funds did not amortize premiums on debt securities. The
cumulative effect of this accounting change will have no impact on the
total net assets of the Funds. The impact of this accounting change has
not been determined but will result in a reclassification between the
cost of securities and a corresponding reclassification in net
unrealized appreciation (depreciation), based on securities held as of
February 28, 2001.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of John Hancock Institutional
Series Trust:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of John Hancock Institutional
Series Trust (comprising, respectively, John Hancock Independence
Balanced Fund, John Hancock Independence Diversified Core Equity Fund II
and John Hancock Independence Medium Capitalization Fund) (the "Funds")
as of February 28, 2001, the related statements of operations for the
year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
February 28, 2001 by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the
Funds constituting John Hancock Institutional Series Trust at February
28, 2001, the results of their operations, the changes in their net
assets, and their financial highlights for the respective stated periods
in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 30, 2001
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished
with respect to the taxable distributions of the Funds for the fiscal
year ended February 28, 2001.
The Funds designated the following as long-term capital gain dividends
during the fiscal year ended February 28, 2001. Additionally, the
following dividend distributions qualify for the dividends-received
deduction available to corporations.
LONG-TERM DIVIDENDS
CAPITAL RECEIVED
GAINS DESIGNATED DEDUCTION
---------------- ---------
Independence Balanced Fund $4,690,902 17.02%
Independence Diversified Core Equity Fund II 84,003,340 100.00
Independence Medium Capitalization Fund 805,410 12.33
NOTES
[This page intentionally left blank.]
NOTES
[This page intentionally left blank.]
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.]
John Hancock Funds, Inc.
MEMBER NASD
101 Huntington Avenue
Boston, MA 02199-7603
1-800-225-5291
1-800-554-6713 TDD
1-800-338-8080 EASI-Line
www.jhfunds.com
This report is for the information of shareholders of the John Hancock
Institutional Series Trust. It is not authorized for distribution to
prospective investors unless it is preceded or accompanied by the
current prospectus, which details charges, investment objectives and
operating policies.
[A recycled logo in lower left hand corner with caption "Printed on
Recycled Paper."]
KI00A 2/01
4/01
The latest report from your
Fund's management team
SEMIANNUAL REPORT
Institutional
Series Trust
Independence Balanced Fund
Independence Diversified Core Equity Fund II
Independence Medium Capitalization Fund
AUGUST 31, 2001
[A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower,
center middle of page. A tag line below reads "JOHN HANCOCK FUNDS".]
Table of Contents
Page
1) CEO Corner 3
2) Portfolio Manager Commentary
This commentary reflects the views of the portfolio
management teams through the end of the Fund's period
discussed in this report. Of course, the teams' views
are subject to change as market and other conditios warrant.
John Hancock Independence Balanced Fund 4
John Hancock Independence Diversified Core Equity Fund II 7
John Hancock Independence Medium Capitalization Fund 10
3) Financial Statements 13
4) Notes to Financial Statements 33
TRUSTEES
James F. Carlin*
William H. Cunningham
John M. DeCiccio
Ronald R. Dion
Maureen R. Ford
Charles L. Ladner
Steven R. Pruchansky*
Lt. Gen. Norman H. Smith, USMC (Ret.)
John P. Toolan*
* Members of Audit Committee
OFFICERS
Maureen R. Ford
Chairman, President and
Chief Executive Officer
William L. Braman
Executive Vice President and
Chief Investment Officer
Richard A. Brown
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Senior Vice President and Secretary
William H. King
Vice President and Treasurer
Thomas H. Connors
Vice President and Compliance Officer
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
INVESTMENT SUBADVISER
Independence Investment LLC
53 State Street
Boston, MA 02109
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, MA 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, MA 02109
[A 1" x 1" photo of Maureen R. Ford, Chairman and Chief Executive
Officer, flush right next to second paragraph.]
CEO CORNER
DEAR FELLOW SHAREHOLDERS,
The U.S. stock market has had a very difficult time so far in 2001, as the
economy has slowed to a near standstill and the parade of corporate
earnings disappointments has continued. The Federal Reserve aggressively
began to attack the economic slowdown with interest-rate cuts totaling
three percentage points between January and the end of August.
The Standard & Poor's 500 Index, a leading benchmark of large-cap stocks,
lost 13.40% year-to-date through August. Bonds have outperformed stocks
overall, producing mostly positive results, as they were the beneficiaries
of the rate cuts and investors' search for safety. As we entered
September, the stock market remained in turmoil, as investors were trying
to get a clearer sense of the timetable for economic and corporate
recovery.
Then on September 11, 2001, a terrorist attack of unspeakable horror was
launched on the United States. We send our condolences to the victims'
families and friends.
Apart from the immediate impact of devastating human loss, the events have
understandably raised concerns about the broader repercussions on our
country's economy and financial markets. We have great confidence in the
United States economy, its financial systems and, above all, its people.
Throughout history, they have withstood a range of challenges -- from the
Great Depression, to wars, natural disasters and global financial turmoil
- -- and have emerged stronger thereafter. We encourage shareholders to keep
this longer-term perspective, difficult as it may seem, when making
investment decisions in the coming days.
Today, we are seeing the full resources of industry and the U.S.
government working to bolster and sustain our systems. Although we expect
market volatility in the near term, what remains certain is that the U.S.
economic and financial systems are working and resilient. "The American
economy is open for business," said Deputy Treasury Secretary Ken Dam the
day after the attack. We never had any doubts.
Sincerely,
/S/ MAUREEN R. FORD
MAUREEN R. FORD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BY JANE A. SHIGLEY AND JIM SHALLCROSS,
FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Independence Balanced Fund
Economic weakness and earnings shortfalls
push stocks lower; bonds rally as Fed cuts rates
Continued economic weakness, coupled with uncertainty and disappointment
over corporate earnings, led to significant stock losses during the
period. Although the U.S. economy narrowly escaped a recession during the
six months ended August 31, 2001, the country was caught in a serious
slump. Even the seven interest-rate cuts made by the Federal Reserve since
January, which were meant to stimulate the economy, weren't enough to stop
the stock market from sliding.
"...significant
stock losses
during the
period."
[Pie chart at bottom left-hand column with heading "Portfolio
Diversification." The chart is divided into four sections (from top to
left): U.S. Agencies 14%, U.S. Government 4%, Corporate Bonds 20% and
Common Stock & Other 62%. A note below the chart reads "As a percentage
of net assets on August 31, 2001."]
In contrast, bonds continued to soar, as rates fell and investors
increasingly sought out the relative stability of fixed-income
investments. Even corporate, agency and mortgage securities, which lagged
their Treasury counterparts throughout much of 2000, got into the act,
posting significant gains and outperforming Treasury securities in the
process.
Fund performance
For the six-month period ended August 31, 2001, John Hancock Independence
Balanced Fund posted a total return of -3.55%, at net asset value,
compared with the average balanced fund's -3.34% return, according to
Lipper, Inc. In the same period, a 50/50 blended index combining the
Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index
returned -1.70%. For historical performance information, see page six. Our
asset allocation remained at 60% to 65% in stocks and 35% to 40% in bonds.
Stocks: Leaders and laggards
Although the stock portion of the Fund suffered losses for the period, its
losses were in line with those of the S&P 500 Index. However, there were
some very strong performers among our holdings. Lowe's Co., a retailer of
home-improvement products, benefited from the lower interest-rate
environment and a surprisingly resilient housing market. First Data Corp.,
a technology-driven financial-services entity and one of our larger
holdings, performed well thanks to continued strength in consumer
spending. Diversified life insurers Hartford Financial and Lincoln
National also produced strong returns.
[Bar chart at top of left-hand column with heading "Fund Performance."
Under the heading is a note that reads "For the six months ended August
31, 2001." The chart is scaled in increments of 1% with -4% at the
bottom and 0% at the top. The first bar represents the -3.55% total
return for John Hancock Independence Balanced Fund. The second bar
represents the -3.34% total return for Average balanced fund. The third
bar represents the -1.70% total return for 50% S&P 500 Index/50% L.B.
Aggregate Bond Index. A note below the chart reads "The total return for
John Hancock Independence Balanced Fund is at net asset value with all
distributions reinvested. The average balanced fund is tracked by
Lipper, Inc. See the following page for historical performance
information."]
Among the poorest performers were specialty retailers RadioShack and CVS.
RadioShack's earnings suffered from reduced commission payments from
Direct TV, as some customers bought the equipment but then pirated the
signal. CVS stock suffered as the company warned that future earnings
would not meet expectations. CVS also was hit by a shortage of
pharmacists, which caused a shortfall in prescription and general sales as
customers tired of waiting in line. Drug stocks, such as Pharmacia and
Merck, were hurt by the slowing in new drug approvals by the FDA.
Bonds: Focus on higher-yielding alternatives
Throughout much of the period, we maintained our focus on higher-yielding
alternatives to Treasuries, including corporate and mortgage securities.
That aided our performance because these groups outpaced their Treasury
counterparts during the period. More recently, we've pared some of our
corporate holdings in the automobile and telephone sectors, locking in
their earlier strong gains and looking for more attractive opportunities
elsewhere. Rather than position the Fund to benefit from rising or falling
interest rates, we kept the Fund's duration -- a gauge of interest
rate-sensitivity -- in line with the bond market overall. We typically
maintain that stance because incorrectly positioning the Fund to benefit
from interest-rate changes could easily overwhelm other factors, such as
security selection.
"....we
maintained
our focus
on higher-
yielding
alternatives
to
Treasuries..."
Outlook
Shortly after the Fund's period ended, the tragic terrorist attacks on the
World Trade Center and the Pentagon rocked the nation. We continue to
closely monitor the impact of these events on financial markets, adjusting
our investment stance accordingly. As always, we'll continue to rely on
our in-depth analysis in choosing investments for the Fund.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (7/6/95)
------- ------- ------- -------
Cumulative Total Returns (3.55%) (11.35%) 55.24% 73.28%
Average Annual Total Returns -- (11.35%) 9.20% 9.34%
YIELD
As of August 31, 2001
SEC 30-DAY
YIELD
-------
John Hancock Independence Balanced Fund 1.95%
Total return measures the change in value of an investment from the
beginning to the end of a period, assuming all distributions were
reinvested.
All figures represent past performance and are no guarantee of future
results. The performance table above and the chart on the right do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Keep in mind that the
total return and share price of the Fund's investments will fluctuate. As
a result, your Fund's shares may be worth more or less than their original
cost, depending on when you sell them. Please read your prospectus
carefully before you invest or send money.
Note to Performance
The Fund's performance results reflect any applicable expense reductions,
without which the expenses would increase and results would have been less
favorable. These reductions can be terminated in the future. See the
prospectus for details.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in John Hancock
Independence Balanced Fund would be worth, assuming all distributions were
reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in a 50/50 blend of the Standard & Poor's 500 Index and
the Lehman Brothers Aggregate Bond Index. The Standard & Poor's 500 Index
is an unmanaged index that includes 500 widely traded common stocks and is
a commonly used measure of stock market performance. The Lehman Brothers
Aggregate Bond Index is an unmanaged index that includes Treasury issues,
agency issues, corporate bond issues and mortgage-backed securities.
It is not possible to invest in an index.
[Line chart with the heading John Hancock Independence Balanced Fund,
representing the growth of a hypothetical $10,000 investment over the
life of the fund. Within the chart are two lines. The first line
represents the 50/50 blended index of the Standard & Poor's 500 Index
and Lehman Brothers Aggregate Bond Index and is equal to $19,282 as of
August 31, 2001. The second line represents the value of the
hypothetical $10,000 investment made in the John Hancock Independence
Balanced Fund on July 6, 1995 and is equal to $17,328 as of August 31,
2001.]
BY STEPHEN LANZENDORF FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Independence Diversified
Core Equity Fund II
Weak economy keeps stocks on the ropes
The slowdown that began in earnest in the fall of 2000 continued to
tighten its grip on the U.S. economy during the period. Revised estimates
for second-quarter GDP (gross domestic product) were scaled back to an
annual rate of just 0.2%, representing the weakest growth in more than
eight years. Capital spending by businesses was hit hardest, while
consumer spending remained surprisingly strong, with demand for housing
particularly resilient. However, analysts worried about the consumer's
ability to continue spending in the face of mounting corporate layoffs,
which reached record levels in July.
[Table at bottom left-hand column entitled "Top Five Common Stock
Holdings." The first listing is General Electric 4.9%, the second is
Pfizer 3.9%, the third Citigroup 3.8%, the fourth ExxonMobil 3.7% and
the fifth Microsoft 3.1%. A note below the table reads "As a percentage
of net assets on August 31, 2001."]
After two interest-rate cuts in January 2001, the Federal Reserve Board
continued to ease aggressively during the period. Half-point rate
reductions in March, April and May were followed by quarter-point
reductions in June and August, leaving the target federal funds rate at
3.50%.
"Stock
selection in
technology
made a
positive
contribution
to the Fund's
performance
relative to
the S&P
500."
Stocks responded to the deepening contraction by falling sharply in March.
In April, bargain-hunters triggered a technology-led rally, which was also
helped by the Fed's surprise rate cut on April 18. Buoyed by the hope that
aggressive Fed easing would rescue the economy, investors pushed stocks
higher through most of May. By late May, relentlessly discouraging news on
the economy and corporate earnings began to undermine the rally, and share
prices backed off over the summer. During the final week of August, news
that consumer confidence had fallen to its lowest level in four months
triggered a sharp sell-off that brought the Standard & Poor's 500 Index
down near its March lows.
Performance summary
For the six months ending August 31, 2001, the John Hancock Independence
Diversified Core Equity Fund II had a total return of -8.21%, slightly
trailing the -7.97% return of the S&P 500 Index, but beating the -9.18%
mark posted by the average large-cap value fund, according to Lipper, Inc.
Historical performance can be found on page nine. Once again, value stocks
far outdistanced growth stocks, while the small-cap sector maintained its
edge over large-cap stocks.
[Bar chart at top of left-hand column with heading "Fund Performance."
Under the heading is a note that reads "For the six months ended August
31, 2001." The chart is scaled in increments of 2% with -10% at the
bottom and 0% at the top. The first bar represents the -8.21% total
return for John Hancock Independence Diversified Core Equity Fund II.
The second bar represents the -9.18% total return for Average large-cap
value fund. The third bar represents the -7.97% total return for S&P 500
Index. A note below the chart reads "The total return for John Hancock
Independence Diversified Core Equity Fund II is at net asset value with
all distributions reinvested. The average large-cap value fund is
tracked by Lipper, Inc. See the following page for historical
performance information."]
The Fund's strategy of seeking undervalued stocks of companies with
improving fundamentals enabled it to avoid many of the worst earnings
surprises. However, in many cases even the companies themselves were
surprised by the swiftness and extent of the damage to their financial
results. In such a volatile environment with minimal earnings visibility,
we consider it a small victory to have finished roughly in line with our
benchmark.
Stock selection in technology made a positive contribution to the Fund's
performance relative to the S&P 500 Index. For example, the Fund was
helped by Intuit, a maker of personal finance software, which in August
reported a smaller-than-expected net loss for its fiscal fourth quarter
ending July 31, 2001. Moreover, although the Fund was hurt on an absolute
basis by its holdings of network equipment giant Cisco Systems, which
declined sharply during the period, our substantially underweighted
position in Cisco helped performance versus the benchmark.
Lowe's and TJX were two retailers that made our list of top performers.
Lowe's is a competitor of Home Depot that benefited from a strong housing
market and aggressive expansion into large metropolitan markets. TJX,
owner of T.J. Maxx and other retailing operations, was helped by continued
strength in consumer spending and consumers' increasing focus on finding
bargains in a weak economy.
On the down side, General Electric declined sharply due to investors'
disappointment over the failed merger with Honeywell. Qwest
Communications, a telephone service provider, sharply reduced its growth
estimates, and we liquidated the position entirely.
"Regardless
of what
happens, our
disciplined
strategy will
not waver."
Outlook
The terrorist attacks that occurred shortly after the end of our reporting
period on September 11, 2001, could have important political and economic
ramifications that are difficult to foresee at the present time. The U.S.
economy is already fragile, and any event that undermines consumer and
investor confidence could have a negative effect on stock prices, at least
in the short term. On the positive side, low inflation and a vigilant Fed
provide some cause for optimism. Regardless of what happens, our
disciplined strategy will not waver. We believe we can add value by
keeping our focus on finding high-quality stocks using our tested
selection process that has proven its worth over complete market cycles.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (3/10/95)
------- ------- ------- -------
Cumulative Total Returns (8.21%) (22.44%) 72.63% 131.71%
Average Annual Total Returns -- (22.44%) 11.54% 13.85%
Total return measures the change in value of an investment from the
beginning to the end of a period, assuming all distributions were
reinvested.
All figures represent past performance and are no guarantee of future
results. The performance table above and the chart on the right do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Keep in mind that the
total return and share price of the Fund's investments will fluctuate. As
a result, your Fund's shares may be worth more or less than their original
cost, depending on when you sell them. Please read your prospectus
carefully before you invest or send money.
Note to Performance
The Fund's performance results reflect any applicable expense reductions,
without which the expenses would increase and results would have been less
favorable. These reductions can be terminated in the future. See the
prospectus for details.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in John Hancock
Independence Diversified Core Equity Fund II would be worth, assuming all
distributions were reinvested for the period indicated. For comparison,
we've shown the same $10,000 investment in the Standard & Poor's 500 Index
- -- an unmanaged index that includes 500 widely traded common stocks and is
often used as a measure of stock market performance. It is not possible to
invest in an index.
[Line chart with the heading John Hancock Independence Diversified Core
Equity Fund II, representing the growth of a hypothetical $10,000
investment over the life of the fund. Within the chart are two lines.
The first line represents the Standard & Poor's 500 Index and is equal
to $25,923 as of August 31, 2001. The second line represents the value
of the hypothetical $10,000 investment made in the John Hancock
Independence Diversified Core Equity Fund II on March 10, 1995 and is
equal to $23,171 as of August 31, 2001.]
BY STEPHEN LANZENDORF FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Independence Medium
Capitalization Fund
Mid caps bear up well as slowing trend continues
At the beginning of the current reporting period, investors were still
hopeful that a proactive Federal Reserve Board could avert a prolonged
economic slowdown. The Fed had trimmed short-term interest rates twice in
January and, with the stock market falling sharply and more bad news on
the economy in February, more rate cuts were widely expected in the
spring.
"Investors'
increasing
preoccupation
with
value was a
favorable
factor for
the Fund..."
[Table at bottom left-hand column entitled "Top Five Stock Holdings."
The first listing is Allegheny Energy 2.0%, the second is UST, Inc.
1.9%, the third Family Dollar Stores 1.8%, the fourth SunGard Data
Systems 1.7% and the fifth Trigon Healthcare 1.7%. A note below the
table reads "As a percentage of net assets on August 31, 2001."]
The Fed performed as anticipated, cutting rates five times during the
period. Although the markets responded with a rally during April and most
of May, continued disappointing news on the economy and corporate earnings
more than offset the positive effects of falling interest rates. As a
result, stocks backed off during the summer and closed the period not far
from their spring lows. As the end of August drew near, the markets were
unsettled by waning consumer confidence numbers and the news that in the
second quarter the economy registered its slowest growth in more than
eight years.
Mid-cap stocks, favored with more modest valuations than the large-cap
sector, generally weathered the storm well. In line with recent trends,
value outperformed growth, as investors retreated to relatively
inexpensive stocks with stable earnings growth.
Performance summary
For the six months ending August 31, 2001, the John Hancock Independence
Medium Capitalization Fund had a total return of -2.38%, trailing the
- -0.19% return of the Standard & Poor's MidCap 400 Index. However, the Fund
finished slightly ahead of the -2.42% return of the average multi-cap
value fund, according to Lipper, Inc. Historical performance can be found
on page 12.
Investors' increasing preoccupation with value was a favorable factor for
the Fund, with its emphasis on undervalued stocks of companies with
improving fundamentals. The most negative influence was a rapidly
deteriorating earnings environment. Things got so bad that many companies
refused to offer guidance about future performance because they themselves
had no clue about what to expect. The lack of earnings visibility made it
difficult to make rational decisions about valuations.
[Bar chart at top of left-hand column with heading "Fund Performance."
Under the heading is a note that reads "For the six months ended August
31, 2001." The chart is scaled in increments of 1% with -3% at the
bottom and 0% at the top. The first bar represents the -2.38% total
return for John Hancock Independence Medium Capitalization Fund. The
second bar represents the -2.42% total return for Average multi-cap
value fund. The third bar represents the -0.19% total return for S&P
Midcap 400 Index. A note below the chart reads "The total return for
John Hancock Independence Medium Capitalization Fund is at net asset
value with all distributions reinvested. The average multi-cap value
fund is tracked by Lipper, Inc. See the following page for historical
performance information."]
Looking at sectors, an overweighting in health care was a positive
influence, as was stock selection in health care, consumer staples,
communication services and technology. On the other hand, the Fund had an
overweighting in technology and an underweighting in financials, both of
which hurt performance versus the benchmark.
Semiconductor manufacturer Lam Research was one positive contributor amid
a sea of minus signs for our technology holdings. Semiconductor stocks
were early to decline and have benefited lately from speculation that an
economic upturn might not be far off. Lands' End, a clothing retailer, had
sold off to very attractive levels near the beginning of the period and
reflected the resilience in consumer spending. AK Steel also recovered
significantly from where it traded early in the period, in part on the
news that the Bush administration will impose restrictions on steel
imports and thus reduce the supply available from foreign competitors.
Turning to detractors, BJ Services and Noble Drilling are both highly
dependent on natural gas prices, which declined dramatically during the
period due to weaker industrial demand and average summer temperatures.
Comverse Technology, a provider of software used in the telecommunications
industry, collapsed in July after significantly lowering its guidance for
future revenues and earnings. Electronics retailer RadioShack struggled in
the face of weakening sales for cellular phones, PCs and other technology
products.
"...we are
confident
that the Fed
will persist
in its effort
to turn the
economy
around."
Outlook
This outlook is being written in the days immediately following the
terrorist attacks of September 11, 2001. Of course, the costs in human
suffering of these events are incalculable. Looking at the economic
impact, there are certain industries, such as the airlines and insurance,
which could be adversely affected in the short run. However, we believe
that the economy as a whole will hold up relatively well unless there is a
significant downturn in consumer sentiment. Furthermore, we are confident
that the Fed will persist in its effort to turn the economy around. The
Fund's management team will focus on what we do best, which is picking
stocks according to a disciplined method that has proven its value over
time.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (10/2/95)
------- ------- ------- -------
Cumulative Total Returns (2.38%) (8.58%) 103.30% 124.72%
Average Annual Total Returns -- (8.58%) 15.25% 14.67%
Total return measures the change in value of an investment from the
beginning to the end of a period, assuming all distributions were
reinvested.
All figures represent past performance and are no guarantee of future
results. The performance table above and the chart on the right do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Keep in mind that the
total return and share price of the Fund's investments will fluctuate. As
a result, your Fund's shares may be worth more or less than their original
cost, depending on when you sell them. Please read your prospectus
carefully before you invest or send money.
Note to Performance
The Fund's performance results reflect any applicable expense reductions,
without which the expenses would increase and results would have been less
favorable. These reductions can be terminated in the future. See the
prospectus for details.
WHAT HAPPENED TO
A $10,000 INVESTMENT...
The chart below shows how much a $10,000 investment in the John Hancock
Independence Medium Capitalization Fund would be worth, assuming all
distributions were reinvested for the period indicated. For comparison,
we've shown the same $10,000 investment in the Standard & Poor's MidCap
400 Index, an unmanaged capitalization-weighted index that measures the
performance of the mid-range sector of the U.S. stock market. It consists
of 400 domestic stocks chosen for market size, liquidity and industry
group representation. It is not possible to invest in an index.
[Line chart with the heading John Hancock Independence Medium
Capitalization Fund, representing the growth of a hypothetical $10,000
investment over the life of the fund. Within the chart are two lines.
The first line represents the Standard & Poor's Midcap 400 Index and is
equal to $24,702 as of August 31, 2001. The second line represents the
value of the hypothetical $10,000 investment made in the John Hancock
Independence Medium Capitalization Fund on October 2, 1995 and is equal
to $22,472 as of August 31 , 2001.]
FINANCIAL STATEMENTS
John Hancock Funds -- Institutional Series Trust
Statements of Assets and Liabilities
August 31, 2001 (Unaudited)
- ------------------------------------------------------------------------------------------------------
INDEPENDENCE INDEPENDENCE
INDEPENDENCE DIVERSIFIED CORE MEDIUM CAPITALIZATION
BALANCED FUND EQUITY FUND II FUND
------------- -------------- ---------------------
Assets:
Investments at value (cost -
$27,822,862, $91,049,755 and
$11,027,423, respectively) $30,635,557 $114,845,509 $11,916,142
Joint repurchase agreement (cost -
$3,348,000, $1,397,000 and
$171,000, respectively) 3,348,000 1,397,000 171,000
----------- ----------- -----------
33,983,557 116,242,509 12,087,142
Cash 469 476 305
Receivable for investments sold -- 27,359 --
Dividends and interest receivable 115,804 170,486 13,781
Other assets 6,777 58,965 1,327
----------- ----------- -----------
Total Assets 34,127,007 116,499,795 12,102,555
- ------------------------------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 3,937,647 -- --
Payable for shares repurchased 41,337 82,295 5,364
Payable to affiliates 13,535 51,230 772
Accounts payable and accrued
expenses 29,189 135,991 23,034
----------- ----------- -----------
Total Liabilities 4,021,708 269,516 29,170
- ------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 28,447,922 78,709,976 11,023,678
Accumulated net realized gain
(loss) on investments (1,231,271) 13,568,071 154,581
Net unrealized appreciation of
investments 2,812,695 23,795,754 888,719
Undistributed net investment income 75,953 156,478 6,407
----------- ----------- -----------
Net Assets $30,105,299 $116,230,279 $12,073,385
======================================================================================================
Net Asset Value Per Share:
(Based on 3,315,412, 14,256,553 and
1,050,470 shares, respectively, of
beneficial interest outstanding -
unlimited number of shares
authorized with no par value) $9.08 $8.15 $11.49
======================================================================================================
The Statement of Assets and Liabilities is each Fund's balance sheet and
shows the value of what the Fund owns, is due and owes as of August 31,
2001. You'll also find the net asset value per share as of that date.
See notes to financial statements.
Statement of Operations
Six months ended August 31, 2001 (Unaudited)
- ------------------------------------------------------------------------------------------------------
INDEPENDENCE INDEPENDENCE
INDEPENDENCE DIVERSIFIED CORE MEDIUM CAPITALIZATION
BALANCED FUND EQUITY FUND II FUND
------------- -------------- ---------------------
Investment Income:
Interest (including income on
securities loaned of none, $910
and $10, respectively) $351,578 $42,947 $6,279
Dividends (net of foreign
withholding tax of $1,044, $9,387
and $325, respectively) 145,071 895,787 69,199
------------- -------------- ---------------------
496,649 938,734 75,478
------------- -------------- ---------------------
Expenses:
Investment management fee 120,664 346,138 57,817
Custodian fee 17,249 32,556 11,879
Registration and filing fee 14,302 46,588 12,565
Auditing fee 11,393 16,333 7,776
Transfer agent fee 8,619 34,614 3,614
Accounting and legal services fee 3,462 13,891 1,371
Printing 2,666 4,707 3,877
Miscellaneous 1,029 4,116 440
Legal fee 289 689 94
Trustees' fee 282 9,551 201
Interest expense -- -- 144
------------- -------------- ---------------------
Total Expenses 179,955 509,183 99,778
Less Expense Reductions (24,816) (24,456) (27,507)
- ------------------------------------------------------------------------------------------------------
Net Expenses 155,139 484,727 72,271
- ------------------------------------------------------------------------------------------------------
Net Investment Income 341,510 454,007 3,207
- ------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain (loss) on
investments sold (905,852) (4,389,731) 185,651
Change in net unrealized
depreciation of investments (525,043) (6,533,958) (384,276)
------------- -------------- ---------------------
Net Realized and Unrealized Loss on
Investments (1,430,895) (10,923,689) (198,625)
- ------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ($1,089,385) ($10,469,682) ($195,418)
======================================================================================================
The Statement of Operations summarizes, for each of the Funds, the investment income earned and
expenses incurred in operating the Fund. It also shows net gains for the period stated.
See notes to financial statements.
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------
INDEPENDENCE INDEPENDENCE DIVERSIFIED
BALANCED FUND CORE EQUITY FUND II
---------------------------------- -----------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED AUGUST 31, 2001 YEAR ENDED AUGUST 31, 2001
FEBRUARY 28, 2001 (UNAUDITED) FEBRUARY 28, 2001 (UNAUDITED)
----------------- --------------- ----------------- ---------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $1,293,456 $341,510 $2,076,952 $454,007
Net realized gain (loss) 3,773,845 (905,852) 76,477,429 (4,389,731)
Change in net unrealized
appreciation (depreciation) (2,214,398) (525,043) (61,720,858) (6,533,958)
----------------- --------------- ----------------- ---------------
Net Increase (Decrease) in Net
Assets from Operations 2,852,903 (1,089,385) 16,833,523 (10,469,682)
----------------- --------------- ----------------- ---------------
Distributions to Shareholders:
From net investment income (1,361,734) (385,121) (2,263,269) (478,885)
From net realized gain (5,809,948) -- (87,327,788) --
----------------- --------------- ----------------- ---------------
Total Distributions to Shareholders (7,171,682) (385,121) (89,591,057) (478,885)
----------------- --------------- ----------------- ---------------
From Fund Share Transactions: *
Shares sold 16,398,287 3,534,711 95,730,680 55,742,745
Shares issued to shareholders in
reinvestment of distributions 7,176,062 384,882 89,504,771 478,101
----------------- --------------- ----------------- ---------------
23,574,349 3,919,593 185,235,451 56,220,846
Less shares repurchased (44,268,315) (7,976,410) (391,359,218) (76,036,696)
----------------- --------------- ----------------- ---------------
Net Decrease (20,693,966) (4,056,817) (206,123,767) (19,815,850)
----------------- --------------- ----------------- ---------------
Net Assets:
Beginning of period 60,649,367 35,636,622 425,875,997 146,994,696
----------------- --------------- ----------------- ---------------
End of period (including
undistributed net investment
income of $136,745, $75,953,
$181,356 and $156,478,
respectively) $35,636,622 $30,105,299 $146,994,696 $116,230,279
================= =============== ================= ===============
* Analysis of Fund Share Transactions:
Shares sold 1,426,451 375,897 6,422,487 6,229,720
Shares issued to shareholders in
reinvestment of distributions 722,973 41,391 9,626,939 55,520
----------------- --------------- ----------------- ---------------
2,149,424 417,288 16,049,426 6,285,240
Less shares repurchased (3,857,647) (846,985) (29,473,073) (8,530,135)
----------------- --------------- ----------------- ---------------
Net Decrease (1,708,223) (429,697) (13,423,647) (2,244,895)
================= =============== ================= ===============
The Statement of Changes in Net Assets shows how the value of each
Fund's net assets has changed since the end of the previous period. The
difference reflects net investment income, any investment gains and
losses, distributions paid to shareholders and any increase or decrease
in money shareholders invested in each Fund. The footnotes illustrate
the number of Fund shares sold, reinvested and repurchased during the
period, along with the per share amount of distributions made to
shareholders of each Fund for the period indicated.
See notes to financial statements.
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------------------
INDEPENDENCE MEDIUM
CAPITALIZATION FUND
-----------------------------------
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, 2001
FEBRUARY 28, 2001 (UNAUDITED)
----------------- ---------------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $42,606 $3,207
Net realized gain 1,811,066 185,651
Change in net unrealized
appreciation (depreciation) (232,293) (384,276)
----------------- ---------------
Net Increase (Decrease) in Net
Assets from Operations 1,621,379 (195,418)
----------------- ---------------
Distributions to Shareholders:
From net investment income (42,957) --
From net realized gain (2,369,957) --
----------------- ---------------
Total Distributions to Shareholders (2,412,914) --
----------------- ---------------
From Fund Share Transactions: *
Shares sold 7,383,548 2,383,394
Shares issued to shareholders in
reinvestment of distributions 2,412,726 --
----------------- ---------------
9,796,274 2,383,394
Less shares repurchased (6,545,189) (4,995,966)
----------------- ---------------
Net Increase (Decrease) 3,251,085 (2,612,572)
----------------- ---------------
Net Assets:
Beginning of period 12,421,825 14,881,375
----------------- ---------------
End of period (including
undistributed net investment
income of $3,200 and $6,407,
respectively) $14,881,375 $12,073,385
================= ===============
* Analysis of Fund Share Transactions:
Shares sold 545,802 200,371
Shares issued to shareholders in
reinvestment of distributions 204,296 --
----------------- ---------------
750,098 200,371
Less shares repurchased (483,464) (414,092)
----------------- ---------------
Net Increase (Decrease) 266,634 (213,721)
================= ===============
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Balanced Fund
Financial Highlights
The following tables include selected data for a share outstanding throughout each period, total investment
return, key ratios and supplemental data.
- -----------------------------------------------------------------------------------------------------------
SIX
MONTHS ENDED
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED AUGUST 31,
---------------------------------- FEBRUARY 29, FEBRUARY 28, 2001
1997 1998 1999 2000 2000 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $9.25 $9.94 $11.42 $11.99 $11.12 $9.52
-------- -------- -------- -------- -------- --------
Net Investment Income(1) 0.38 0.38 0.26 0.27 0.28 0.10
Net Realized and Unrealized
Gain (Loss) on Investments 0.73 1.60 1.37 (0.02) 0.10 (0.44)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 1.11 1.98 1.63 0.25 0.38 (0.34)
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.34) (0.35) (0.29) (0.28) (0.30) (0.10)
From Net Realized Gain (0.08) (0.15) (0.77) (0.84) (1.68) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.42) (0.50) (1.06) (1.12) (1.98) (0.10)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $9.94 $11.42 $11.99 $11.12 $9.52 $9.08
======== ======== ======== ======== ======== ========
Total Return(2,3) 12.36% 20.44% 14.50% 1.83% 3.13% (3.55%)(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $13,093 $77,116 $82,969 $60,649 $35,637 $30,105
Ratio of Expenses to Average
Net Assets 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%(5)
Ratio of Adjusted Expenses to
Average Net Assets(6) 1.64% 1.06% 0.95% 0.96% 0.91% 1.04%(5)
Ratio of Net Investment
Income to Average Net Assets 3.96% 3.52% 2.26% 2.26% 2.51% 1.98%(5,7)
Portfolio Turnover Rate 149% 224% 158% 268% 261% 94%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment.
(3) Total returns would have been lower had certain expenses not been reduced during the periods shown.
(4) Not annualized.
(5) Annualized.
(6) Does not take into consideration expense reductions during the periods shown.
(7) Had the Fund not amortized premiums on debt securities, the annualized ratio of net investment income
to average net assets would have been 2.03%.
The Financial Highlights summarizes the impact of the following factors on
a single share for each period indicated: net investment income, gains
(losses), distributions and total investment return of each Fund. It shows
how the Fund's net asset value for a share has changed since the
commencement of operations. Additionally, important relationships between
some items presented in the financial statements are expressed in ratio
form.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Diversified Core Equity Fund II
Financial Highlights (continued)
The following tables include selected data for a share outstanding throughout each period, total investment
return, key ratios and supplemental data.
- -----------------------------------------------------------------------------------------------------------
SIX
MONTHS ENDED
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED AUGUST 31,
---------------------------------- FEBRUARY 29, FEBRUARY 28, 2001
1997 1998 1999 2000 2000 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $10.96 $12.76 $15.34 $15.69 $14.23 $8.91
-------- -------- -------- -------- -------- --------
Net Investment Income(1) 0.20 0.17 0.12 0.09 0.09 0.03
Net Realized and Unrealized
Gain (Loss) on Investments 2.23 3.91 2.76 0.34 (0.29) (0.76)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 2.43 4.08 2.88 0.43 (0.20) (0.73)
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.19) (0.17) (0.14) (0.09) (0.10) (0.03)
From Net Realized Gains (0.44) (1.33) (2.39) (1.80) (5.02) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.63) (1.50) (2.53) (1.89) (5.12) (0.03)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $12.76 $15.34 $15.69 $14.23 $8.91 $8.15
======== ======== ======== ======== ======== ========
Total Return(2) 22.63% 33.61% 18.98% 1.99% (2.68%) (8.21%)(3,4)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $320,029 $572,093 $552,296 $425,876 $146,995 $116,230
Ratio of Expenses to Average
Net Assets 0.67% 0.65% 0.63% 0.64% 0.67% 0.70%(5)
Ratio of Adjusted Expenses to
Average Net Assets(6) -- -- -- -- -- 0.74%(5)
Ratio of Net Investment
Income to Average Net Assets 1.65% 1.12% 0.76% 0.57% 0.61% 0.66%(5)
Portfolio Turnover Rate 81% 76% 55% 69% 56% 19%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Assumes dividend reinvestment.
(3) Not annualized.
(4) Total return would have been lower had certain expenses not been reduced during the period shown.
(5) Annualized.
(6) Does not take into consideration expense reductions during the period shown.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Medium Capitalization Fund
Financial Highlights (continued)
The following tables include selected data for a share outstanding throughout each period, total investment
return, key ratios and supplemental data.
- -----------------------------------------------------------------------------------------------------------
SIX
MONTHS ENDED
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED AUGUST 31,
---------------------------------- FEBRUARY 29, FEBRUARY 28, 2001
1997 1998 1999 2000 2000 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $9.29 $10.45 $13.30 $12.04 $12.45 $11.77
-------- -------- -------- -------- -------- --------
Net Investment Income(1) 0.12 0.09 0.08 0.06 0.04 --(2)
Net Realized and Unrealized
Gain (Loss) on Investments 1.45 3.69 0.06 1.58 1.60 (0.28)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 1.57 3.78 0.14 1.64 1.64 (0.28)
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.12) (0.09) (0.09) (0.06) (0.04) --
From Net Realized Gain (0.29) (0.84) (1.31) (1.17) (2.28) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.41) (0.93) (1.40) (1.23) (2.32) --
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $10.45 $13.30 $12.04 $12.45 $11.77 $11.49
======== ======== ======== ======== ======== ========
Total Return(3,4) 17.19% 37.30% 0.96% 14.18% 13.14% (2.38%)(5)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $5,240 $9,722 $10,407 $12,422 $14,881 $12,073
Ratio of Expenses to Average
Net Assets 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%(6)
Ratio of Adjusted Expenses to
Average Net Assets(7) 2.70% 1.36% 1.60% 1.52% 1.32% 1.38%(6)
Ratio of Net Investment
Income to Average Net Assets 1.26% 0.75% 0.59% 0.44% 0.29% 0.04%(6)
Portfolio Turnover Rate 78% 65% 67% 136% 145% 33%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Assumes dividend reinvestment.
(4) Total returns would have been lower had certain expenses not been reduced during the periods shown.
(5) Annualized.
(6) Not annualized.
(7) Does not take into consideration expense reductions during the periods shown.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Balanced Fund
Schedule of Investments
August 31, 2001 (Unaudited)
- -------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the Independence Balanced
Fund on August 31, 2001. It's divided into four main categories: common stocks, corporate bonds,
U.S. government and agencies securities, and short-term investments. The common stocks and corporate
bonds are further broken down by industry group. Short-term investments, which represent the Fund's
"cash" position, are listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- -------------- --------------
COMMON STOCKS
Advertising (0.05%)
Omnicom Group, Inc. 200 $15,558
--------------
Aerospace (1.30%)
General Dynamics Corp. 2,100 165,816
United Technologies Corp. 3,300 225,720
--------------
391,536
--------------
Automobile/Trucks (0.98%)
Ford Motor Co. 7,700 152,999
Lear Corp.* 2,200 79,728
Visteon Corp. 3,600 61,560
--------------
294,287
--------------
Banks - United States (3.44%)
Bank of America Corp. 3,300 202,950
Bank of New York Co., Inc. (The) 3,800 150,860
Comerica, Inc. 2,600 155,350
FleetBoston Financial Corp. 2,300 84,709
Mellon Financial Corp. 3,100 109,275
U.S. Bancorp 13,700 332,088
--------------
1,035,232
--------------
Beverages (1.04%)
Anheuser-Busch Cos., Inc. 3,200 137,728
PepsiCo, Inc. 3,700 173,900
--------------
311,628
--------------
Building (0.76%)
Black & Decker Corp. (The) 3,300 129,789
Danaher Corp. 1,800 100,026
--------------
229,815
--------------
Chemicals (2.05%)
Air Products & Chemicals, Inc. 3,300 139,920
Dow Chemical Co. 7,500 262,950
Eastman Chemical Co. 1,500 58,185
Praxair, Inc. 3,300 155,331
--------------
616,386
--------------
Computers (7.19%)
Adobe Systems, Inc. 2,200 73,942
BMC Software, Inc.* 2,100 33,600
Cisco Systems, Inc.* 3,100 50,623
Dell Computer Corp.* 9,400 200,972
Electronic Data Systems Corp. 2,000 117,960
First Data Corp. 3,300 217,305
International Business Machines Corp. 4,000 400,000
Intuit, Inc.* 1,700 64,226
Lexmark International, Inc.* 2,900 150,945
Microsoft Corp.* 10,600 604,730
Oracle Corp.* 11,100 135,531
SunGard Data Systems, Inc.* 4,800 113,520
--------------
2,163,354
--------------
Cosmetics & Personal Care (0.44%)
Avon Products, Inc. 2,900 133,777
--------------
Diversified Operations (4.66%)
General Electric Co. 21,700 889,266
Minnesota Mining & Manufacturing Co. 1,700 176,970
Tyco International Ltd. 6,500 337,675
--------------
1,403,911
--------------
Electronics (4.04%)
Analog Devices, Inc.* 1,700 81,226
Applied Materials, Inc.* 1,900 81,871
Intel Corp. 18,300 511,668
KLA-Tencor Corp.* 3,200 157,248
Linear Technology Corp. 2,900 119,132
Maxim Integrated Products, Inc.* 2,300 106,283
Tektronix, Inc.* 2,600 50,804
Texas Instruments, Inc. 2,600 86,060
Waters Corp.* 700 23,191
--------------
1,217,483
--------------
Energy (0.07%)
Calpine Corp.* 600 19,812
--------------
Finance (3.98%)
Citigroup, Inc. 15,200 695,400
Concord EFS, Inc.* 1,300 68,211
J.P. Morgan Chase & Co. 3,800 149,720
Stilwell Financial, Inc. 3,400 97,240
Washington Mutual, Inc. 5,000 187,200
--------------
1,197,771
--------------
Food (0.76%)
Archer Daniels Midland Co. 8,190 109,992
Kraft Foods, Inc. (Class A) 1,700 54,825
Sara Lee Corp. 2,900 63,800
--------------
228,617
--------------
Insurance (3.02%)
American International Group, Inc. 3,600 281,520
Hartford Financial Services Group, Inc.
(The) 3,600 233,280
Lincoln National Corp. 2,500 124,650
Marsh & McLennan Cos., Inc. 600 55,740
St. Paul Cos., Inc. (The) 2,800 117,684
Torchmark Corp. 2,300 97,152
--------------
910,026
--------------
Leisure (0.55%)
Disney (Walt) Co. (The) 6,500 165,295
--------------
Media (1.84%)
AOL Time Warner, Inc.* 4,400 164,340
Clear Channel Communications, Inc.* 1,300 65,351
Liberty Media Corp. (Class A)* 8,500 129,200
Viacom, Inc. (Class B)* 4,600 195,040
--------------
553,931
--------------
Medical (8.38%)
Abbott Laboratories # 4,000 198,800
Allergan, Inc. 2,200 158,950
American Home Products Corp. # 3,700 207,200
Invitrogen Corp.* 800 54,424
Johnson & Johnson 5,700 300,447
Lincare Holdings, Inc.* 2,800 79,548
Merck & Co., Inc. 5,400 351,540
Pfizer, Inc. # 18,800 720,228
Pharmacia Corp. 3,700 146,520
Schering-Plough Corp. 3,000 114,390
Tenet Healthcare Corp.* 1,900 105,298
Trigon Healthcare, Inc.* 1,300 84,175
--------------
2,521,520
--------------
Mortgage Banking (0.91%)
Fannie Mae 3,600 274,356
--------------
Office (0.53%)
Avery Dennison Corp. 2,000 102,820
Reynolds & Reynolds Co. (The)
(Class A) 2,300 57,270
--------------
160,090
--------------
Oil & Gas (5.20%)
BJ Services Co.* 3,000 67,290
BP Amoco Plc American Depositary
Receipt (ADR) (United Kingdom) 1,600 81,408
Chevron Corp. 2,500 226,875
Conoco, Inc. (Class A)* 3,100 91,915
Enron Corp. 3,100 108,469
Exxon Mobil Corp. 14,800 594,220
Kerr-McGee Corp. 1,100 64,251
Royal Dutch Petroleum Co. ADR
(Netherlands) 4,400 249,172
USX - Marathon Group 2,600 81,926
--------------
1,565,526
--------------
Paper & Paper Products (0.25%)
Kimberly-Clark Corp. 1,200 74,460
--------------
Retail (5.07%)
Abercrombie & Fitch Co. (Class A)* 2,000 60,680
Bed Bath & Beyond, Inc.* 2,900 83,665
CVS Corp. 1,600 57,776
Home Depot, Inc. (The) 5,700 261,915
Kohl's Corp.* 4,300 238,650
Lowe's Cos., Inc. 7,100 264,120
Target Corp. 4,200 145,530
TJX Cos., Inc. 3,500 122,850
Toys R Us, Inc.* 2,200 52,646
Walgreen Co. 2,200 75,570
Wal-Mart Stores, Inc. 3,400 163,370
--------------
1,526,772
--------------
Soap & Cleaning Preparations (0.36%)
Colgate-Palmolive Co. 2,000 108,300
--------------
Telecommunications (2.94%)
Broadwing, Inc.* 4,000 71,840
QUALCOMM, Inc.* 2,800 164,780
Sprint Corp* 6,800 169,864
Verizon Communications, Inc. # 9,600 480,000
--------------
886,484
--------------
Tobacco (1.15%)
Philip Morris Cos., Inc. 7,300 346,020
--------------
Transport (0.30%)
Burlington Northern Santa Fe Corp. 3,300 89,463
--------------
Utilities (2.23%)
Allegheny Energy, Inc. 3,000 132,240
Duke Energy Corp. 3,000 117,930
Dynegy, Inc. (Class A) 1,900 80,123
El Paso Corp. 1,900 92,321
SBC Communications, Inc. 6,100 249,551
--------------
672,165
--------------
TOTAL COMMON STOCKS
(Cost $16,683,240) (63.49%) 19,113,575
-------------- --------------
INTEREST CREDIT PAR VALUE
ISSUER, DESCRIPTION RATE RATING** (000s OMITTED) VALUE
- ------------------- --------- -------- ------------- -------------
CORPORATE BONDS
Aerospace (0.27%)
Lockheed Martin Corp.,
Bond 12-01-29 8.500% BBB- $70 $81,813
--------------
Automobile/Trucks (0.15%)
Ford Motor Co.,
Bond 10-01-28 6.625 A 50 44,777
--------------
Banks - United States (1.37%)
Bank of America Corp.,
Sub Note 01-15-11 7.400 A 70 75,333
First Union Corp.,
Note 11-01-04 # 6.950 A 320 338,541
--------------
413,874
--------------
Broker Services (2.78%)
Lehman Brothers Holdings, Inc.,
Note 04-01-04 6.625 A 200 208,288
Note 02-05-06 # 6.625 A 300 312,201
Salomon Inc.,
Sr Note 02-01-04 # 7.200 AA- 300 316,962
--------------
837,451
--------------
Finance (4.06%)
Citigroup, Inc.,
Note 01-18-11 6.500 AA- 190 196,302
EOP Operating L.P.,
Note 07-15-11 7.000 BBB+ 70 71,491
Ford Motor Credit Co.,
Note 02-01-06 6.875 A 200 206,458
General Motors Acceptance Corp.,
Note 07-15-05 7.500 A 200 212,810
Household Finance Corp.,
Note 05-01-04 6.000 A 115 118,825
Note 01-24-06 6.500 A 90 93,689
MBNA Master Credit Card Trust
Note 11-15-04 # 6.600 AAA 315 321,593
--------------
1,221,168
--------------
Government - Foreign (0.97%)
Province of Quebec,
Deb (Canada) 09-15-29 7.500 A+ 180 201,589
Note (Canada) 04-11-06 5.500 A+ 90 91,254
--------------
292,843
--------------
Media (0.49%)
News America, Inc.,
Deb 04-08-28 7.125 BBB- 80 73,152
Media (continued)
Time Warner, Inc.,
Sr Gtd Note 05-15-29 6.625 BBB+ 80 74,061
--------------
147,213
--------------
Mortgage Banking (5.30%)
ABSC Home Equity Loan Trust,
Pass Thru Ctf Ser 2000-LB1 Class
AF2 08-21-31 7.570 Aaa 140 144,834
Bear Stearns Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 2001-TOP2 Class
A1 02-15-35 6.080 AAA 99 101,140
Chase Commercial Mortgage Securities Corp.,
Commercial Pass Thru Ctf Ser 1997-1
Class A2 02-19-07 7.370 AAA 140 143,612
Credit Suisse First Boston Mortgage Securities Corp.,
Commercial Mtg Pass Thru Ctf Ser
2000-C1 Class A-2 04-15-10 # 7.545 AAA 420 459,456
Green Tree Financial Corp.,
Pass Thru Ctf Ser 1996-8 Class A-6
10-15-27 7.600 AAA 190 199,083
LB-UBS Commercial Mortgage Trust,
Pass Thru Ctf Ser 2000-C4 Class A-2
08-15-26 7.370 AAA 300 323,484
Mortgage Capital Funding, Inc.,
Commercial Mtg Pass Thru Ctf Ser
1996-MC2 Class A1 12-21-26 6.758 Aaa 24 23,983
Residential Funding Mortgage Securities II, Inc.,
Home Loan-Backs Note, Ser 1998-HI4
09-25-18 5.940 AAA 200 200,312
--------------
1,595,904
--------------
Oil & Gas (1.46%)
Phillips Petroleum,
Note 05-25-05 # 8.500 BBB 400 440,988
--------------
Retail (1.32%)
Target Corp.,
Sr Note 01-15-11 6.350 A+ 180 182,542
Wal-Mart Stores, Inc.,
Sr Note 02-15-30 7.550 AA 190 215,293
--------------
397,835
--------------
Telecommunications (0.76%)
AT&T Corp.,
Note 03-15-29 6.500 A 40 35,435
BellSouth Capital Funding Corp.,
Deb 02-15-30 7.875 A+ 30 33,724
Qwest Capital Funding, Inc.,
Deb 07-15-28 6.875 BBB+ 40 36,297
WorldCom, Inc.,
Note 05-15-11 7.500 BBB+ 120 121,872
--------------
227,328
--------------
Tobacco (0.28%)
Philip Morris Cos., Inc.,
Deb 10-15-03 8.250 A- 80 85,434
--------------
Utilities (1.03%)
Coastal Corp. (The),
Sr Note 09-15-02 # 8.125 BBB 300 309,690
--------------
TOTAL CORPORATE BONDS
(Cost $5,783,356) (20.25%) 6,096,318
----------- --------------
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (4.06%)
United States Treasury,
Bond 02-15-29 5.250 AAA 150 145,218
Bond 08-15-17 8.875 AAA 70 96,031
Bond 05-15-30 6.250 AAA 185 206,678
Note 05-31-03 # 4.250 AAA 340 343,720
Note 11-15-05 5.750 AAA 50 52,640
Note 02-15-11 # 5.000 AAA 377 379,002
--------------
1,223,289
--------------
Government - U.S. Agencies (13.96%)
Fannie Mae,
Bond 11-15-30 6.625 AAA 192 203,820
Note 05-15-03 4.625 AAA 87 88,128
Note 11-14-03 4.750 AAA 90 91,223
Note 06-15-09 6.375 AAA 75 79,277
Federal National Mortgage Assn.,
30 Yr Pass Thru Ctf 09-15-29 *** 6.000 AAA 610 599,514
30 Yr Pass Thru Ctf 09-15-29 *** 7.000 AAA 936 956,770
30 Yr Pass Thru Ctf 09-15-29 *** 6.500 AAA 1,404 1,409,265
30 Yr Pass Thru Ctf 09-15-29 *** 7.500 AAA 600 618,378
30 Yr Pass Thru Ctf 09-01-30 *** 8.000 AAA 150 156,000
--------------
4,202,375
--------------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $5,356,266) (18.02%) 5,425,664
------- --------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (11.12%)
Investment in a joint repurchase agreement transaction with
UBS Warburg, Inc. - Dated 08-31-01, due 09-04-01 (Secured by U.S.
Treasury Bond 8.75% due 05-15-20 and U.S. Treasury Note
4.75% due 11-15-08) 3.640% $3,348 $3,348,000
--------------
TOTAL SHORT-TERM INVESTMENTS (11.12%) 3,348,000
------- --------------
TOTAL INVESTMENTS (112.88%) 33,983,557
------- --------------
OTHER ASSETS AND LIABILITIES, NET (12.88%) (3,878,258)
------- --------------
TOTAL NET ASSETS (100.00%) $30,105,299
======= ==============
* Non-income producing security.
** Credit ratings by Moody's Investors Service or John Hancock Advisers, Inc. where Standard & Poor's ratings are
not available.
*** These securities, having an aggregate value of $3,940,239 or 13.09% of the Fund's net assets, have been
purchased as a forward commitment -- that is, the Fund has agreed on trade date, to take delivery of and to make
payment for these securities on a delayed basis subsequent to the date of this schedule. The purchase price and
interest rate of these securities is fixed at trade date, although the Fund does not earn any interest on these
securities until settlement date. The Fund has instructed its Custodian Bank to segregate assets with a current
value at least equal to the amount of the forward commitments.
# These securities, totaling the market value of $4,084,506, have been segregated to cover the forward commitments.
Parenthetical disclosure of a foreign country in the security description represents country of a foreign issue.
The percentage shown for each investment category is the total value of that category as a percentage of the
net assets of the Fund.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Diversified Core Equity Fund II
Schedule of Investments
August 31, 2001 (Unaudited)
- -------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the Independence
Diversified Core Equity Fund II on August 31, 2001. It's divided into two main categories:
common stocks and short-term investments. Common stocks are further broken down by industry group
Short-term investments, which represent the Fund's "cash" position, are listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- -------------- --------------
COMMON STOCKS
Advertising (0.07%)
Omnicom Group, Inc. 1,000 $77,790
--------------
Aerospace (2.30%)
General Dynamics Corp. 15,600 1,231,776
United Technologies Corp. 21,100 1,443,240
--------------
2,675,016
--------------
Automobile/Trucks (1.73%)
Borg-Warner Automotive, Inc. 6,600 337,260
Ford Motor Co. 60,800 1,208,096
Lear Corp.* 12,800 463,872
--------------
2,009,228
--------------
Banks - United States (5.09%)
Bank of America Corp. 25,700 1,580,550
Bank of New York Co., Inc. (The) 19,800 786,060
Comerica, Inc. 16,800 1,003,800
FleetBoston Financial Corp. 14,200 522,986
Mellon Financial Corp. 24,700 870,675
U.S. Bancorp 47,700 1,156,248
--------------
5,920,319
--------------
Beverages (0.95%)
Anheuser-Busch Cos., Inc. 14,400 619,776
PepsiCo, Inc. 10,300 484,100
--------------
1,103,876
--------------
Building (1.03%)
Black & Decker Corp. (The) 14,200 558,486
Danaher Corp. 11,400 633,498
--------------
1,191,984
--------------
Chemicals (2.79%)
Air Products & Chemicals, Inc. 18,300 775,920
Dow Chemical Co. (The) 37,900 1,328,774
Eastman Chemical Co. 8,800 341,352
Praxair, Inc. 17,000 800,190
--------------
3,246,236
--------------
Computers (11.76%)
Adobe Systems, Inc. 9,900 332,739
BMC Software, Inc.* 11,300 180,800
Cadence Design Systems, Inc.* 21,800 479,164
Cisco Systems, Inc.* 36,300 592,779
Dell Computer Corp.* 51,600 1,103,208
Electronic Data Systems Corp. 5,400 318,492
First Data Corp. 22,900 1,507,965
International Business Machines Corp. 23,600 2,360,000
Intuit, Inc.* 8,000 302,240
Lexmark International, Inc.* 17,100 890,055
Microsoft Corp.* 62,500 3,565,625
Network Associates, Inc.* 18,400 291,640
Oracle Corp.* 57,000 695,970
PeopleSoft, Inc.* 6,000 206,880
Sabre Holdings Corp.* 8,300 350,094
SunGard Data Systems, Inc.* 20,800 491,920
--------------
13,669,571
--------------
Cosmetics & Personal Care (0.95%)
Avon Products, Inc. 23,900 1,102,507
--------------
Diversified Operations (2.99%)
Minnesota Mining & Manufacturing Co. 12,600 1,311,660
Tyco International Ltd. 41,700 2,166,315
--------------
3,477,975
--------------
Electronics (10.58%)
Altera Corp.* 7,800 221,520
Analog Devices, Inc.* 8,600 410,908
Applied Materials, Inc.* 11,000 473,990
General Electric Co. 140,000 5,737,200
Intel Corp. 100,900 2,821,164
KLA-Tencor Corp.* 15,700 771,498
Linear Technology Corp. 9,500 390,260
Maxim Integrated Products, Inc.* 10,900 503,689
Novellus Systems, Inc.* 5,500 243,705
Tektronix, Inc.* 10,000 195,400
Waters Corp.* 4,700 155,711
Xilinx, Inc.* 9,500 370,880
--------------
12,295,925
--------------
Energy (0.10%)
Calpine Corp.* 3,600 118,872
--------------
Finance (6.15%)
Citigroup, Inc. 96,400 4,410,300
Concord EFS, Inc.* 10,100 529,947
J.P. Morgan Chase & Co. 19,200 756,480
Stilwell Financial, Inc. 11,800 337,480
Washington Mutual, Inc. 29,900 1,119,456
--------------
7,153,663
--------------
Food (0.71%)
Archer Daniels Midland Co. 36,540 490,732
Kraft Foods, Inc. (Class A) 10,300 332,175
--------------
822,907
--------------
Insurance (3.51%)
American International Group, Inc. 5,400 422,280
CIGNA Corp. 5,200 468,000
Hartford Financial Services Group, Inc. (The) 26,000 1,684,800
Lincoln National Corp. 23,000 1,146,780
Marsh & McLennan Cos., Inc. 3,800 353,020
--------------
4,074,880
--------------
Leisure (0.68%)
Disney (Walt) Co. (The) 31,200 793,416
--------------
Media (2.93%)
AOL Time Warner, Inc.* 25,900 967,365
Clear Channel Communications, Inc.* 7,500 377,025
Liberty Media Corp. (Class A)* 45,900 697,680
Viacom, Inc. (Class B)* 32,200 1,365,280
--------------
3,407,350
--------------
Medical (13.99%)
Abbott Laboratories 17,200 854,840
Allergan, Inc. 8,300 599,675
American Home Products Corp. 20,900 1,170,400
Baxter International, Inc. 21,600 1,114,560
Bristol-Myers Squibb Co. 17,000 954,380
Invitrogen Corp.* 6,100 414,983
Johnson & Johnson 37,100 1,955,541
Laboratory Corp. of America
Holdings* 9,700 755,630
Lincare Holdings, Inc.* 15,500 440,355
Merck & Co., Inc. 36,200 2,356,620
Pfizer, Inc. 118,000 4,520,580
Pharmacia Corp. 5,200 205,920
Schering-Plough Corp. 10,000 381,300
Trigon Healthcare, Inc.* 8,200 530,950
--------------
16,255,734
--------------
Mortgage Banking (1.76%)
Fannie Mae 26,900 2,050,049
--------------
Office (0.78%)
Avery Dennison Corp. 10,900 560,369
Reynolds & Reynolds Co. (The)
(Class A) 13,700 341,130
--------------
901,499
--------------
Oil & Gas (7.56%)
El Paso Corp. 11,900 578,221
Enron Corp. 11,200 391,888
Exxon Mobil Corp. 106,600 4,279,990
Kerr-McGee Corp. 10,400 607,464
Royal Dutch Petroleum Co.
American Depositary Receipts (ADR)
(Netherlands) 42,800 2,423,764
USX - Marathon Group 16,100 507,311
--------------
8,788,638
--------------
Paper & Paper Products (0.38%)
Kimberly-Clark Corp. 7,100 440,555
--------------
Retail (8.69%)
Abercrombie & Fitch Co. (Class A)* 11,600 351,944
Bed Bath & Beyond, Inc.* 13,600 392,360
CVS Corp. 7,900 285,269
Home Depot, Inc. (The) 25,100 1,153,345
Kohl's Corp.* 23,500 1,304,250
Lowe's Cos., Inc. 40,800 1,517,760
May Department Stores Co. (The) 8,500 286,025
Target Corp. 21,700 751,905
TJX Cos., Inc. 23,600 828,360
Walgreen Co. 13,000 446,550
Wal-Mart Stores, Inc. 57,800 2,777,290
--------------
10,095,058
--------------
Soap & Cleaning Preparations (0.52%)
Colgate-Palmolive Co. 6,400 346,560
Procter & Gamble Co. (The) 3,400 252,110
--------------
598,670
--------------
Steel (0.41%)
Nucor Corp. 9,800 476,280
--------------
Telecommunications (5.12%)
Broadwing, Inc.* 24,900 447,204
General Motors Corp. (Class H)* 16,800 313,320
QUALCOMM, Inc.* 16,400 965,140
Sprint Corp. (PCS Group)* 47,300 1,181,554
Verizon Communications. 47,600 2,380,000
WorldCom, Inc.* 51,900 667,434
--------------
5,954,652
--------------
Tobacco (1.91%)
Philip Morris Cos., Inc. 38,400 1,820,160
UST, Inc. 12,200 402,600
--------------
2,222,760
--------------
Utilities (3.37%)
Allegheny Energy, Inc. 17,800 784,624
Duke Energy Corp. 10,100 397,031
Dynegy, Inc. (Class A) 14,300 603,031
Exelon Corp. 23,900 1,304,940
SBC Communications, Inc. 20,300 830,473
--------------
3,920,099
--------------
TOTAL COMMON STOCKS
(Cost $91,049,755) (98.81%) 114,845,509
------------- --------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.20%)
Investment in a joint repurchase
agreement transaction with
UBS Warburg, Inc. - Dated
08-31-01, due 09-04-01
(Secured by U.S. Treasury Bond
8.750% due 05-15-20 and
U.S. Treasury Note 4.750%
due 11-15-08) 3.64% $1,397 $1,397,000
------------- --------------
TOTAL SHORT-TERM INVESTMENTS (1.20%) 1,397,000
------------- --------------
TOTAL INVESTMENTS (100.01%) 116,242,509
------------- --------------
OTHER ASSETS AND LIABILITIES, NET (0.01%) (12,230)
------------- --------------
TOTAL NET ASSETS (100.00%) $116,230,279
============= ==============
* Non-income producing security.
Parenthetical disclosure of a foreign country in the security description represents country of a
foreign issuer.
The percentage shown for each investment category is the total value of that category as a percentage
of the net assets of the Fund.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Independence Medium Capitalization Fund
Schedule of Investments
August 31, 2001 (Unaudited)
- -------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the Independence Medium
Capitalization Fund on August 31, 2001. It's divided into two main categories: common stocks and
short-term investments. Common stocks are further broken down by industry group. Short-term
investments, which represent the Fund's "cash" position, are listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- -------------- --------------
COMMON STOCKS
Abrasives (1.10%)
Cabot Microelectronics Corp.* 1,900 $133,095
--------------
Aerospace (1.07%)
General Dynamics Corp. 500 39,480
Precision Castparts Corp. 2,600 89,284
--------------
128,764
--------------
Automobile/Trucks (4.44%)
Borg-Warner Automotive, Inc. 2,200 112,420
Lear Corp.* 4,000 144,960
Ryder System, Inc. 3,000 67,770
Superior Industries International, Inc. 2,600 99,710
Visteon Corp. 6,500 111,150
--------------
536,010
--------------
Banks - United States (4.83%)
Comerica, Inc. 2,200 131,450
Mellon Financial Corp. 700 24,675
SouthTrust Corp. 6,300 153,468
Synovus Financial Corp. 3,300 101,640
TCF Financial Corp. 3,800 172,520
--------------
583,753
--------------
Building (3.90%)
Black & Decker Corp. (The) 5,000 196,650
Centex Corp. 4,500 197,100
Danaher Corp. 1,400 77,798
--------------
471,548
--------------
Chemicals (2.29%)
Air Products & Chemicals, Inc. 2,100 89,040
Eastman Chemical Co. 1,300 50,427
Praxair, Inc. 2,900 136,503
--------------
275,970
--------------
Computers (12.48%)
Adobe Systems, Inc. 1,400 47,054
BEA Systems, Inc.* 1,100 17,787
Cadence Design Systems, Inc.* 8,000 175,840
CDW Computer Centers, Inc. 3,100 126,480
First Data Corp. 1,000 65,850
Fiserv, Inc.* 1,700 92,089
Intuit, Inc.* 1,900 71,782
Lexmark International, Inc.* 2,500 130,125
Mentor Graphics Corp.* 3,200 52,800
Network Associates, Inc.* 6,900 109,365
NVIDIA Corp.* 1,367 115,799
PeopleSoft, Inc.* 2,055 70,856
Sabre Holdings Corp.* 3,600 151,848
SunGard Data Systems, Inc.* 8,900 210,485
Sybase, Inc.* 5,000 68,850
--------------
1,507,010
--------------
Cosmetics & Personal Care (0.30%)
Avon Products, Inc. 800 36,904
--------------
Electronics (8.28%)
Advanced Micro Devices, Inc.* 3,100 42,005
Analog Devices, Inc.* 1,800 86,004
KLA-Tencor Corp.* 2,100 103,194
Lam Research Corp.* 4,200 118,902
Linear Technology Corp. 2,000 82,160
LSI Logic Corp.* 3,200 64,800
Maxim Integrated Products, Inc.* 1,900 87,799
Novellus Systems, Inc.* 1,400 62,034
QLogic Corp.* 500 15,005
Tektronix, Inc.* 3,300 64,482
TriQuint Semiconductor, Inc.* 3,400 72,080
Waters Corp.* 4,200 139,146
Xilinx, Inc.* 1,600 62,464
--------------
1,000,075
--------------
Energy (0.22%)
Calpine Corp.* 800 26,416
--------------
Finance (2.17%)
Concord EFS, Inc.* 2,200 115,434
Golden West Financial Corp. 1,300 75,231
Stilwell Financial, Inc. 2,500 71,500
--------------
262,165
--------------
Food (1.30%)
Hormel Foods Corp. 4,000 101,880
Sensient Technologies Corp. 2,500 54,975
--------------
156,855
--------------
Furniture (0.67%)
Hillenbrand Industries, Inc. 1,500 81,450
--------------
Instruments - Scientific (0.37%)
Millipore Corp. 700 44,415
--------------
Insurance (6.71%)
Everest Re Group Ltd. (Bermuda) 900 58,410
First Health Group Corp.* 4,400 123,200
Hartford Financial Services Group, Inc. (The) 2,000 129,600
Lincoln National Corp. 1,800 89,748
PartnerRe Ltd. (United Kingdom) 2,600 128,310
St. Paul Cos., Inc. (The) 1,900 79,857
Torchmark Corp. 3,000 126,720
XL Capital Ltd. (Class A) 900 74,700
--------------
810,545
--------------
Media (2.69%)
EchoStar Communications Corp.* 1,500 42,240
Knight-Ridder, Inc. 1,000 60,600
Reader's Digest Association, Inc.
(Class A) 2,500 46,750
Univision Communications, Inc.
(Class A)* 1,000 29,830
Westwood One, Inc.* 5,100 145,350
--------------
324,770
--------------
Medical (11.66%)
Allergan, Inc. 2,600 187,850
Cephalon, Inc. 1,300 76,986
CV Therapeutics, Inc.* 2,000 99,540
Forest Laboratories, Inc.* 300 21,903
Genzyme Corp.* 2,700 152,928
Inspire Pharmaceuticals, Inc.* 3,400 37,298
Invitrogen Corp.* 2,200 149,666
King Pharmaceuticals, Inc.* 1,333 57,652
Laboratory Corp. of America
Holdings* 1,400 109,060
Lincare Holdings, Inc.* 7,000 198,870
Trigon Healthcare, Inc.* 3,200 207,200
Universal Health Services, Inc.
(Class B)* 2,300 108,790
--------------
1,407,743
--------------
Metal (1.07%)
Worthington Industries, Inc. 9,200 128,800
--------------
Office (1.40%)
Avery Dennison Corp. 1,500 77,115
Reynolds & Reynolds Co. (The)
(Class A) 3,700 92,130
--------------
169,245
--------------
Oil & Gas (8.50%)
Amerada Hess Corp. 1,500 116,565
Anadarko Petroleum Corp. 400 20,700
Apache Corp. 700 32,851
Baker Hughes, Inc. 400 13,176
BJ Services Co.* 7,000 157,010
Conoco, Inc. (Class A) 4,600 136,390
Cooper Cameron Corp.* 1,300 56,225
Imperial Oil Ltd. (Canada) 2,600 70,174
Kerr-McGee Corp. 500 29,205
Murphy Oil Corp. 1,200 90,600
Noble Drilling Corp.* 4,000 108,800
Sunoco, Inc. 3,800 143,754
USX - Marathon Group 1,600 50,416
--------------
1,025,866
--------------
Paper & Paper Products (0.67%)
Abitibi-Consolidated, Inc. (Canada) 10,400 80,600
--------------
Printing - Commercial (0.59%)
Donnelley (R.R.) & Sons 2,400 71,568
--------------
Retail (9.82%)
Abercrombie & Fitch Co. (Class A)* 4,300 130,462
Bed Bath & Beyond, Inc.* 3,473 100,196
BJ's Wholesale Club, Inc.* 2,100 102,900
Brinker International, Inc.* 4,400 117,040
CVS Corp. 1,000 36,110
Darden Restaurants, Inc. 2,400 68,688
Family Dollar Stores, Inc. 7,100 213,000
Kohl's Corp.* 1,300 72,150
Land's End, Inc. 2,400 92,208
TJX Cos., Inc. 2,700 94,770
Toys R Us, Inc.* 3,500 83,755
Wendy's International, Inc. 2,600 73,814
--------------
1,185,093
--------------
Soap & Cleaning Preparations (0.17%)
Ecolab, Inc. 500 20,040
--------------
Steel (1.36%)
AK Steel Holding Corp. 12,600 164,052
--------------
Telecommunications (1.37%)
Broadwing, Inc.* 9,200 165,232
--------------
Textile (0.69%)
Jones Apparel Group, Inc.* 2,600 82,940
--------------
Tobacco (1.90%)
UST, Inc. 6,947 229,251
--------------
Transportation (0.70%)
CNF Transportation, Inc. 2,800 84,084
--------------
Utilities (5.98%)
Allegheny Energy, Inc. 5,500 242,440
Dominion Resources, Inc. 2,000 125,900
Dynegy, Inc. (Class A) 1,100 46,387
Exelon Corp. 2,386 130,276
UtiliCorp United, Inc. 5,500 176,880
--------------
721,883
--------------
TOTAL COMMON STOCKS
(Cost $11,027,423) (98.70%) 11,916,142
-------------- --------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.41%)
Investment in a joint repurchase
agreement transaction with
UBS Warburg, Inc. - Dated
08-31-01, due 09-04-01
(Secured by U.S. Treasury Bond
8.750% due 05-15-20 and
U.S. Treasury Note 4.750%
due 11-15-08) 3.64% $171 $171,000
TOTAL SHORT-TERM INVESTMENTS (1.41%) 171,000
-------------- --------------
TOTAL INVESTMENTS (100.11%) 12,087,142
-------------- --------------
OTHER ASSETS AND LIABILITIES, NET (0.11%) (13,757)
-------------- --------------
TOTAL NET ASSETS (100.00%) $12,073,385
============== ==============
* Non-income producing security.
Parenthetical disclosure of a foreign country in the security description represents country of a
foreign issuer.
The percentage shown for each investment category is the total value of that category as a percentage
of the net assets of the Fund.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds -- Institutional Series Trust
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Independence Balanced Fund ("Independence Balanced Fund"),
John Hancock Independence Diversified Core Equity Fund II ("Independence
Diversified Core Equity Fund II") and John Hancock Independence Medium
Capitalization Fund ("Independence Medium Capitalization Fund") (each, a
"Fund" and collectively, the "Funds"), are separate portfolios of John
Hancock Institutional Series Trust ("Trust"), an open-end investment
management company registered under the Investment Company Act of 1940,
organized as a Massachusetts business trust in 1994. The investment
objective of Independence Balanced Fund and Independence Diversified Core
Equity Fund II is to seek above average total return consisting of capital
appreciation and income. The investment objective of Independence Medium
Capitalization Fund is to seek above average total return. Each Fund's
class of shares has equal rights as to voting, redemption, dividends and
liquidation within their respective Fund. The Trustees may authorize the
creation of additional portfolios from time to time to satisfy various
investment objectives.
Significant accounting policies of the Funds are as follows:
VALUATION OF INVESTMENTS Securities in each Fund's portfolio are valued on
the basis of market quotations, valuations provided by independent pricing
services or at fair value as determined in good faith in accordance with
procedures approved by the Trustees. Short-term debt investments maturing
within 60 days are valued at amortized cost, which approximates market
value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Funds, along with other registered
investment companies having a management contract with John Hancock
Advisers, Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley
Financial Group, Inc., may participate in a joint repurchase agreement
transaction. Aggregate cash balances are invested in one or more large
repurchase agreements, whose underlying securities are obligations of the
U.S. government and/or its agencies. The Funds' custodian bank receives
delivery of the underlying securities for the joint account on the Funds'
behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the
date of purchase, sale or maturity. Net realized gains and losses on sales
of investments are determined on the identified cost basis. Some
securities may be purchased on a "when-issued" or "forward delivery"
basis, which means that the securities will be delivered to each Fund at a
future date, usually beyond customary settlement date.
DISCOUNT AND PREMIUM ON SECURITIES The Funds accrete discount and amortize
premium from par value on securities from either the date of issue or the
date of purchase over the life of the security.
EXPENSES The majority of the expenses are directly identifiable to an
individual fund. Expenses, which are not readily identifiable to a
specific fund, will be allocated in such a manner as deemed equitable,
taking into consideration, among other things, the nature and type of
expense and the relative size of the funds.
BANK BORROWINGS The Funds are permitted to have bank borrowings for
temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of
securities. The Funds have entered into a syndicated line of credit
agreement with various banks. This agreement enables the Funds to
participate with other funds managed by the Adviser in an unsecured line
of credit with banks, which permit borrowings up to $500 million,
collectively. Interest is charged to each fund, based on its borrowing. In
addition, a commitment fee is charged to each fund based on the average
daily unused portion of the line of credit and is allocated among the
participating funds. The Funds had no borrowing activities under the line
of credit during the period ended August 31, 2001.
SECURITIES LENDING The Funds may lend securities to certain qualified
brokers who pay the Funds negotiated lender fees. These fees are included
in interest income. The loans are collateralized at all times with cash or
securities with a market value at least equal to the market value of the
securities on loan. As with other extensions of credit, the Funds may bear
the risk of delay of the loaned securities in recovery or even loss of
rights in the collateral, should the borrower of the securities fail
financially. At August 31, 2001, the Independence Diversified Core Equity
Fund II loaned securities having a market value of $664,372 collateralized
by securities in the amount of $666,606.
FEDERAL INCOME TAXES Each Fund qualifies as a "regulated investment
company" by complying with the applicable provisions of the Internal
Revenue Code and will not be subject to federal income tax on taxable
income which is distributed to shareholders. Therefore, no federal income
tax provision is required.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment
securities is recorded on the ex-dividend date or, in the case of some
foreign securities, on the date thereafter when the Funds identify the
dividend. Interest income on investment securities is recorded on the
accrual basis. Foreign income may be subject to foreign withholding taxes,
which are accrued as applicable.
The Funds record distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ
from accounting principles generally accepted in the United States of
America.
USE OF ESTIMATES The preparation of these financial statements, in
accordance with accounting principles generally accepted in the United
States of America, incorporates estimates made by management in
determining the reported amount of assets, liabilities, revenues and
expenses of the Funds. Actual results could differ from these estimates.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
The Funds have an investment management contract with the Adviser. Under
the investment management contract, the Funds pay monthly management fees
to the Adviser, equivalent, on an annual basis, to the following:
FUND RATE
- ------------------- ----------------------------------------------------
Independence 0.70% of average daily net assets up to $500 million
Balanced Fund 0.65% of such assets in excess of $500 million
Independence
Diversified Core 0.50% of average daily net assets up to $1 billion
Equity Fund II 0.45% of such assets in excess of $1 billion
Independence Medium 0.80% of average daily net assets up to $500 million
Capitalization Fund 0.75% of such assets in excess of $500 million
The Funds and the Adviser have a subadvisory contract with Independence
Investment LLC, a wholly owned indirect subsidiary of John Hancock Life
Insurance Company ("JHLICo"). The Funds are not responsible for payment of
subadviser's fees.
The Adviser has agreed to limit the Funds' expenses to 0.90% of
Independence Balanced Fund's average daily net assets, 0.70% of
Independence Diversified Core Equity Fund II's average daily net assets
and 1.00% of Independence Medium Capitalization Fund's average daily net
assets at least until June 30, 2002. Accordingly, for the period ended
August 31, 2001, the reduction in the Funds' expenses amounted to $24,816
for Independence Balanced Fund, $24,456 for Independence Diversified Core
Equity Fund II and $27,507 for Independence Medium Capitalization Fund.
The Adviser reserves the right to terminate this limitation in the future.
The Funds have a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the period ended
August 31, 2001, all sales of shares of beneficial interest were sold at
net asset value. JH Funds pay all expenses of printing prospectuses and
other sales literature, all fees and expenses in connection with
qualification as a dealer in various states, and all other expenses in
connection with the sale and offering for sale of the shares of the Funds
which have not been herein specifically allocated to the Trust.
The Funds have a transfer agent agreement with John Hancock Signature
Services, Inc., an indirect wholly owned subsidiary of JHLICo. The Funds
pay a monthly transfer agent fee equivalent, on an annual basis, to 0.05%
of the Funds' average daily net asset value, plus certain out-of-pocket
expenses.
The Funds have an agreement with the Adviser to perform necessary tax,
accounting and legal services for each Fund. The compensation for the
period was at an annual rate of 0.02% of the average net assets of each
Fund.
Ms. Maureen R. Ford and Mr. John M. DeCiccio are directors and/or officers
of the Adviser and/or its affiliates, as well as Trustees of the Funds.
The compensation of unaffiliated Trustees is borne by the Funds. The
unaffiliated Trustees may elect to defer for tax purposes their receipt of
this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Funds make investments into other John Hancock
funds, as applicable, to cover their liability for the deferred
compensation. Investments to cover the Funds' deferred compensation
liability are recorded on the Funds' books as an other asset. The deferred
compensation liability and the related other asset are always equal and
are marked to market on a periodic basis to reflect any income earned by
the investment as well as any unrealized gains or losses. The Deferred
Compensation Plan investments had no impact on the operations of the
Funds.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities for the Funds, other than
short-term investments, during the period ended August 31, 2001, were as
follows:
PURCHASES PROCEEDS
---------- -----------
Independence Balanced Fund
U.S. Government Securities $1,288,686 $362,928
Other Investments 30,861,595 35,579,450
Independence Diversified
Core Equity Fund II 26,129,570 50,527,238
Independence Medium
Capitalization
Fund 4,698,131 7,155,986
The cost of investments owned on August 31, 2001 (including short-term
investments), and gross unrealized appreciation and depreciation of
investments owned by the Funds, for a federal income tax purpose, were as
follows:
GROSS GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
---------- ------------ ------------ ------------
Independence
Balanced
Fund $31,286,096 $4,041,840 $1,344,379 $2,697,461
Independence
Diversified
Core Equity
Fund II 92,565,820 31,336,374 7,659,685 23,676,689
Independence
Medium
Capitalization
Fund 11,262,682 1,853,509 1,029,049 824,460
NOTE D --
CHANGE IN ACCOUNTING PRINCIPLE
Effective March 1, 2001 the Funds adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies, as revised, and began
amortizing premiums on debt securities. Prior to this date, the Funds did
not amortize premiums on debt securities. The cumulative effect of this
accounting change had no impact on the total net assets of the Funds, but
for the Independence Balanced Fund resulted in a $17,181 reduction in the
cost of the investments and a corresponding increase in unrealized
appreciation on investments, based on securities held as of February 28,
2001.
For the Independence Balanced Fund the effect of this change in the period
ended August 31, 2001 was to decrease net investment income by $8,693,
increase unrealized appreciation on investments by $541 and decrease net
realized loss on investments by $8,152. The effect of this change on the
per share operating performance and the annualized ratio of net investment
income to average net assets for the period ended August 31, 2001 was as
follows: decrease in the net investment income by less than $0.00 per
share, decrease in net realized and unrealized loss on investments by less
than $0.00 per share and decrease in the ratio of net investment income to
average net assets by 0.05%. The Statements of Changes in Net Assets and
the Financial Highlights for prior periods have not been restated to
reflect this change in presentation.
[A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner.]
John Hancock Funds, Inc.
MEMBER NASD
101 Huntington Avenue
Boston, MA 02199-7603
1-800-225-5291
1-800-554-6713 TDD
1-800-338-8080 EASI-Line
www.jhfunds.com
This report is for the information of shareholders of the John Hancock
Institutional Series Trust.
[A recycled logo in lower left hand corner with caption "Printed on
Recycled Paper."]
KI0SA 8/01
10/01
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Investment Trust (the "Registrant") on Form N-1A under
the Securities Act of 1933 and the Investment company Act of 1940 (File Nos.
2-10156 and 811-0560), which information is incorporated herein by reference.
ITEM 16. EXHIBITS:
1 Registrant's Amended and Restated Filed herewith as Exhibit 1
Declaration of Trust
2 Amended and Restated By-Laws of Filed as Exhibit 99.b to Registrant's
Registrant. Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 77 (file
nos. 811-0560 and 2-10156 on December 20,
1997, accession
no. 0001010521-96-000224) ("PEA 77")
Amendment to Amended and Restated Filed herewith as Exhibit 2
By-Laws of Registrant
3 Not applicable
4 Form of Agreement and Plan of Filed herewith as Exhibit B to the Proxy
reorganization Statement and Prospectus included as Part
A of this Registration Statement
5 Not applicable
6 Investment Management Contract Filed as Exhibit 99.d to Registrant's
between Large Cap Equity Fund and Registration Statement on Form N-1A and
John Hancock Advisers, LLC incorporated herein by reference to
post-effective amendment no. 73 (file
nos. 811-0560 and 2-10156 on May 10,
1995, accession
no. 0000950135-95-001122) ("PEA 73")
6.1 Investment Management Contract Filed as Exhibit 99.d.1 to Registrant's
between the John Hancock Sovereign Registration Statement on Form N-1A and
Investors Fund, John Hancock Balanced incorporated herein by reference to
Fund and John Hancock Advisers, LLC post-effective amendment no. 78 (file
nos. 811-0560 and 2-10156 on February 27,
1997, accession
no. 0001010521-97-000228) ("PEA 78")
6.2 Investment Management Contract Filed as Exhibit 99.d.2 to Registrant's
between the John Hancock Real Estate Registration Statement on Form N-1A and
Fund and John Hancock Advisers, LLC incorporated herein by reference to
post-effective amendment no. 84 (file
nos. 811-0560 and 2-10156 on April 27,
1999, accession
no. 0001010521-00-000194) ("PEA 84")
6.3 Investment Management Contract Filed as Exhibit 99.d.3 to Registrant's
between the John Hancock Fundamental Registration Statement on Form N-1A and
Value Fund and John Hancock Advisers, incorporated herein by reference to
LLC post-effective amendment no. 90 (file
nos. 811-0560 and 2-10156 on June 25,
2001, accession no. 0001010521-01-500061)
("PEA 90")
6.4 Investment Management Contract Filed as Exhibit 99.d.4 to Registrant's
between the John Hancock Strategic Registration Statement on Form N-1A and
Growth Fund and John Hancock incorporated herein by reference to
Advisers, LLC post-effective amendment no. 93 (file
nos. 811-0560 and 2-10156 on February 27,
2002, accession no. 0001010521-02-000112)
("PEA 93")
7 Distribution Agreement between the Filed as Exhibit 99.e to PEA 73 and
Registrant and John Hancock Funds, LLC incorporated herein by reference
7.1 Amendment to Distribution Agreement Filed as Exhibit 99.e.1 to PEA 78 and
between the Registrant and John incorporated herein by reference
Hancock Funds, LLC
7.2 Form of Soliciting Dealer Agreement Filed as Exhibit 99.e.2 to PEA 73 and
between John Hancock Funds LLC and incorporated herein by reference
Selected Dealers
7.3 Form of Financial Institution Sales Filed as Exhibit 99.e.3 to PEA 73 and
and Service agreement between John incorporated herein by reference
Hancock Funds, LLC and John Hancock
funds
7.4 Amendment to Distribution Agreement Filed as Exhibit 99.e.3 to PEA 84 and
between the John Hancock Real Estate incorporated herein by reference
Fund and John Hancock Funds, LLC
7.5 Amendment to Distribution Agreement Filed as Exhibit 99.e.5 to PEA 90 and
between the John Hancock Fundamental incorporated herein by reference
Value Fund and John Hancock Funds LLC
7.6 Amendment to Distribution Agreement Filed as Exhibit 99.e.6 to PEA 93 and
between the John Hancock Strategic incorporated herein by reference
Growth Fund and John Hancock Funds,
LLC
8 Not applicable.
9 Master Custodian Agreement between Filed as Exhibit 99.g to Registrant's
John Hancock Mutual Funds (including Registration Statement on Form N-1A and
Registrant) and The Bank of New York incorporated herein by reference to
post-effective amendment no. 92 (file
nos. 811-0560 and 2-10156 on December 27,
2001, accession
no. 0001010521-01-500301) ("PEA 92")
10 Amended & Restate Master Transfer Filed as Exhibit 99.h to Registrant's
Agent Service Agreement between John Registration Statement on Form N-1A and
Hancock Mutual Funds (including incorporated herein by reference to
Registrant) and John Hancock Funds, post-effective amendment no. 82 (file
LLC nos. 811-0560 and 2-10156 on July 15,
1998, accession
no. 0001010521-98-000292) ("PEA 82")
10.1 Amended & Restate Master Transfer Filed as Exhibit 99.h.1 to PEA 84 and
Agent Service Agreement between John incorporated herein by reference
Hancock Mutual Funds (including
Registrant) and John Hancock Funds,
LLC
10.2 Service Agreement between Charles Filed as Exhibit 99.h.2 to Registrant's
Schwab, John Hancock Funds, LLC and Registration Statement on Form N-1A and
John Hancock Large Cap Equity Fund incorporated herein by reference to
post-effective amendment no. 88 (file
nos. 811-0560 and 2-10156 on March 15,
2001, accession
no. 0001010521-01-000199) ("PEA 88")
10.3 Amendment to Amended & Restate Master Filed as Exhibit 99.h.3 to PEA 90 and
Transfer Agent Service Agreement incorporated herein by reference
between John Hancock Fundamental
Value Fund and John Hancock Funds, LLC
10.4 Amended & Restate Master Transfer Filed as Exhibit 99.h.4 to PEA 93 and
Agent Service Agreement between John incorporated herein by reference
Hancock Strategic Growth and John
Hancock Funds, LLC
11 Class A and Class B Distribution Filed as Exhibit 99.m to PEA 78 and
Plans between John Hancock Sovereign incorporated herein by reference.
Investors Fund and John Hancock
Funds, LLC
11.1 Class A and Class B Distribution Filed as Exhibit 99.m.1 to PEA 78 and
Plans between John Hancock Balanced incorporated herein by reference
Fund and John Hancock Funds, LLC
11.2 Class A and Class B Distribution Filed as Exhibit 99.m.2 to PEA 73 and
Plans between John Hancock Large Cap incorporated herein by reference
Equity Fund and John Hancock Funds,
LLC
11.3 Class C Distribution Plans between Filed as Exhibit 99.m.3 to PEA 82 and
John Hancock Large Cap Equity Fund, incorporated herein by reference
John Hancock Sovereign Investors and
John Hancock Funds, LLC
11.4 Class C Distribution Plans between Filed as Exhibit 99.m.4 to PEA 84 and
John Hancock Balanced Fund and John incorporated herein by reference
Hancock Funds, LLC
11.5 Class A, Class B and Class C Filed as Exhibit 99.m.5 to PEA 90 and
Distribution Plans between John incorporated herein by reference
Hancock Fundamental Value Fund and
John Hancock Funds, LLC
11.6 Class A, Class B and Class C Filed as Exhibit 99.m.6 to PEA 93 and
Distribution Plans between John incorporated herein by reference
Hancock Strategic Growth Fund and
John Hancock Funds, LLC
12 John Hancock Funds Class A, Class B Filed as Exhibit 99.o to PEA 93 and
and Class C Amended and restated incorporated herein by reference
Multiple Class Plan pursuant to Rule
18f-3
12.1 John Hancock Funds Class A, Class B, Filed as Exhibit 99.o.1 to PEA 88 and
Class C and Class I Amended and incorporated herein by reference
restated Multiple Class Plan pursuant
to
Rule 18f-3
13 Revised Code of Ethics John Hancock Filed as Exhibit 99.p to PEA 78 and
Funds, LLC incorporated herein by reference.
14 Opinion as to legality of shares and Filed herewith as Exhibit 14
consent
15 Form of opinion as to tax matters and Filed herewith as Exhibit 15
consent
16 Not applicable
17 Consent of Ernst & Young LLP Filed herewith as Exhibit 17
regarding the audited financial
statements of John Hancock Balanced
Fund and Consent of Deloitte & Touche LLP
regarding the audited financial
statements of John Hancock
Independence Balanced Fund
18 Not applicable
19 Powers of Attorney Filed as addendum to signature pages and
incorporated herein by reference.
20 Prospectus of John Hancock Balanced Filed herewith as Exhibit B to Part B of
Fund-Class I dated March 1, 2002 this Registration Statement.
20.1 Prospectus of John Hancock Filed herewith as Exhibit B to Part B of
Independence Balanced Fund, dated this Registration Statement.
July 2, 2001
21 Statement of Additional Filed herewith as Exhibit A and B
Information of John Hancock to Part B of this Registration
Institutional Series Trust dated Statement.
July 1, 2001
21.1 Statement of Additional Information Filed herewith as Exhibit A and B to Part
of John Hancock Balanced Fund B of this Registration Statement.
dated March 1, 2002
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering of the
securities registered through the use of a prospectus which is part of this
registration statement by any person or party which is deemed to be an
underwriter within the meaning of Rule 145(c) under the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as part of an amendment to the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has caused this Registration Statement on Form N-14 to be signed
on its behalf by the undersigned, duly authorized, in the City of Boston, and
The Commonwealth of Massachusetts on the 8th day of March, 2002.
JOHN HANCOCK INVESTMENT TRUST
By: *
-------------------------------------
Maureen R. Ford
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
*
- ----------------------- Trustee, Chairman, President and March 8, 2002
Maureen R. Ford Chief Executive Officer
*
- ----------------------- Senior Vice President and
Richard A. Brown Chief Financial Officer
/s/William H. King Vice President, Treasurer
- ----------------------- (Chief Accounting Officer)
William H. King
* Trustee
- ------------------------
James F. Carlin
* Trustee
- ------------------------
William H. Cunningham
* Trustee
- ------------------------
Ronald R. Dion
* Trustee
- ------------------------
John M. DeCiccio
* Trustee
- ------------------------
Charles L. Ladner
Signature Title Date
--------- ----- ----
* Trustee
- ------------------------
Steven R. Pruchansky
* Trustee
- ------------------------
Norman H. Smith
* Trustee
- ------------------------
John P. Toolan
*By: /s/Susan S. Newton
------------------ March 8, 2002
Susan S. Newton
Attorney-in-Fact
Power of Attorney dated
June 23, 2001 and September 12, 2001.
Panel A
- -------
John Hancock Capital Series John Hancock Strategic Series
John Hancock Declaration Trust John Hancock Tax-Exempt Series Fund
John Hancock Income Securities Trust John Hancock World Fund
John Hancock Investors Trust John Hancock Investment Trust II
John Hancock Equity Trust John Hancock Investment Trust III
John Hancock Sovereign Bond Fund
Panel B
- -------
John Hancock Bank and Thrift Opportunity Fund John Hancock Patriot Global Dividend Fund
John Hancock Bond Trust John Hancock Patriot Preferred Dividend Fund
John Hancock California Tax-Free Income Fund John Hancock Patriot Premium Dividend Fund I
John Hancock Current Interest John Hancock Patriot Premium Dividend Fund II
John Hancock Institutional Series Trust John Hancock Patriot Select Dividend Trust
John Hancock Investment Trust John Hancock Series Trust
John Hancock Cash Reserve, Inc. John Hancock Tax-Free Bond Trust
POWER OF ATTORNEY
-----------------
The undersigned Officer of each of the above listed Trusts, each a
Massachusetts business trust, or Maryland Corporation, does hereby severally
constitute and appoint SUSAN S. NEWTON, WILLIAM H. KING, AND AVERY P. MAHER, and
each acting singly, to be my true, sufficient and lawful attorneys, with full
power to each of them, and each acting singly, to sign for me, in my name and in
the capacity indicated below, any Registration Statement on Form N-1A and any
Registration Statement on Form N-14 to be filed by the Trust under the
Investment Company Act of 1940, as amended (the "1940 Act"), and under the
Securities Act of 1933, as amended (the "1933 Act"), and any and all amendments
to said Registration Statements, with respect to the offering of shares and any
and all other documents and papers relating thereto, and generally to do all
such things in my name and on my behalf in the capacity indicated to enable the
Trust to comply with the 1940 Act and the 1933 Act, and all requirements of the
Securities and Exchange Commission thereunder, hereby ratifying and confirming
my signature as it may be signed by said attorneys or each of them to any such
Registration Statements and any and all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 23rd day of June, 2001.
/s/Richard A. Brown
-------------------
Richard A. Brown
Chief Financial Officer
Commonwealth of Massachusetts )ss
- ----------------------------------------------------------
COUNTY OF Suffolk )
------------------------------------------------
Then personally appeared the above-named Richard A. Brown, who
acknowledged the foregoing instrument to be his free act and deed, before me,
this 23rd day of June, 2001.
/s/Erika L. Nager
-----------------
Notary Public
My Commission Expires: June 14, 2007
-------------
s:\general\prwattn\01June23.doc
John Hancock Bank and Thrift Opportunity Fund John Hancock Patriot Global Dividend Fund
John Hancock Bond Trust John Hancock Patriot Preferred Dividend Fund
John Hancock California Tax-Free Income Fund John Hancock Patriot Premium Dividend Fund I
John Hancock Current Interest John Hancock Patriot Premium Dividend Fund II
John Hancock Institutional Series Trust John Hancock Patriot Select Dividend Trust
John Hancock Investment Trust John Hancock Series Trust
John Hancock Cash Reserve, Inc. John Hancock Tax-Free Bond Trust
POWER OF ATTORNEY
The undersigned Trustee/Officer of each of the above listed Trusts,
each a Massachusetts business trust or Maryland corporation, does hereby
severally constitute and appoint Susan S. Newton, WILLIAM H. KING, and AVERY P.
MAHER, and each acting singly, to be my true, sufficient and lawful attorneys,
with full power to each of them, and each acting singly, to sign for me, in my
name and in the capacity indicated below, any Registration Statement on Form
N-1A and any Registration Statement on Form N-14 to be filed by the Trust under
the Investment Company Act of 1940, as amended (the "1940 Act"), and under the
Securities Act of 1933, as amended (the "1933 Act"), and any and all amendments
to said Registration Statements, with respect to the offering of shares and any
and all other documents and papers relating thereto, and generally to do all
such things in my name and on my behalf in the capacity indicated to enable the
Trust to comply with the 1940 Act and the 1933 Act, and all requirements of the
Securities and Exchange Commission thereunder, hereby ratifying and confirming
my signature as it may be signed by said attorneys or each of them to any such
Registration Statements and any and all amendments thereto.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument as
of the 12th day of September, 2001.
/s/Maureen R. Ford /s/Charles L. Ladner
- ------------------ --------------------
Maureen R. Ford, as Charles L. Ladner
Chairman and Chief
Executive Officer
/s/John M. DeCiccio /s/Steven R. Pruchansky
- ------------------- -----------------------
John M. DeCiccio, as Trustee Steven R. Pruchansky
/s/James F. Carlin /s/Norman H. Smith
- ------------------ ------------------
James F. Carlin Norman H. Smith
/s/William H. Cunningham /s/John P. Toolan
- ------------------------ -----------------
William H. Cunningham John P. Toolan
/s/Ronald R. Dion
- -----------------
Ronald R. Dion
COMMONWEALTH OF MASSACHIUSETTS)
- ------------------------------
)ss
COUNTY OF SUFFOLK )
- -----------------
Then personally appeared the above-named Richard A. Brown, who
acknowledged the foregoing instrument to be his free act and deed, before me,
this 23rd day of June, 2001.
/s/Erika Nager
--------------
Notary Public
My Commission Expires: June 14, 2007
-------------
s:\general\prwattn\01Sept12.doc
EXHIBIT INDEX
The following exhibits are filed as part of this Registration Statement:
Exhibit No. Description
1 Amended and Restated Declaration of Trust of John Hancock Investment Trust
dated March 1, 2002.
2.1 Amendment to Amended and Restated By-Laws of Registrant.
4 Agreement and Plan of Reorganization between John Hancock Sovereign
Investors ("the Acquiring Fund") and John Hancock Dividend Performers Fund
("the Acquired Fund") (filed as EXHIBIT A to Part A of this Registration
Statement).
4.1 Agreement and Plan of Reorganization between John Hancock Balanced Fund
("the Acquiring Fund") and John Hancock Independence Balanced Fund (the
"Acquired") (filed as EXHIBIT A to Part A of this Registration Statement).
14 Opinion as to legality of shares and consent.
15 Form of opinion as to tax matters and consents.
17 Consent of Ernst & Young LLP regarding the audited financial statements
and highlights of John Hancock Balanced Fund and John Hancock Sovereign
Investors Fund. Consent of Deloitte & Touche LLP regarding the audited
financial statements and highlights of the John Hancock Independence
Balanced Fund and John Hancock Dividend Performers Fund.