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 SOVEREIGN BOND FUND
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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 Sovereign Bond Fund.
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. 2-48925 and 811-2402).
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 Bond Fund
INSTITUTIONAL CLASS I
[LOGO](R) As with all mutual funds, the Securities and Exchange
- ------------------ Commission has not approved or disapproved this fund or
JOHN HANCOCK FUNDS 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 Bond 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
Financial highlights 12
For more information back cover
Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks to generate a high level of current income consistent
with prudent investment risk. In pursuing this goal, the fund normally invests
at least 80% of its assets in a diversified portfolio of bonds and other debt
securities. These include corporate bonds and debentures as well as U.S.
government and agency securities. Most of these securities are investment grade,
although the fund may invest up to 25% of assets in high yield bonds rated as
low as CC/Ca and their unrated equivalents. There is no limit on the fund's
average maturity.
In managing the fund's portfolio, the managers concentrate on sector
allocation, industry allocation and securities selection: deciding which types
of bonds and industries to emphasize at a given time, and then which individual
bonds to buy. When making sector and industry allocations, the managers try to
anticipate shifts in the business cycle, using top-down analysis to determine
which sectors and industries may benefit over the next 12 months.
In choosing individual securities, the managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look at bonds of
all quality levels and maturities from many different issuers, potentially
including U.S. dollar-denominated securities of foreign governments and
corporations.
The fund intends to keep its exposure to interest rate movements generally in
line with those of its peers. The fund may invest in mortgage-related securities
and certain other derivatives (investments whose value is based on indexes,
securities or currencies).
Under normal circumstances, the fund may not invest more than 10% of assets in
cash or cash equivalents.
In abnormal circumstances, the fund may temporarily invest extensively in
investment-grade short-term securities. In these and other cases, the fund might
not achieve its goal.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- ------------------------------------
Executive vice president of adviser
Joined fund team in 1988
Joined adviser in 1985
Began business career in 1977
Benjamin A. Matthews
- ------------------------------------
Vice president of adviser
Joined fund team in 1995
Joined adviser in 1995
Began business career in 1970
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 existed for less than a full
calendar year, 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 does not indicate future results.
- --------------------------------------------------------------------------------
Class A year-by-year total returns -- calendar years
- --------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
8.19% 11.69% -2.77% 19.45% 4.09% 9.66% 7.50% -1.36% 10.39% 7.15%
Best quarter: Q2 '95, 6.57% Worst quarter: Q1 '94, -2.71%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/01
- --------------------------------------------------------------------------------
1 year 5 year 10 year
Class A 2.33% 5.60% 6.73%
Class I (began 9-1-01) -- -- --
Index 10.40% 7.22% 7.68%
Index: Lehman Brothers Credit Bond Index, an unmanaged index of U.S. corporate
bonds and Yankee bonds.
4
MAIN RISKS
[Clip Art] The major factors in this fund's performance are interest rates and
credit risk. When interest rates rise, bond prices generally fall. Generally, an
increase in the fund's average maturity will make it more sensitive to interest
rate risk.
The fund could lose money if any bonds it owns are downgraded in credit rating
or go into default. In general, high yield bonds (also known as "junk bonds")
have higher credit risks. If certain sectors or investments do not perform as
the fund expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Junk bonds and foreign securities may make the fund more sensitive to
market or economic shifts in the U.S. and abroad.
o If interest rate movements cause the fund's mortgage-related and callable
securities to be paid off substantially earlier or later than expected,
the fund's share price or yield could be hurt.
o In a down market, higher-risk securities and derivatives could become
harder to value or to sell at a fair price.
o Certain derivatives could produce disproportionate losses.
Any U.S. government guarantees on portfolio securities do not apply to these
securities' market value or current yield, or to fund shares.
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 0.50%
Other expenses 0.14%
Total fund operating expenses 0.64%
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 $65 $205 $357 $798
FUND CODES
Class I
- ----------------------------
Ticker --
CUSIP 410223408
Newspaper --
SEC number 811-2402
JH fund number 431
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 o Make out a check for the
the investment amount, investment amount payable
payable to "John Hancock to "John Hancock Signature
Signature Services, Inc." Services, Inc."
o Deliver the check and o Fill out the detachable
your completed application investment slip from an
to your financial account statement. If no
representative, or mail slip is available,
them to Signature include a note specifying
Services (address below). 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 representative or
Signature Services to Signature Services to
request an exchange. request an exchange.
o You may only exchange o You may only exchange
for shares of other for shares of other
institutional funds or institutional
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 the amount of your
financial representative investment to:
or mail it to Signature First Signature Bank & Trust
Services. Account # 900022260
Routing # 211475000
o Obtain your account
number by calling your Specify the fund name(s), your
financial representative share class, your account number
or Signature Services. and the name(s) in which the
account is registered. Your bank
o Instruct your bank to wire may charge a fee to wire funds.
the amount of your
investment to:
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 7
- --------------------------------------------------------------------------------
Selling shares
- --------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip Art] o Sales of any amount; o Write a letter of instruction
however, sales of $5 indicating the fund name,
million or more must your account number, your
be made by letter. share class, the name(s) in
which the account is
o Certain requests will registered and the dollar
require a Medallion value or number of shares you
signature guarantee. wish to sell.
Please refer to "Selling
shares in writing." 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 o To verify that the telephone
sell any amount. redemption privilege is in
place on an account, or to
o Requests by phone to sell request the forms to add it
up to $5 million (accounts to an existing account, call
with 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 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 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
valui ng 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 shares of 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 funds generally declare income dividends daily and pay them
monthly. Your income dividends begin accruing the day after payment is received
by a fund and continue through the day your shares are actually sold. Capital
gains, if any, are distributed annually, typically after the end of a fund's
fiscal year.
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 of the fund have the power to change the focus of the fund's 80%
investment policy without shareholder approval. The fund will provide written
notice to shareholders at least 60 days prior to a change in its 80% investment
policy.
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 May 31, 2001, the fund paid the investment
adviser management fees at a rate of 0.50% of average net assets.
YOUR ACCOUNT 11
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
This table details the performance of the fund, including total return
information showing how much an investment in the fund has increased or
decreased each year. Since Class I shares of Bond Fund have no operational
history, financial highlights are provided for the fund's Class A shares, which
are offered in a separate prospectus.
Bond Fund
Figures audited by Ernst & Young LLP.
CLASS A SHARES -- PERIOD ENDED 12-31-96 5-31-97(1) 5-31-98 5-31-99 5-31-00 5-31-01
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANC
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93
Net investment income 1.09 0.44 1.05(2) 0.97(2) 0.96(2) 0.92(2)
Net realized and unrealized gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76
Total from investment operations 0.59 0.32 1.52 0.48 0.13 1.68
Less distributions
From net investment income (1.09) (0.44) (1.05) (0.97) (0.96) (0.92)
Net asset value, end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69
Total return(3)(%) 4.11 2.22(4) 10.54 3.11 0.97 12.38
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $1,416 $1,362 $1,328 $1,279 $1,098 $1,140
Ratio of expenses to average net assets (%) 1.14 1.11(5) 1.08 1.07 1.11 1.12
Ratio of net investment income to average net assets (%) 7.32 7.38(5) 6.90 6.35 6.69 6.38
Portfolio turnover (%) 123 58 198 228 162 235
(1) Effective May 31, 1997, the fiscal year end changed from December 31 to
May 31.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) Annualized.
12
For more information
Two documents are available that offer further information on the John Hancock
Bond 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 SPONSER
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
21IPN 3/02
John Hancock
Bond Fund
ANNUAL REPORT
5.31.01
[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,
in upper left-hand corner.]
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 21
For your information
page 37
Dear Fellow Shareholders,
The stock market had a rough start to 2001, as last year's downward
spiral continued, due to growing concern over the slowing economy and a
parade of disappointing earnings announcements. But as the Federal
Reserve aggressively attacked the slowdown with five interest-rate cuts
between January and May, the market began to rebound in April on the
belief that the worst might be over. Bonds wound up outperforming
stocks, producing mostly positive returns, while the Standard & Poor's
500 Index returned -4% through May. Bonds were the beneficiaries of
both the rate cuts and investors' search for safety. Even with the
spring upturn, the market remains indecisive, as investors try to get a
clearer sense of the timetable for economic and corporate recovery.
As always, we will continue to update you on these developments and
anything that specifically relates to your fund and its performance. In
fact, this newly designed shareholder report is our latest offering in
that regard, and is part of our ongoing effort to better serve our
shareholders.
Based on your feedback, we set out to create a more inviting report that
you could easily navigate and that would provide you with more
information on your fund. In addition to the new overall look, there are
several prominent changes, including a table of contents, additional
charts and a new summary page opposite this one. The most obvious
difference is the report's size. By changing it to a standard mailing
format we hope to deliver it to you in an even more timely fashion.
These twice-yearly shareholder reports are your best way to better
understand your fund and what has been driving its performance. We
encourage you to read them, and hope that our new version will make the
task easier and more meaningful.
Sincerely,
/S/ MAUREEN R. FORD
Maureen R. Ford,
Chairman and Chief Executive Officer
YOUR FUND
AT A GLANCE
The Fund seeks a
high level of
current income
consistent with
prudent investment
risk by investing in
a diversified
portfolio of debt
securities,
including corporate
bonds and U.S.
government and
agency securities.
Over the last twelve months
* The economy slowed rapidly, hurting corporate profits and the stock market.
* Bond funds surpassed stock funds; U.S. Treasuries dominated the first
half and then corporate bonds rallied as the Federal Reserve cut rates.
* The Fund reduced its U.S. Treasury position and increased stakes in
high-yield and emerging-market debt.
[Bar chart with heading "John Hancock Bond Fund." Under the heading is a
note that reads "Fund performance for the year ended May 31, 2001." The
chart is scaled in increments of 5% with 0% at the bottom and 15% at the
top. The first bar represents the 12.38% total return for Class A. The
second bar represents the 11.64% total return for Class B. The third bar
represents the 11.60% total return for Class C. A note below the chart
reads "Total returns are at net asset value with all distributions
reinvested."]
Top holdings
13.5% United States Treasury
7.4% Federal National Mortgage Assn.
4.9% Government National Mortgage Assn.
1.4% GMAC Commercial Mortgage Securities
1.2% Iberdrola International
1.0% Hydro-Quebec
1.0% New York Life Insurance Co.
0.9% Morgan Stanley Capital I
0.9% RBSG Capital
0.8% Scotland International Finance No. 2
As a percentage of net assets on May 31, 2001.
BY JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER AND
BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER
John Hancock
Bond Fund
MANAGERS'
REPORT
The investment environment in the second half of fiscal 2001 proved to
be beneficial to all the fixed-income sectors in which the John Hancock
Bond Fund invests. This was a welcome change from the unease that
plagued several sectors in the period's first half -- high-yield and
investment-grade corporate bonds in particular. We took advantage of the
portfolio's flexibility, tapping into the opportunities the changing
market conditions offered.
STRONG RESULTS
With this backdrop, John Hancock Bond Fund produced double-digit returns
for the year ended May 31, 2001. The Fund's Class A, Class B and Class C
shares posted total returns of 12.38%, 11.64% and 11.60%, respectively,
at net asset value. By comparison, the average corporate debt A-rated
fund returned 12.09%, 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. Longer-term performance information can be
found on pages six and seven.
"...the second half of
fiscal 2001 proved to be
beneficial to all the fixed-
income sectors in which
the...Fund invests."
THE FED'S ACT I
In June 2000, the Fund's fiscal year began on the heels of several
interest-rate increases by the Federal Reserve Board, which succeeded in
slowing economic growth, but to such a degree that fears of recession
set in. By November, corporate bonds were suffering severe price
declines as a result. Credit spreads (the difference in yield between
bonds of different credit quality) had widened to levels last seen in
1990--1991. When corporations missed their earnings projections,
investors feared the profit outlook would only get worse. Quality was
the key to weathering the market's volatility. In this first half of the
fiscal year, we had emphasized U.S. Treasury issues, mortgage-backed
securities and higher-quality corporate bonds, all of which proved to be
the better-performing sectors.
[A photo of Team leader Jim Ho flush right next to first paragraph.]
THE FED'S ACT II
By the end of the Fund's fiscal year in May 2001, the Fed was in the
midst of an aggressive campaign to ease monetary policy, which has
improved the outlook for an economic recovery -- if not presently, at
least at some point in the foreseeable future. Between January and the
end of May, the Fed had enacted five interest-rate cuts, totaling 2.50%.
Though these cuts have caused only short bursts of optimism for stock
investors, they have lifted the broad fixed-income market, in particular
credit-sensitive sectors, which are in a constant forward-looking mode.
The lower interest rates have reduced the borrowing costs for companies
and consumers. As a result, corporate new-issuance supply has increased
and has been met with strong demand. More confident in taking on risk,
bond investors are returning to sectors that offer attractive risk
premiums, such as lower-tier investment-grade and high-yield debt, as
well as emerging-market issues.
"We continue to maintain
fair representation in
recession-resistant
industries..."
ECONOMICALLY SENSITIVE ISSUES BOOSTED
The recently passed tax-cut legislation lends further support to a
brighter economic outlook, and we have selectively bolstered the Fund's
stake in high-yield bonds and lower-quality investment-grade securities.
Though the default rate is relatively high, history tells us that
defaults are backward indicators -- the cumulative result of a series of
prior financial events or disappointments. The Fed's commitment to boost
economic growth gives us reason to believe that defaults should
stabilize and perhaps decline. Furthermore, our intense credit research
capabilities have enabled us to steer clear of many problem credits or
provided us with enough information to move out of problem issues before
conditions got worse.
[Table at top left-hand side of page entitled "Top five sectors." The
first listing is U.S. government 14%, the second is U.S. government
agencies 13%, the third Utilities 13%, the fourth Finance 6%, and the
fifth Media 5%.]
We added to economically sensitive issues -- such as those in the
airline, mining, paper and retail industries -- as well as select
telecommunication, cable/media and financial issues. We bought or added
to holdings such as Northwest Airlines, Newmont Mining, Phelps Dodge,
Georgia-Pacific, Federated Department Stores, AOL Time Warner, Viacom
and Bank One. We also increased the Fund's weighting in emerging-market
bonds, purchasing BBVA Bancomer (a Mexican corporate bond that we later
sold for profits), Brazil C-bonds and Colombia sovereign debt.
[Pie chart at bottom of page with heading "Types of investments in the
Fund As of May 31, 2001." The chart is divided into six sections (from
top to left): Corporate bonds 56%, Government bonds 26%, Foreign
corporate bonds 8%, Foreign government bonds 2%, Preferred stock 1% and
Short-term investments & other 7%.]
We continue to maintain fair representation in recession-resistant
industries such as defense, utilities, health care, media and energy.
Noteworthy performers in these areas included BellSouth, Qwest Capital
Funding, Progress Energy, HealthSouth and Cox Communications.
YIELD CURVE STEEPENS
Long-term U.S. Treasury bonds dominated fixed-income performance last
summer. As they rallied, the Fund benefited from its substantial
exposure. The price strength of long-term Treasury bonds created an
inverted yield curve, an unusual occurrence wherein rates on long-term
securities are lower than those offered by shorter-term issues. The
yield curve modified in the fall and then in response to the Fed's
easing reverted to its normally steep shape this past spring.
Consequently, Treasury securities stepped out of the performance
limelight. In the period's second half, we reduced the Fund's exposure
to Treasury bonds as well as mortgage-backed and agency issues,
redeploying those assets into corporate bonds and emerging-market debt.
[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 AT&T
Wireless followed by an up arrow with the phrase "Rebound in
telecommunications." The second listing is Bank of America followed by
an up arrow with the phrase "Decline in interest rates." The third
listing is Brazil C-Bonds followed by a sideways arrow with the phrase
"Uncertainty in Argentina."]
"...we shall watch the
markets carefully and rely on
intense credit research..."
Our duration, or interest-rate sensitivity, and our yield-curve strategy
remained relatively neutral throughout most of the year. More recently,
we have shortened duration slightly, believing that Treasury yields do
not have much more room to fall. Should the Fed's actions succeed in
stimulating economic growth as we anticipate, the yield curve may begin
to flatten and a shorter-duration stance would prove beneficial.
OUTLOOK
Though fiscal 2002 is shaping up to offer corporate bonds a more benign
investment environment, we are very aware that the economy may not
respond as favorably to the Fed's easing as we hope, or could even
deteriorate further. Experience tells us the latter scenario, though
possible, is doubtful, given the Fed's resolve. Nevertheless, we shall
watch the markets carefully and rely on intense credit research to guide
our investment decisions.
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 year ended
May 31, 2001.
The index used for
comparison is the
Lehman Brothers
Corporate Bond
Index, an unman
aged index that
mirrors the invest
ment objectives and
characteristics of
the Fund.
It is not possible to
invest in an index.
Class A Class B Class C Index
Inception date 11-9-73 11-23-93 10-1-98 --
Average annual returns with maximum sales charge (POP)
One year 7.30% 6.64% 9.50% 13.76%
Five years 6.13% 6.07% -- 7.40%
Ten years 7.32% -- -- 7.92%
Since inception -- 5.81% 3.15% --
Cumulative total returns with maximum sales charge (POP)
One year 7.30% 6.64% 9.50% 13.76%
Five years 34.63% 34.24% -- 42.89%
Ten years 102.60% -- -- 114.39%
Since inception -- 52.86% 8.61% --
SEC 30-day yield as of May 31, 2001
7.23% 6.87% 6.79% --
Performance figures assume all distributions are reinvested. Returns
with maximum sales charge reflect a sales charge on Class A shares of
4.5% 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 Lehman Brothers Corporate Bond 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 $21,439
as of May 31, 2001. The second line represents the value of the
hypothetical $10,000 investment made in the John Hancock Bond Fund,
before sales charge, and is equal to $21,204 as of May 31, 2001. The
third bar represents the same hypothetical $10,000 investment made in
the John Hancock Bond Fund, after sales charge, and is equal to $20,251
as of May 31, 2001.
Class B 1 Class C 1
Inception date 11-23-93 10-1-98
Without sales charge $15,286 $10,973
With maximum sales charge -- $10,863
Index $16,301 $11,510
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 May 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
May 31, 2001.
This schedule is divided into three main categories: bonds, preferred
stocks and warrants, and short-term investments. The bonds are further
broken down by industry group. Short-term investments, which represent
the Fund's cash position, are listed last.
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING* (000s OMITTED) VALUE
BONDS 92.08% $1,274,705,116
(Cost $1,273,419,554)
Aerospace 0.79% $10,919,732
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) 10.910% BBB $5,800 6,293,000
Lockheed Martin Corp.,
Bond 12-01-29 8.500 BBB- 4,145 4,626,732
Agricultural Operations 0.55% 7,612,044
Cargill, Inc.,
Note 05-01-06 (R) 6.250 A+ 3,050 3,016,175
Potash Corp.,
Note (Canada) 05-31-11 (Y) 7.750 BBB+ 4,485 4,595,869
Automobiles/Trucks 2.09% 28,890,826
DaimlerChrysler Auto Trust,
Pass Thru Ctf Ser 2001-A Class A-4 03-06-06 5.400 AAA 6,380 6,377,863
ERAC USA Finance Co.,
Note 02-15-05 (R) 6.625 BBB+ 1,440 1,404,706
Note 12-15-09 (R) 7.950 BBB+ 2,675 2,674,171
Ford Credit Auto Owner Trust,
Pass Thru Ctf Ser 2000-F Class A-3 11-15-04 6.580 AAA 7,985 8,200,196
Ford Motor Co.,
Note 07-16-31 7.450 A 4,245 4,088,190
Toyota Auto Receivables Owner Trust,
Asset Backed Note Ser 2000-B Class A-4 04-15-07 6.800 AAA 5,920 6,145,700
Banks -- Foreign 3.60% 49,853,765
Abbey National First Capital, B.V.,
Sub Note (United Kingdom) 10-15-04 (Y) 8.200 AA- 10,000 10,789,600
African Development Bank,
Sub Note (Supra National) 12-15-03 (Y) 9.750 AA- 8,000 8,824,000
Barclays Bank Plc,
Sub Note (United Kingdom) 06-15-49 (R) (Y) 7.375 A+ 3,455 3,473,899
International Bank for Reconstruction & Development,
Deb (Supra National) 09-01-16 (Y) 8.250 AAA 5,000 5,909,900
Royal Bank of Scotland Group Plc,
Bond (United Kingdom) 03-31-49 (Y) 8.817 A- 3,130 3,366,878
Scotland International Finance No. 2, B.V.,
Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) 8.850 A 10,335 11,382,452
Standard Chartered Bank,
Sub Note (United Kingdom) 05-30-31 (R) (Y) 8.000 A- 2,815 2,901,533
UBS PFD Funding Trust I,
Gtd Bond 10-01-49 8.622 AA- 2,870 3,205,503
Banks -- United States 3.12% 43,165,543
Bank of New York,
Cap Security 12-01-26 (R) 7.780 A- 5,750 5,803,072
Bank One Corp.,
Sub Note 08-01-10 7.875 A- 2,585 2,761,943
BNP Paribas Capital Trust,
Sub Note 12-27-49 (R) 9.003 A 2,615 2,875,611
Capital One Bank,
Sr Note 02-01-06 6.875 BBB- 3,075 3,016,590
Colonial Bank,
Sub Note 06-01-11 9.375 BBB- 2,595 2,632,212
HSBC Holding Plc,
Sub Note (United Kingdom) 07-15-09 (Y) 7.500 A 3,430 3,593,988
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 10.125 A 10,605 11,752,991
Skandinaviska Enskilda,
Jr Sub Note 12-29-49 (R) 6.500 BBB 3,150 3,161,529
Wells Fargo Bank N.A.,
Sub Note 02-01-11 6.450 A+ 3,855 3,801,377
Zions Financial Corp.,
Note 05-15-11 (R) 6.950 BBB- 3,770 3,766,230
Beverages 0.30% 4,202,100
Canandaigua Brands, Inc.,
Sr Sub Note Ser C 12-15-03 8.750 B+ 4,140 4,202,100
Broker Services 0.75% 10,449,649
Goldman Sachs Group, Inc.,
Bond 01-15-11 6.875 A+ 3,880 3,836,544
Radian Group, Inc.,
Note 06-01-11 (R) 7.750 A 4,145 4,132,980
Salomon Smith Barney Holdings, Inc.,
Note 03-15-06 5.875 A 2,500 2,480,125
Building 0.44% 6,056,183
Black & Decker Holdings,
Note 06-01-11 (R)*** 7.125 BBB 4,135 4,124,663
Vulcan Materials Co.,
Note 02-01-06 6.400 A+ 1,920 1,931,520
Chemicals 0.51% 7,062,328
Akzo Nobel, Inc.,
Bond 11-15-03 (R) 6.000 A- 2,860 2,895,750
Nova Chemicals Corp.,
Note 05-15-06 7.000 BBB 4,190 4,166,578
Containers 0.17% 2,288,288
Stone Container Corp.,
Sr Note 02-01-11 (R) 9.750 B 2,195 2,288,288
Cosmetics & Personal Care 0.23% 3,250,183
International Flavors & Fragrances, Inc.,
Note 05-15-06 (R) 6.450 BBB+ 3,255 3,250,183
Energy 1.12% 15,516,770
Enron Corp.,
Note 08-15-05 (R) 8.000 BBB+ 3,990 4,098,328
MidAmerican Energy Holdings,
Sr Bond 09-15-28 8.480 BBB- 4,275 4,551,079
P&L Coal Holdings Corp.,
Sr Sub Note Ser B 05-15-08 9.625 B 4,065 4,329,225
Progress Energy, Inc.,
Sr Note 03-01-11 7.100 BBB 2,515 2,538,138
Finance 5.76% 79,682,166
American Express Credit Account Master Trust,
Pass Thru Ctf Ser 2000-1 Class A 09-17-07 7.200 AAA 5,985 6,342,185
Bombardier Capital, Inc.,
Note 01-15-02 (R) 6.000 A- 4,675 4,711,465
Citigroup, Inc.,
Note 01-18-11 6.500 AA- 2,665 2,644,906
Ford Motor Credit Co.,
Note 04-28-03 6.125 A 5,540 5,613,904
General Motors Acceptance Corp.,
Note 07-15-05 7.500 A 4,025 4,212,726
Heller Financial, Inc.,
Bond 01-15-03 6.400 A- 3,815 3,862,687
Household Finance Corp.,
Note 05-09-05 8.000 A 5,165 5,528,203
Note 01-24-06 6.500 A 2,600 2,628,080
Note 07-15-10 8.000 A 2,680 2,879,178
Humpuss Funding Corp.,
Gtd Note 12-15-09 (R) 7.720 B3 1,868 1,335,392
ING Capital Funding Trust III,
Gtd Note 12-31-49 8.439 A 2,850 3,018,862
Marlin Water Trust/Marlin Water Capital Corp.,
Sr Sec Note 12-15-01 (R) 7.090 BBB 4,460 4,510,755
MBNA Master Credit Card Trust,
Pass Thru Ctf Ser 1999-G Class A 12-15-06 6.350 AAA 6,320 6,509,600
MMCA Auto Owner Trust,
Pass Thru Ctf Ser 2000-2 Class A-4 06-15-05 6.860 AAA 6,500 6,759,935
Pemex Project Funding Master Trust,
Gtd Note 10-13-10 (R)** 9.125 BB+ 4,175 4,295,031
Standard Credit Master Trust,
Ser 1995-1 Class A 01-07-07 8.250 AAA 7,372 8,005,476
Takefuji Corp.,
Sr Note (Japan) 04-15-11 (R) (Y) 9.200 A- 3,470 3,618,828
Yanacocha Receivables Master Trust,
Pass Thru Cert Ser 1997-A 06-15-04 (R) 8.400 BBB- 3,304 3,204,953
Food 0.30% 4,212,860
Earthgrains Co.,
Sr Note 08-01-03 8.375 BBB 4,085 4,212,860
Government -- Foreign 1.99% 27,497,285
Brazil, Federal Republic of,
Bond (Brazil) 04-15-14 (Y) 8.000 BB- 6,933 5,108,601
Colombia, Republic of,
Gtd Note (Colombia) 04-09-11 (Y) 9.750 BBB 3,750 3,731,250
Nova Scotia, Province of,
Deb (Canada) 04-01-22 (Y) 8.750 A- 7,500 9,052,500
Quebec, Province of,
Deb (Canada) 09-15-29 (Y) 7.500 A+ 3,215 3,414,234
Saskatchewan, Province of,
Deb (Canada) 12-15-20 (Y) 9.375 A+ 5,000 6,190,700
Government -- U.S. 13.54% 187,400,492
United States Treasury,
Bond 08-15-17 8.875 AAA 25,342 33,285,196
Bond 05-15-18 9.125 AAA 17,990 24,224,614
Bond 05-15-30 6.250 AAA 20,090 21,210,620
Note 08-15-03 5.750 AAA 13,600 13,986,784
Note 02-15-05 7.500 AAA 31,574 34,435,236
Note 07-15-06 7.000 AAA 30,140 32,744,397
Note 01-15-07 3.375 AAA 5,769 5,831,785
Note 05-15-08 5.625 AAA 3,770 3,847,737
Note 08-15-10 5.750 AAA 17,455 17,834,123
Government -- U.S. Agencies 12.92% 178,803,067
Federal Home Loan Mortgage Corp.,
30 Yr Pass Thru Ctf 01-01-16 11.250 AAA 357 399,817
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 869 901,585
15 Yr Pass Thru Ctf 09-01-10 to 11-01-14 7.000 AAA 8,951 9,153,642
15 Yr Pass Thru Ctf 12-01-12 6.500 AAA 6,973 7,036,180
15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 15,972 15,529,627
15 Yr Pass Thru Ctf 06-01-16 6.000 AAA 5,536 5,482,633
30 Yr Pass Thru Ctf 10-01-23 to 06-01-31** 7.000 AAA 8,001 8,096,005
30 Yr Pass Thru Ctf 11-01-28 6.500 AAA 3,138 3,109,430
Federal National Mortgage Assn.,
30 Yr Pass Thru Ctf 06-01-29 to 06-01-31** 7.500 AAA 6,422 6,570,887
30 Yr Pass Thru Ctf 03-01-31 to 04-01-31 6.000 AAA 21,320 20,564,663
Note 01-15-30 7.125 AAA 21,080 22,621,370
Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 2,982 3,121,886
Financing Corp.,
Bond 02-08-18 9.400 AAA 7,000 9,072,630
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 01-15-16 10.500 AAA 54 59,594
30 Yr Pass Thru Ctf 01-15-16 11.000 AAA 104 115,500
30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 9.000 AAA 5,100 5,482,211
30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 9.500 AAA 1,354 1,457,986
30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 10.000 AAA 537 584,313
30 Yr Pass Thru Ctf 11-15-22 8.000 AAA 2,198 2,311,810
30 Yr Pass Thru Ctf 08-15-28 to 06-01-31** 7.000 AAA 21,247 21,536,768
30 Yr Pass Thru Ctf 01-15-29 to 07-15-29 6.500 AAA 24,745 24,602,154
30 Yr Pass Thru Ctf 05-15-30 7.500 AAA 10,685 10,992,376
Insurance 2.98% 41,271,930
AXA,
Sub Note (France) 12-15-30 (Y) 8.600 A- 4,080 4,470,342
Equitable Life Assurance Society of the United States,
Surplus Note 12-01-05 (R) 6.950 A+ 3,700 3,794,054
Hartford Life, Inc.,
Sr Note 03-01-31 7.375 A 2,680 2,688,254
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) 7.625 AA 3,970 3,954,120
MONY Group, Inc. (The),
Sr Note 12-15-05 7.450 A- 1,860 1,900,083
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) 7.500 AA- 15,000 13,800,000
Sun Canada Financial Co.,
Gtd Sub Note 12-15-07 (R) 6.625 AA- 7,250 7,344,250
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 AA+ 3,110 3,320,827
Leisure 0.78% 10,778,053
Harrah's Operating Co., Inc.,
Gtd Sr Sub Note 12-15-05 7.875 BB+ 2,055 2,080,687
HMH Properties, Inc.,
Gtd Sr Sec Note Ser A 08-01-05 7.875 BB 3,455 3,403,175
MGM Mirage, Inc.,
Gtd Sr Note 09-15-10 8.500 BBB- 2,295 2,343,103
Station Casinos, Inc.,
Sr Note 02-15-08 8.375 BB- 1,095 1,108,688
Waterford Gaming LLC/Waterford Gaming
Finance Corp.,
Sr Note 03-15-10 (R) 9.500 B+ 1,880 1,842,400
Media 4.90% 67,822,434
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 9.250 B+ 4,750 4,750,000
Sr Note Ser B 07-15-03 8.125 B+ 2,250 2,193,750
AOL Time Warner, Inc.,
Bond 04-15-31 7.625 BBB+ 4,155 4,183,046
British Sky Broadcasting Group Plc,
Gtd Sr Note (United Kingdom) 07-15-09 (Y) 8.200 BB+ 2,940 2,913,217
Century Communications Corp.,
Sr Note 03-01-05 9.500 B+ 1,720 1,616,800
Charter Communications Holdings LLC/Charter
Communications Capital Corp.,
Sr Note 01-15-11 11.125 B+ 980 1,043,700
Sr Note 05-15-11 (R) 10.000 B+ 1,065 1,067,662
Clear Channel Communications, Inc.,
Sr Note 06-15-05 7.875 BBB- 5,170 5,429,948
Continental Cablevision, Inc.,
Sr Note 05-15-06 8.300 A 3,820 4,114,102
CSC Holdings, Inc.,
Sr Note 04-01-11 (R) 7.625 BB+ 4,605 4,471,547
Sr Sub Deb 05-15-16 10.500 BB- 2,910 3,215,550
EchoStar DBS Corp.,
Sr Note 02-01-09 9.375 B+ 1,570 1,585,700
Garden State Newspapers, Inc.,
Sr Sub Note 07-01-11 8.625 B+ 2,485 2,385,600
Lenfest Communications, Inc.,
Sr Note 11-01-05 8.375 BBB 2,685 2,874,830
Mediacom LLC/Mediacom Capital Corp.,
Sr Note Ser B 04-15-08 8.500 B+ 1,435 1,345,313
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 8.250 BBB- 1,805 1,829,873
News America, Inc.,
Gtd Note 04-30-28 7.300 BBB- 2,575 2,325,122
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) 10.000 BB+ 4,880 5,233,800
TCI Communications, Inc.,
Sr Deb 02-15-26 7.875 A 2,830 2,863,790
Time Warner, Inc.,
Deb 01-15-13 9.125 BBB+ 3,420 3,974,690
Viacom, Inc.,
Gtd Note 01-30-06 (R) 6.400 A- 2,090 2,109,897
Gtd Sr Note 01-30-06 6.400 A- 2,095 2,115,070
Gtd Sr Deb 07-30-30 7.875 A- 3,965 4,179,427
Medical 1.68% 23,237,580
Athena Neuro Finance LLC,
Gtd Sr Note 02-21-08 7.250 BBB 2,655 2,696,312
Dynacare, Inc.,
Sr Note (Canada) 01-15-06 (Y) 10.750 B+ 3,465 3,534,300
Fresenius Medical Care Capital Trust II,
Gtd Trust Preferred Security 02-01-08 7.875 B+ 3,480 3,393,000
HCA -- The Healthcare Co.,
Note 06-01-06 7.125 BB+ 3,930 3,881,268
Note 09-01-10 8.750 BB+ 1,845 1,951,087
HealthSouth Corp.,
Note 02-01-08 (R) 8.500 BBB- 2,035 2,045,175
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 10.750 B+ 3,205 3,389,288
Tenet Healthcare Corp.,
Sr Note 01-15-05 8.000 BB+ 890 918,925
Triad Hospitals, Inc.,
Gtd Sr Note 05-01-09 (R) 8.750 B- 1,390 1,428,225
Metal 0.42% 5,864,864
Newmont Mining Corp.,
Note 05-15-11 8.625 BBB 2,600 2,570,724
Phelps Dodge Corp.,
Sr Note 06-01-11 8.750 BBB 3,355 3,294,140
Mortgage Banking 5.21% 72,090,252
Commercial Mortgage Acceptance Corp.,
Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 5,403 5,532,897
ContiMortgage Home Equity Loan Trust,
Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 3,452 3,498,660
Credit Suisse First Boston Mortgage Securities Corp.,
Commercial Mtg Pass Thru Ctf Ser 1998-C1
Class A-1A 12-17-07 6.260 AAA 4,341 4,387,475
Deutsche Mortgage & Asset Receiving Corp.,
Commercial Mtg Pass Thru Ctf Ser 1998-C1
Class C 03-15-08 6.861 A2 3,585 3,563,714
FirstPlus Home Loan Trust,
Pass Thru Ctf Ser 1998-4 Class A-5 01-10-18 6.380 AAA 6,220 6,272,435
GMAC Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 1997-C2 Class A-3 11-15-07 6.566 Aaa 6,025 5,995,816
Pass Thru Ctf Ser 1998-C1 Class A-1 11-15-07 6.411 Aaa 12,820 13,039,899
LB Commercial Conduit Mortgage Trust,
Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 5,531 5,617,601
Morgan Stanley Capital I, Inc.,
Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 12,480 12,772,988
Salomon Brothers Mortgage Securities VII, Inc.,
Mtg Pass Thru Ctf Ser 1997-HUD2
Class A-2 07-25-24 6.750 Aaa 3,940 3,958,991
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-D1 Class A6 02-15-25 7.180 AAA 7,260 7,449,776
Oil & Gas 2.43% 33,571,782
Alberta Energy Co., Ltd.,
Note (Canada) 09-15-30 (Y) 8.125 BBB+ 2,850 3,096,154
Chesapeake Energy Corp.,
Sr Note 04-01-11 (R) 8.125 B+ 1,505 1,467,375
El Paso Energy Corp.,
Med Term Note 10-15-30 8.050 BBB 4,245 4,332,362
Louis Dreyfus Natural Gas Corp.,
Note 12-01-07 6.875 BBB 2,685 2,646,605
Occidental Petroleum Corp.,
Sr Deb 09-15-09 10.125 BBB- 1,080 1,292,576
Ocean Energy, Inc.,
Gtd Sr Sub Note Ser B 07-15-07 8.875 BB+ 2,220 2,355,797
Petroleum Geo-Services ASA,
Sr Note (Norway) 03-30-28 (Y) 7.125 BBB- 3,445 2,780,770
Santa Fe Snyder Corp.,
Sr Sub Note 06-15-07 8.750 BBB+ 2,575 2,744,306
Tosco Corp.,
Note 02-15-30 8.125 BBB 4,335 4,704,342
Transocean Sedco Forex, Inc.,
Note 04-15-31 (R) 7.500 A- 4,015 4,010,543
Union Pacific Resources Group, Inc.,
Deb 05-15-28 7.150 BBB+ 4,330 4,140,952
Paper & Paper Products 0.92% 12,777,080
Georgia-Pacific Corp.,
Note 05-15-31 8.875 BBB- 4,150 4,053,346
International Paper Co.,
Note 07-08-05 8.125 BBB+ 4,165 4,444,055
Stora Enso Oyj,
Sr Note 05-15-11 7.375 BBB+ 4,255 4,279,679
Real Estate Investment Trust 1.56% 21,640,277
American Health Properties, Inc.,
Note 01-15-07 7.500 BBB+ 2,350 2,305,937
Cabot Industrial Properties, L.P.,
Note 05-01-04 7.125 BBB 3,455 3,502,057
Camden Property Trust,
Note 04-15-04 7.000 BBB 3,800 3,863,992
Healthcare Realty Trust, Inc.,
Sr Note 05-01-11 8.125 BBB- 2,600 2,580,500
Liberty Property, L.P.,
Med Term Note 06-05-02 6.600 BBB 3,030 3,108,568
Mack-Cali Realty, L.P.,
Note 02-15-11 7.750 BBB 2,655 2,680,674
ProLogis Trust,
Sr Note 04-15-04 6.700 BBB+ 3,555 3,598,549
Real Estate Operations 0.12% 1,596,400
EOP Operating, L.P.,
Sr Note 02-15-05 6.625 BBB+ 1,580 1,596,400
Retail 0.82% 11,348,769
Archer-Daniels-Midland Co.,
Deb 02-01-31 7.000 A+ 3,580 3,450,010
Delhaize America Inc.,
Note 04-15-11 (R) 8.125 BBB- 3,835 3,936,551
Federated Department Stores, Inc.,
Sr Note 04-01-11 6.625 BBB+ 4,155 3,962,208
Telecommunications 4.85% 67,194,070
American Tower Corp.,
Sr Note 02-01-09 (R) 9.375 B 505 494,900
AT&T Wireless Group,
Sr Note 03-01-31 (R) 8.750 BBB 2,470 2,586,732
BellSouth Capital Funding Corp.,
Deb 02-15-30 7.875 AA- 4,210 4,506,931
Citizens Communications Co.,
Note 05-15-06 8.500 BBB 2,600 2,613,026
Note 05-15-11 9.250 BBB 2,600 2,609,282
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon (10.125%, 05-01-04)
(Canada) 05-01-09 (A) (Y) Zero B3 2,500 2,156,250
Cox Communications, Inc.,
Note 11-01-10 7.750 BBB 2,825 2,977,635
Crown Castle International Corp.,
Sr Note 05-15-11 9.000 B 1,325 1,272,000
Sr Note 08-01-11 (R) 9.375 B 780 768,300
Deutsche Telekom International Finance B.V.,
Gtd Bond (Netherlands) 06-15-05 (Y) 7.750 A- 2,375 2,490,021
Dominion Resources, Inc.,
Sr Note Ser A 06-15-10 8.125 BBB+ 4,255 4,616,675
LCI International, Inc.,
Sr Note 06-15-07 7.250 BBB+ 3,860 3,852,627
MetroNet Communications Corp.,
Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 2,430 2,648,700
NTL Communications Corp.,
Sr Note Ser B 10-01-08 11.500 B 1,770 1,433,700
Qwest Capital Funding, Inc.,
Bond 02-15-31 (R) 7.750 BBB+ 5,425 5,258,995
Telefonos de Mexico S.A. de C.V.,
Sr Note (Mexico) 01-26-06 (R) (Y) 8.250 BB+ 5,590 5,649,394
Telus Corp.,
Note 06-01-11 8.000 BBB+ 5,575 5,622,388
Time Warner Telecom, Inc.,
Sr Note 02-01-11 10.125 B- 480 465,600
Tritel PCS, Inc.,
Sr Sub Note 01-15-11 (R) 10.375 B3 675 651,375
Triton PCS, Inc.,
Sr Sub Note 02-01-11 (R) 9.375 CCC+ 1,585 1,573,113
Verizon Global Funding Corp.,
Bond 12-01-30 (R) 7.750 A+ 5,640 5,859,396
VoiceStream Wireless Corp.,
Sr Note 09-15-09 11.500 A- 2,640 3,049,200
WorldCom, Inc.,
Note 05-15-06 8.000 BBB+ 3,860 4,037,830
Transportation 4.22% 58,468,555
America West Airlines, Inc.,
Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 A- 3,313 3,243,010
Burlington Northern & Santa Fe Railway Co.,
Deb 08-15-30 7.950 BBB+ 4,255 4,480,855
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1996-C 10-15-13 9.500 BBB+ 4,188 4,641,837
Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA+ 5,307 5,163,865
Delphi Auto Systems Corp.,
Note 06-15-06 6.550 BBB 2,720 2,726,283
Delta Air Lines, Inc.,
Note 12-15-05 7.700 BBB- 3,150 3,116,515
Northwest Airlines, Inc.,
Gtd Note 03-15-04 8.375 BB 2,175 2,137,025
Gtd Note 06-01-06 8.875 BB 2,605 2,578,950
Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 BBB- 1,873 1,933,549
Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BBB- 3,376 3,471,449
NWA Trust,
Sr Note Ser A 12-21-12 9.250 AA 4,878 5,337,137
Railcar Trust No. 1992-1,
Pass Thru Ser 1992-1 Class A 06-01-04 7.750 AAA 8,642 8,959,438
US Airways, Inc.,
Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 BB- 4,349 4,479,946
United Air Lines, Inc.,
Pass Thru Ctf Ser 2000-2 Class A-1 10-01-10 7.032 AAA 3,760 3,764,596
Wisconsin Central Transportation Corp.,
Note 04-15-08 6.625 BBB- 2,525 2,434,100
Utilities 12.91% 178,762,242
AES Corp.,
Sr Note 06-01-09 9.500 BB 2,620 2,682,225
Sr Note 09-15-10 9.375 BB 1,110 1,159,950
Sr Sub Note 07-15-06 10.250 B+ 3,570 3,712,800
AES Eastern Energy,
Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 3,700 3,732,042
Beaver Valley Funding Corp.,
Sec Lease Oblig Bond 06-01-17 9.000 BB- 3,960 4,143,150
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 8.890 BB- 6,600 6,930,000
Calpine Canada Energy Finance ULC,
Gtd Sr Note 05-01-08 8.500 BB+ 2,610 2,559,635
Calpine Corp.,
Sr Note 08-15-05 8.250 BB+ 1,685 1,677,628
Sr Note 05-15-06 10.500 BB+ 4,650 4,882,500
Sr Note 02-15-11 8.500 BB+ 2,585 2,563,622
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 9.500 BB+ 10,220 10,539,375
CMS Energy Corp.,
Sr Note 10-15-07 9.875 BB 1,160 1,223,800
Sr Note 04-15-11 8.500 BB 550 551,501
Sr Note Ser B 01-15-04 6.750 BB 3,595 3,451,200
EIP Funding-PNM,
Sec Fac Bond 10-01-12 10.250 BBB- 8,473 9,256,752
GG1B Funding Corp.,
Deb 01-15-11 7.430 BBB- 3,288 3,346,022
HQI Tanselec Chile SA,
Sr Note (Chile) 04-15-11 (R) (Y) 7.875 A- 4,075 3,986,491
Hydro-Quebec,
Gtd Deb Ser FU (Canada) 02-01-12 (Y) 11.750 A+ 5,000 6,931,250
Gtd Deb Ser IF (Canada) 02-01-03 (Y) 7.375 A+ 7,185 7,486,986
Iberdrola International B.V.,
Note 10-01-02 7.500 AA- 8,000 8,278,240
Sr Note (Netherlands) 06-01-03 (R) (Y) 7.125 AA- 8,629 8,946,547
KeySpan Corp.,
Sr Note 11-15-30 8.000 A 2,695 2,905,372
Long Island Lighting Co.,
Deb 03-15-23 8.200 A- 5,615 5,720,281
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.750 BB+ 7,545 8,374,950
Deb Ser B 07-23-06 13.250 BB+ 1,900 2,223,000
Mirant Americas Generation, Inc.,
Sr Note 05-01-11 (R) 8.300 BBB- 3,160 3,175,768
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 1,191 1,197,016
Niagara Mohawk Power Corp.,
Sec Fac Deb Bond 01-01-18 8.770 BBB 6,847 7,113,485
NiSource Finance Corp.,
Gtd Note 11-15-10 7.875 BBB 3,180 3,357,508
North Atlantic Energy Corp.,
1st Mtg Ser A 06-01-02 9.050 BBB 2,351 2,416,993
Northeast Utilities,
Note Ser A 12-01-06 8.580 BBB 911 942,106
NRG Energy, Inc.,
Sr Note 04-01-11 7.750 BBB- 2,725 2,747,972
PECO Energy Transition Trust,
Pass Thru Ctf Ser 1999-A Class A-6 03-01-09 6.050 AAA 4,511 4,527,646
Pinnacle Partners,
Sr Note 08-15-04 (R) 8.830 BBB- 3,830 3,858,422
Pinnacle West Capital Corp.,
Sr Note 04-01-06 6.400 BBB 3,810 3,726,828
PNPP II Funding Corp.,
Deb 05-30-16 9.120 BB- 4,120 4,346,806
PSEG Energy Holdings, Inc.,
Sr Note 02-15-08 (R) 8.625 BBB- 2,685 2,626,252
Sierra Pacific Resources,
Note 05-15-05 8.750 BBB- 1,835 1,838,633
System Energy Resources, Inc.,
1st Mtg 08-01-01 7.710 BBB- 5,525 5,541,907
TXU Electric Capital V,
Gtd Note 01-01-37 8.175 BBB- 2,930 2,855,812
Waterford 3 Funding Corp.,
Sec Lease Oblig Bond 01-02-17 8.090 BBB- 7,133 7,302,529
Xcel Energy, Inc.,
Sr Note 12-01-10 7.000 BBB+ 3,985 3,921,240
Waste Disposal Service & Equipment 0.10% 1,417,547
Waste Management, Inc.,
Sr Note 08-01-10 7.375 BBB 1,415 1,417,547
NUMBER OF
SHARES OR
WARRANTS VALUE
PREFERRED STOCKS AND WARRANTS 1.15% $15,955,782
(Cost $15,155,138)
California Federal Preferred Capital Corp., 9.125%,
Ser A, Preferred Stock 327,190 8,294,267
CSC Holdings, Inc., 11.125% Ser M, Preferred Stock 56,373 6,179,890
CSC Holdings, Inc., 11.750%, Ser H, Preferred Stock 9,475 1,042,250
MetroNet Communications Corp., Warrant (Canada) (R) (Y) 4,625 439,375
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
SHORT-TERM INVESTMENTS 6.85% $94,836,000
(Cost $94,836,000)
Joint Repurchase Agreement 6.85%
Investment in a joint repurchase agreement
transaction with Barclays Capital, Inc.
-- Dated 05-31-01, due 06-01-01
(Secured by U.S. Treasury Note
3.625%, due 01-15-08) 4.060% $94,836 94,836,000
TOTAL INVESTMENTS 100.08% $1,385,496,898
OTHER ASSETS AND LIABILITIES, NET (0.08%) ($1,202,978)
TOTAL NET ASSETS 100.00% $1,384,293,920
(A) Cash interest will be paid on this obligation at the stated rate
beginning on the stated date.
(R) These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $190,883,696, or 13.79%
of net assets as of 5-31-01.
(Y) Parenthetical disclosure of a foreign country in the security
description represents country of a foreign issuer.
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investor Services or John Hancock Advisers, Inc.
where Standard & Poor's ratings are not available.
** A portion of these securities having an aggregate value of
$16,594,500, or 1.20% of the Fund's net assets, has been purchased as
forward commitments -- that is, the Fund has agreed on trade date to
take delivery of and to make payment for this security on a delayed
basis subsequent to the date of this schedule. The purchase price and
interest rate of these securities are 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. Accordingly, the market value of $17,011,491 of United
States Treasury Note, 7.500%, 2-15-05, has been segregated to cover the
forward commitment.
*** A portion of this security having an aggregate value of $4,124,663,
or 0.30% of the Fund's net assets, has been purchased on a when-issued
basis. The purchase price and the interest rate of this security is
fixed at trade date, although the Fund does not earn any interest on
this security until settlement date. The Fund has instructed its
custodian bank to segregate assets with a current value at least equal
to the amount of its when-issued commitment. Accordingly, the market
value of $4,185,800 of United States Treasury Note, 7.500%, 02-15-05,
has been segregated to cover the when-issued commitment.
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
May 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 $1,383,410,692) $1,385,496,898
Cash 110
Receivable for investments sold 20,747,741
Receivable for shares sold 1,164,330
Dividends and interest receivable 21,586,776
Other assets 164,389
Total assets 1,429,160,244
LIABILITIES
Payable for investments purchased 43,420,826
Payable for shares repurchased 178,354
Payable to affiliates 995,835
Other payables and accrued expenses 271,309
Total liabilities 44,866,324
NET ASSETS
Capital paid-in 1,443,711,478
Accumulated net realized loss on investments (61,396,037)
Net unrealized appreciation of investments 2,057,637
Distributions in excess of net investment income (79,158)
Net assets $1,384,293,920
NET ASSET VALUE PER SHARE
Based on net asset values and shares outstanding
Class A ($1,140,440,995 [DIV] 77,625,186 shares) $14.69
Class B ($217,972,871 [DIV] 14,836,528 shares) $14.69
Class C ($25,880,054 [DIV] 1,761,550 shares) $14.69
MAXIMUM OFFERING PRICE PER SHARE
Class A1 ($14.69 [DIV] 95.5%) $15.38
Class C ($14.69 [DIV] 99%) $14.84
1 On single retail sales of less than $100,000. On sales of $100,000 or
more and on group sales the offering price is reduced.
See notes to
financial statements.
OPERATIONS
For the year ended
May 31, 2001.
This Statement
of Operations
summarizes the
Fund's investment
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 $192,917) $99,845,218
Dividends 1,459,094
Total investment income 101,304,312
EXPENSES
Investment management fee 6,760,696
Class A distribution and service fee 3,378,701
Class B distribution and service fee 1,971,426
Class C distribution and service fee 212,760
Transfer agent fee 3,406,505
Custodian fee 275,486
Accounting and legal services fee 262,846
Trustees' fees 87,329
Registration and filing fees 78,425
Miscellaneous 73,403
Printing 61,525
Auditing fee 42,039
Legal fees 9,173
Total expenses 16,620,314
Net investment income 84,683,998
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on
Investments 5,040,798
Financial futures contracts (8,795)
Change in unrealized appreciation on
investments 65,332,336
Net realized and unrealized gain 70,364,339
Increase in net assets from operations $155,048,337
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 difference
reflects earnings
less expenses,
any investment
gains and losses,
distributions paid to
shareholders and
any increase or
decrease in money
shareholders
invested in the
Fund.
YEAR YEAR
ENDED ENDED
5-31-00 5-31-01
INCREASE (DECREASE) IN NET ASSETS
From operations
Net investment income $94,785,969 $84,683,998
Net realized gain (loss) (41,120,589) 5,032,003
Change in net unrealized
appreciation (depreciation) (42,640,839) 65,332,336
Increase in net assets
resulting from operations 11,024,541 155,048,337
Distributions to shareholders
From net investment income
Class A (80,052,771) (71,799,469)
Class B (13,337,325) (11,680,442)
Class C (1,395,873) (1,204,086)
(94,785,969) (84,683,997)
From fund share transactions (135,698,460) (5,151,356)
NET ASSETS
Beginning of period 1,538,540,824 1,319,080,936
End of period 1 $1,319,080,936 $1,384,293,920
1 Includes distributions in excess of net investment income of $91,031
and $79,158, 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 12-31-96 5-31-97 1 5-31-98 5-31-99 5-31-00 5-31-01
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93
Net investment income 1.09 0.44 1.05 2 0.97 2 0.96 2 0.92 2
Net realized and unrealized
gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76
Total from investment
operations 0.59 0.32 1.52 0.48 0.13 1.68
Less distributions
From net investment income (1.09) (0.44) (1.05) (0.97) (0.96) (0.92)
Net asset value,
end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69
Total return 3 (%) 4.11 2.224 10.54 3.11 0.97 12.38
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $1,416 $1,362 $1,328 $1,279 $1,098 $1,140
Ratio of expenses
to average net assets (%) 1.14 1.11 5 1.08 1.07 1.11 1.12
Ratio of net investment income
to average net assets (%) 7.32 7.38 5 6.90 6.35 6.69 6.38
Portfolio turnover (%) 123 58 198 228 162 235
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
CLASS B SHARES
PERIOD ENDED 12-31-96 5-31-97 1 5-31-98 5-31-99 5-31-00 5-31-01
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93
Net investment income 0.98 0.40 0.95 2 0.86 2 0.86 2 0.83 2
Net realized and unrealized
gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76
Total from investment
operations 0.48 0.28 1.42 0.37 0.03 1.59
Less distributions
From net investment income (0.98) (0.40) (0.95) (0.86) (0.86) (0.83)
Net asset value,
end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69
Total return 3 (%) 3.38 1.93 4 9.78 2.39 0.27 11.64
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $134 $133 $166 $239 $197 $218
Ratio of expenses
to average net assets (%) 1.84 1.81 5 1.78 1.77 1.81 1.78
Ratio of net investment income
to average net assets (%) 6.62 6.68 5 6.18 5.65 6.00 5.71
Portfolio turnover (%) 123 58 198 228 162 235
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
CLASS C SHARES
PERIOD ENDED 5-31-99 6 5-31-00 5-31-01
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $15.61 $14.76 $13.93
Net investment income 2 0.55 0.85 0.82
Net realized and unrealized
gain (loss) on investments (0.85) (0.83) 0.76
Total from investment
operations (0.30) 0.02 1.58
Less distributions
From net investment income (0.55) (0.85) (0.82)
Net asset value,
end of period $14.76 $13.93 $14.69
Total return 3 (%) 1.95 4 0.28 11.60
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $21 $24 $26
Ratio of expenses
to average net assets (%) 1.77 5 1.80 1.82
Ratio of net investment income
to average net assets (%) 5.65 5 6.01 5.66
Portfolio turnover (%) 228 162 235
1 Effective 5-31-97, the fiscal year end changed from December 31 to May 31.
2 Based on the average of the shares outstanding at the end of each month.
3 Assumes dividend reinvestment and does not reflect the effect of sales
charges.
4 Not annualized.
5 Annualized.
6 Class C shares began operations on 10-1-98.
See notes to
financial statements.
NOTES TO
STATEMENTS
NOTE A
Accounting policies
John Hancock Bond Fund (the "Fund") is a diversified series of John
Hancock Sovereign Bond Fund, an open-end management investment company
registered under the Investment Company Act of 1940. The investment
objective of the Fund is to generate a high level of current income,
consistent with prudent investment risk, through investment in a
diversified portfolio of freely marketable debt securities.
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
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 which 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, 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. Some securities may be
purchased on a "when-issued" or "forward delivery" basis, which means
that the securities will be delivered to the Fund at 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.
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 Fund had no
borrowing activity under the line of credit during the year ended May
31, 2001.
Securities lending
The Fund may lend its 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 May 31, 2001, the Fund loaned securities having a market
value of $236,200,000, collateralized by securities in the amount of
$240,993,626.
Financial futures contracts
The Fund may buy and sell financial futures contracts. Buying futures
tends to increase the Fund's exposure to the underlying instrument.
Selling futures tends to decrease the Fund's exposure to the underlying
instrument or hedge other Fund instruments. At the time the Fund enters
into a financial futures contract, it is required to deposit with its
custodian a specified amount of cash or U.S. government securities,
known as "initial margin," equal to a certain percentage of the value of
the financial futures contract being traded. Each day, the futures
contract is valued at the official settlement price of the board of
trade or U.S. commodities exchange on which it trades. Subsequent
payments to and from the broker, known as "variation margin," are made
on a daily basis as the market price of the financial futures contract
fluctuates. Daily variation margin adjustments, arising from this "mark
to market," are recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks
of entering into futures contracts include the possibility that there
may be an illiquid market and/or that a change in the value of the
contracts may not correlate with changes in the value of the underlying
securities. In addition, the Fund could be prevented from opening or
realizing the benefits of closing out futures positions because of
position limits or limits on daily price fluctuation imposed by an
exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures
contracts.
The Fund had no open financial futures contracts at May 31, 2001.
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, the Fund has $55,393,254 of capital
loss carryforwards available, to the extent provided by regulations, to
offset future net realized capital gains. To the extent such
carryforwards are used by the Fund, no capital gain distribution will be
made. The Fund's carryforwards expire as follows: May 31, 2002 --
$9,347,493, May 31, 2004 -- $8,402,805, May 31, 2005 -- $1,183,431, May
31, 2007 -- $619,870, May 31, 2008 -- $15,467,220 and May 31, 2009 --
$20,372,435. Availability of a certain amount of loss carryforwards,
which were acquired on September 15, 1995 in a merger, may be limited in
a given year. Additionally, net capital losses of $5,279,008 are
attributable to security transactions incurred after October 31, 2000
are treated as arising on the first day (June 1, 2001) of the Fund's
next taxable year.
Dividends, interest and distributions
Dividend income on investment securities is recorded on the ex-dividend
date. Interest income on investment securities is recorded on the
accrual basis.
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 generally accepted accounting principles. 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 equivalent, on an annual basis, to the sum of: (a)
0.50% of the first $1,500,000,000 of the Fund's average daily net asset
value, (b) 0.45% of the next $500,000,000, (c) 0.40% of the next
$500,000,000 and (d) 0.35% of the Fund's average daily net asset value
in excess of $2,500,000,000.
The Fund has Distribution Plans with John Hancock Funds, Inc. ("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, to reimburse JH Funds for its
distribution and service costs. 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 May 31, 2001, JH Funds received net up-front sales
charges of $1,043,537 with regard to sales of Class A shares. Of this
amount, $105,641 was retained and used for printing prospectuses,
advertising, sales literature and other purposes, $479,481 was paid as
sales commissions to unrelated broker-dealers and $458,415 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 May 31,
2001, JH Funds received net up-front sales charges of $167,416 with
regard to sales of Class C shares. Of this amount, $163,582 was paid as
sales commissions to unrelated broker-dealers and $3,834 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 May 31, 2001, CDSCs
received by JH Funds amounted to $527,296 for Class B shares and $8,555
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 monthly
transfer agent fees based on the number of shareholder accounts and
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 officers
of the Adviser and 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 Compen-sation Plan investments had no impact on the operations
of the Fund.
NOTE C
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
May 31, 2001, aggregated $2,047,870,666 and $1,957,083,829,
respectively. Purchases and proceeds from sales of obligations of the
U.S. government, during the year ended May 31, 2001, aggregated
$962,006,177 and $1,074,143,371, respectively.
The cost of investments owned at May 31, 2001 (including short-term
investments) for federal income tax purposes was $1,384,094,460. Gross
unrealized appreciation and depreciation of investments aggregated
$22,816,165 and $21,413,727, respectively, resulting in net unrealized
appreciation of $1,402,438.
NOTE D
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 5-31-00 YEAR ENDED 5-31-01
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Sold 16,180,316 $230,911,081 20,329,913 $292,695,235
Distributions reinvested 4,427,262 63,104,859 3,885,469 56,285,950
Repurchased (28,432,224) (405,098,642) (25,386,067) (365,444,508)
Net decrease (7,824,646) ($111,082,702) (1,170,685) ($16,463,323)
CLASS B SHARES
Sold 3,416,464 $49,024,555 4,030,445 $58,808,128
Distributions reinvested 554,800 7,907,679 438,799 6,362,603
Repurchased (5,984,221) (85,404,315) (3,783,675) (54,786,515)
Net increase (decrease) (2,012,957) ($28,472,081) 685,569 $10,384,216
CLASS C SHARES
Sold 586,098 $8,361,864 1,373,262 $19,986,436
Distributions reinvested 78,808 1,122,359 43,807 633,249
Repurchased (397,387) (5,627,900) (1,370,639) (19,691,934)
Net increase 267,519 $3,856,323 46,430 $927,751
NET DECREASE (9,570,084) ($135,698,460) (438,686) ($5,151,356)
NOTE E
Reclassification of accounts
During the year ended May 31, 2001, the Fund has reclassified amounts to
reflect a decrease in net realized loss on investments of $4,066,817, a
decrease in distributions in excess of net investment income of $11,872,
and a decrease in capital paid-in of $4,078,689. This represents the
amount necessary to report these balances on a tax basis, excluding
certain temporary difference, as of May 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 certain differences in computation of distributable
income and capital gains under federal tax rules versus generally
accepted accounting principles. The calculation of net investment income
(loss) per share in the financial highlights excludes these adjustments.
NOTE F
Change in accounting principle
The Fund will adopt 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 Fund will begin
amortizing premiums on debt securities effective June 1, 2001. Prior to
this date, the Fund 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 Fund but will result in a reduction in the cost
of the investments and a corresponding increase in unrealized
appreciation on investments, estimated at $8,529,110 based on securities
held as of May 31, 2001.
AUDITORS'
REPORT
Report of
Ernst & Young
LLP, Independent
Auditors
To the Board of Trustees and Shareholders of
John Hancock Bond Fund of
John Hancock Sovereign Bond Fund
We have audited the accompanying statement of assets and liabilities of
the John Hancock Bond Fund (the "Fund"), one of the portfolios
constituting the John Hancock Sovereign Bond Fund, including the
schedule of investments, as of May 31, 2001, the related statement 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 periods indicated therein. 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. Our
procedures included confirmation of securities owned as of May 31, 2001,
by correspondence with the custodian and brokers, or 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 Bond Fund of the John Hancock
Sovereign Bond Fund at May 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 indicated periods, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
July 9, 2001
TAX
INFORMATION
Unaudited.
For federal income tax purposes, the following information is furnished
with respect to the dividends of the Fund paid during its taxable year
ended May 31, 2001.
With respect to the ordinary dividends paid by the Fund for the fiscal
year ended May 31, 2001, 1.72% of the dividends qualify for the
dividends received deduction.
Shareholders will be mailed a 2001 U.S. Treasury Department Form
1099-DIV in January 2001. This will reflect the total of all
distributions which are taxable for calendar year 2001.
FOR YOUR
INFORMATION
TRUSTEES
Dennis S. Aronowitz*
Richard P. Chapman, Jr.
William J. Cosgrove*
John M. DeCiccio
Richard A. Farrell*
Maureen R. Ford
Gail D. Fosler
William F. Glavin
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
*Members of the 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
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
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
This report is for the information of the shareholders of the John
Hancock Bond Fund.
2100A 5/01
7/01
John Hancock
Bond
Fund
SEMI
ANNUAL
REPORT
11.30.01
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 20
For your information
page 33
Dear Fellow Shareholders,
The U.S. stock market has had a very difficult time in 2001, as the
economy has slowed to a standstill and the parade of corporate earnings
disappointments has continued. The Federal Reserve aggressively began to
attack the economic slowdown, cutting short-term interest rates
throughout the year. However, the moves had little effect and the market
remained in turmoil as investors tried to get a clearer timetable for
economic and corporate recovery.
Then on September 11, 2001, a terrorist attack of unspeakable magnitude
was launched on the United States, shocking the world, sending markets
worldwide into a short-term free fall and pushing the already fragile
U.S. economy into recession. As a result, the Standard & Poor's 500
Index, a leading benchmark of large-cap stocks, lost 12.64% year-to-date
through November. Bonds have outperformed stocks overall, producing
mostly positive results, as they were the beneficiaries of the rate cuts
and investors' search for safety.
Apart from the immediate impact of devastating human loss, the tragic
events of September 11 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
YOUR FUND
AT A GLANCE
The Fund seeks
a high level of
current income
consistent with
prudent invest
ment risk by
investing in a
diversified
portfolio of bonds
and other debt
securities, includ
ing corporate
bonds and U.S.
government and
agency securities.
Over the last six months
* The September 11 attacks adversely affected the economy, investor
confidence and corporate bonds.
* The Federal Reserve Board continued to aggressively cut rates.
* Bonds outperformed stocks, producing positive results as rates fell
and investors looked for safer havens.
[Bar chart with heading "John Hancock Bond Fund." Under the heading is
a note that reads "Fund performance for the six months ended November
30, 2001." The chart is scaled in increments of 1% with 0% at the
bottom and 5% at the top. The first bar represents the 4.80% total
return for Class A. The second bar represents the 4.44% total return
for Class B. The third bar represents the 4.43% total return for Class
C. The fourth bar represents the 1.51%* total return for Class I. A
note below the chart reads "Total returns for the Fund are at net
asset value with all distributions reinvested. * From inception
September 4, 2001 to November 30, 2001."]
Top 10 issuers
17.5% United States Treasury
8.1% Government National Mortgage Assn.
5.5% Federal National Mortgage Assn.
1.2% Iberdrola International B.V.
1.0% Hydro-Quebec
0.9% Morgan Stanley Capital I, Inc.
0.9% Morgan Stanley Dean Witter Capital I Trust
0.8% Scotland International Finance No. 2, B.V.
0.8% RBSG Capital Corp.
0.8% GMAC Commercial Mortgage Securities, Inc.
As a percentage of net assets on November 30, 2001.
MANAGERS'
REPORT
BY JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND
BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER
John Hancock
Bond Fund
During the past six months the broad fixed-income market and John
Hancock Bond Fund enjoyed positive results. A souring economy and
aggressive interest-rate cuts by the Federal Reserve Board helped
domestic bond sectors, especially ultra-safe Treasury bonds, outperform
stocks. There did, however, exist pockets of pressure within the
corporate sector overall, particularly within the high-yield arena in
the telecommunications and technology sectors, especially in the
aftermath of the September 11 tragedy.
FUND PERFORMANCE
For the six months ended November 30, 2001, John Hancock Bond Fund
posted total returns of 4.80%, 4.44%, and 4.43% at net asset value for
Class A, Class B and Class C shares, respectively. By comparison, the
average corporate debt A-rated fund returned 5.10%, according to Lipper,
Inc.1 Class I shares, which were launched on September 4, 2001, returned
1.51% at net asset value from inception through November 30, 2001. 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. Longer-term performance
information can be found on pages six and seven.
"...the broad fixed-income
market and John Hancock
Bond Fund enjoyed
positive results."
THE INVESTMENT ENVIRONMENT PRIOR TO 9/11
The Fund began the period in June in the midst of the corporate earnings
announcement season, which caused credit spreads to widen, as investors
worried about the impact of the slowing economy on corporate earnings.
(A credit spread is the difference in yield between bonds of different
credit quality.) As a result, higher-quality issues outperformed
lower-quality securities. When the second quarter's numbers were
finalized, the risk factor diminished, as investors' worst fears were
somewhat allayed, and corporate bonds in general began outperforming
Treasury bonds. However, many companies, particularly those in the
telecommunications, technology and so-called "new economy" sectors were
experiencing financial distress. This, in turn, caused defaults to rise
and several companies to shutter their operations, casting a shadow
across the high-yield sector, dragging overall high-yield bond prices
down.
[A photo of Team leader Jim Ho flush right next to first paragraph.]
In order to jump-start the faltering economy, the Federal Reserve Board
remained aggressive in cutting interest rates -- so much so that we
believed yields on Treasury securities did not have much more room to
fall. Thus, in the spring and summer we kept the Fund's interest-rate
sensitivity, or duration, relatively short. The shorter the duration,
the less price volatility a portfolio experiences when interest rates
rise and prices fall.
"By applying in-depth credit
analysis, we were able to
avoid many of the credit
blowups over the period."
In this difficult environment, we trimmed the Fund's overall high-yield
exposure because of the uncertainty in that sector, while simultaneously
and selectively targeting more cyclically oriented issuers that stand to
perform well once the economy gathers steam. We also increased the
Fund's stake in investment-grade corporate bonds, adding to or newly
purchasing issues on price dips. These include Deutsche Telekom,
Verizon, BellSouth, Burlington Northern and Ford.
THE EFFECTS OF THE TRAGEDIES
Immediately following the events of September 11, corporate bonds
swooned and prospects for economic recovery were pushed back, as the
economy slipped into recession. The Fed intervened aggressively to
provide liquidity and investors fled to the relative safety of Treasury
and agency securities, pushing their yields even lower and their prices
higher. By late October, however, the negative sentiment appeared a bit
overdone and corporate bond prices rose. By November's end, the Fed had
cut interest rates ten times in 2001, bringing the fed funds rate that
banks charge each other for overnight loans to 2.0% -- a 40-year low. At
this time last year, the rate stood at 6.5%.
[Table at top left-hand side of page entitled "Top five sectors." The
first listing is U.S. government 17%, the second is U.S. government
agencies 14%, the third Utilities 12%, the fourth Finance 7%, and the
fifth Mortgage banking 6%.]
FUND POSITIONING POST SEPTEMBER 11
Certain sectors were hit harder than others in the immediate aftermath
of the attacks. The airline, transportation, travel and leisure
industries suffered the most. Inasmuch as we could, we decreased the
Fund's exposure to such areas as unsecured airline debt. We also
lengthened the portfolio's average duration a bit and emphasized
intermediate-term government securities, which involved increasing the
Fund's exposure to mortgage-backed issues. We also further added to, or
initiated purchases in, such higher-grade holdings as Ford, AT&T
Wireless, Singapore Telephone, Amerada Hess and Apache Corp. And we
moved out of some cyclical issues, such as Georgia Pacific, when prices
bounced in November.
[Pie chart at bottom of page with heading "Portfolio diversification
as a percentage of net assets on 11-30-01." The chart is divided into
five sections (from top to left): Corporate bonds 62%, U.S. government
bonds 32%, Short-term investments & other 3%, Foreign government bonds
2% and Preferred stock 1%.]
[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 El
Paso Corporation followed by a down arrow with the phrase "Adversely
affected by fallout from Enron." The second listing is AT&T Wireless
followed by an up arrow with the phrase "Increased demand for wireless
technology." The third listing is Lockheed Martin followed by an up
arrow with the phrase "Increase in defense spending."]
DISCIPLINED RESEARCH PAYS OFF
The economic downturn posed problems for many issuers. By applying
in-depth credit analysis, we were able to avoid many of the credit
blowups over the period. For example, while many investors suffered
losses from collateralized debt obligations, we avoided this volatile,
esoteric subsector altogether. We also paid attention to early warning
signs within the utility industry and reduced exposure to issuers that
would suffer price losses in sympathy with Enron. We were able to pare
or eliminate such holdings as Enron, Mirant Americas Generation, NRG and
other generating companies before the brunt of their price declines was
realized. Research also prompted us to increase exposure to defense
issuer Lockheed Martin. The firm recently was awarded a Pentagon
contract to build the next generation of fighter jets.
"Currently, corporate bonds
represent good value and
cyclically oriented issues
may garner our increased
attention..."
OUTLOOK
The Fed's commitment to jump-starting the economy, plus the fiscal
stimulus package being discussed in Washington, should help boost
economic growth some time next year. In turn, corporate credit quality
should improve. Currently, corporate bonds represent good value and
cyclically oriented issues may garner our increased attention in the
months ahead.
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
November 30, 2001
The index used for
comparison is the
Lehman Brothers
Credit Bond Index, an
unmanaged index that
mirrors the investment
objectives and charac-
teristics of the Fund.
It is not possible to
invest in an index.
Class A Class B Class C Class I 1 Index
Inception date 11-9-73 11-23-93 10-1-98 9-4-01 --
Average annual returns with maximum sales charge (POP)
One year 5.22% 4.43% 7.30% -- 12.64%
Five years 5.60% 5.53% -- -- 7.07%
Ten years 7.07% -- -- -- 7.75%
Since inception -- 6.01% 4.06% 1.51% 2 --
Cumulative total returns with maximum sales charge (POP)
Six months 0.10% --0.56% 2.39% -- 5.66%
One year 5.22% 4.43% 7.30% -- 12.64%
Five years 31.35% 30.89% -- -- 40.73%
Ten years 98.09% -- -- -- 110.94%
Since inception -- 59.64% 13.43% 1.51% --
SEC 30-day yield as of November 30, 2001
4.84% 4.36% 4.31% 5.60% --
Performance figures assume all distributions are reinvested. Returns
with maximum sales charge reflect a sales charge on Class A shares of
4.5% 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 one year or less 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.
1 For certain types of investors as described in the Fund's prospectus
for Class I shares.
2 Not annualized.
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 Lehman Brothers Credit Bond 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
$21,094 as of November 30, 2001. The second line represents the value
of the hypothetical $10,000 investment made in the John Hancock Bond
Fund, before sales charge, and is equal to $20,736 as of November 30,
2001. The third bar represents the same hypothetical $10,000
investment made in the John Hancock Bond Fund, after sales charge, and
is equal to $19,802 as of November 30, 2001.
Class B 1 Class C 1 Class I 2
Inception date 11-23-93 10-1-98 9-4-01
Without sales charge $15,964 $11,460 $9,936
With maximum sales charge -- $11,345 --
Index $17,223 $12,161 $10,162
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, Class C and Class I shares, respectively, as of November 30, 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.
2 For certain types of investors as described in the Fund's prospectus
for Class I shares.
FUND'S
INVESTMENTS
Securities owned
by the Fund on
November 30, 2001
(unaudited).
This schedule is divided into three main categories: bonds, preferred
stocks and warrants, and short-term investments. The bonds are further
broken down by industry group. Short-term investments, which represent
the Fund's cash position, are listed last.
ISSUER, DESCRIPTION, INTEREST CREDIT PAR VALUE
MATURITY DATE RATE RATING** (000s OMITTED) VALUE
BONDS 95.37% $1,385,000,816
(Cost $1,356,629,033)
Aerospace 1.19% $17,357,955
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R) 10.910% BB- $5,800 5,220,000
Lockheed Martin Corp.,
Bond 12-01-29 8.500 BBB- 5,595 6,726,029
Systems 2001 Asset Trust LLC,
Pass Thru Cert 12-15-11 (R) 7.156 A 5,224 5,411,926
Agricultural Operations 0.55% 7,983,235
Cargill, Inc.,
Note 05-01-06 (R) 6.250 A+ 3,050 3,137,596
Potash Corp.,
Note (Canada) 05-31-11 (Y) 7.750 BBB+ 4,485 4,845,639
Automobiles/Trucks 1.33% 19,368,025
DaimlerChrysler Auto Trust,
Pass Thru Ctf Ser 2000-E Class A-4 01-08-06 6.160 AAA 6,955 7,330,570
Delphi Automotive Systems Corp.,
Note 06-15-06 6.550 BBB 2,450 2,440,666
ERAC USA Finance Co.,
Note 02-15-05 (R) 6.625 BBB+ 1,440 1,450,310
Note 06-15-08 (R) 7.350 BBB+ 2,600 2,635,750
Note 12-15-09 (R) 7.950 BBB+ 2,675 2,778,870
Ford Motor Co.,
Note 07-16-31 7.450 BBB+ 2,890 2,731,859
Banks -- Foreign 3.58% 51,942,484
Abbey National First Capital, B.V.,
Sub Note (United Kingdom) 10-15-04 (Y) 8.200 AA- 10,000 10,952,000
African Development Bank,
Sub Note (Supra National) 12-15-03 (Y) 9.750 AA- 8,000 8,914,480
Barclays Bank Plc,
Perpetual Bond (7.375% to 12-15-11 then variable)
(United Kingdom) 06-29-49 (R) (Y) 7.375 A+ 3,455 3,638,599
International Bank for Reconstruction & Development,
Deb (Supra National) 09-01-16 (Y) 8.250 AAA 5,000 6,204,250
Royal Bank of Scotland Group Plc,
Bond (United Kingdom) 03-31-49 (Y) 8.817 A- 3,130 3,429,197
Perpetual Bond (7.648% to 09-30-31 then variable)
(United Kingdom) 08-31-49 (R) (Y) 7.648 A- 3,505 3,565,882
Scotland International Finance No. 2, B.V.,
Gtd Sub Note (Netherlands) 11-01-06 (R) (Y) 8.850 AA- 10,335 11,998,522
Skandinaviska Enskilda,
Perpetual Bond (6.50% to 6-04-03 then variable)
(Sweden) 12-29-49 (R) (Y) 6.500 BBB 3,150 3,239,554
Banks -- United States 2.57% 37,342,249
Bank of New York,
Cap Security 12-01-26 (R) 7.780 A- 5,750 5,985,060
BNP Paribas Capital Trust,
Perpetual Bond (9.003% to 10-27-10 then variable)
12-27-49 (R) 9.003 A 2,705 3,107,315
Colonial Bank,
Sub Note 06-01-11 9.375 BBB- 2,595 2,775,067
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 10.125 A 10,605 11,958,304
UBS Preferred Funding Trust I,
Perpetual Bond (8.622% to 10-01-10 then variable)
10-01-49 8.622 AA- 2,870 2,911,328
Wells Fargo Bank N.A.,
Sub Note 02-01-11 6.450 A+ 3,855 3,987,535
Zions Bancorp,
Note 10-15-11 (R) 6.500 BBB- 2,825 2,802,400
Zions Financial Corp.,
Gtd Note 05-15-11 6.950 BBB- 3,770 3,815,240
Beverages 0.29% 4,160,700
Canandaigua Brands, Inc.,
Sr Sub Note Ser C 12-15-03 8.750 B+ 4,140 4,160,700
Broker Services 0.45% 6,589,010
Goldman Sachs Group, Inc.,
Bond 01-15-11 6.875 A+ 3,880 4,004,160
Salomon Smith Barney Holdings, Inc.,
Note 03-15-06 5.875 AA- 2,500 2,584,850
Building 0.14% 1,992,000
Vulcan Materials Co.,
Note 02-01-06 6.400 A+ 1,920 1,992,000
Business Services -- Misc. 0.37% 5,313,600
Cendant Corp.,
Note 08-15-06 (R) 6.875 BBB 5,535 5,313,600
Chemicals 0.57% 8,258,061
Akzo Nobel, Inc.,
Bond 11-15-03 (R) 6.000 A- 2,860 2,972,941
Equistar Chemicals, L.P./Equistar Funding Corp.,
Sr Note 02-15-04 8.500 BBB- 2,785 2,685,770
Nova Chemicals Corp.,
Sr Note (Canada) 05-15-06 (Y) 7.000 BBB 2,795 2,599,350
Computers 0.09% 1,264,900
Sabre Holdings Corp.,
Note 08-01-11 7.350 BBB+ 1,390 1,264,900
Cosmetics & Personal Care 0.19% 2,723,814
International Flavors & Fragrance, Inc.,
Note 05-15-06 6.450 BBB+ 2,700 2,723,814
Electronics 0.29% 4,199,084
HQI Transelect Chile SA,
Sr Note (Chile) 04-15-11 (Y) 7.875 A- 4,075 4,199,084
Energy 0.57% 8,303,031
MidAmerican Energy Holdings,
Sr Bond 09-15-28 8.480 BBB- 4,275 4,781,331
P&L Coal Holdings Corp.,
Gtd Sr Sub Note Ser B 05-15-08 9.625 B+ 3,276 3,521,700
Finance 6.75% 98,065,543
American Express Credit Account Master Trust,
Pass Thru Ctf Ser 2000-1 Class A 09-15-07 7.200 AAA 6,940 7,575,426
Bombardier Capital, Inc.,
Note 01-15-02 (R) 6.000 A- 4,675 4,683,882
Citigroup, Inc.,
Note 01-18-11 6.500 AA- 2,665 2,775,171
Ford Motor Credit Co.,
Note 02-01-06 6.875 BBB+ 3,650 3,757,164
Note 10-25-11 7.250 BBB+ 5,805 5,904,254
General Motors Acceptance Corp.,
Note 07-15-05 7.500 BBB+ 4,025 4,229,752
Note 03-02-11 7.250 BBB+ 4,145 4,223,838
Household Finance Corp.,
Note 07-15-10 8.000 A 2,680 3,013,338
Sr Note 05-09-05 8.000 A 5,165 5,636,771
HSBC Capital Funding, L.P.,
Perpetual Note (9.547% to 06-30-10 then variable)
(Channel Islands) 12-31-49 (R) (Y) 9.547 A- 3,430 4,033,680
Humpuss Funding Corp.,
Gtd Note 12-15-09 (R) 7.720 B3 1,794 1,291,798
ING Capital Funding Trust III,
Perpetual Bond (8.439% to 12-31-10 then variable)
12-31-49 8.439 A 2,850 3,149,250
MBNA Master Credit Card Trust II,
Pass Thru Ctf Ser 2000-A Class A 07-16-07 7.350 AAA 7,040 7,662,547
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.750 BB+ 8,050 8,935,500
Deb Ser B 07-23-06 13.250 BB+ 1,900 2,223,000
Pemex Project Funding Master Trust,
Gtd Note 10-13-10 9.125 BB+ 5,580 5,886,900
Standard Credit Master Trust,
Ser 1995-1 Class A 01-07-07 8.250 AAA 9,970 11,113,360
Tiers-MIR-2001-14,
Coll Trust 06-15-04 (R) 7.200 BBB- 5,200 5,123,248
U.S. Bank N.A.,
Note 08-01-11 6.375 A 3,740 3,823,103
Yanacocha Receivables Master Trust,
Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 2,994 3,023,561
Food 0.79% 11,499,879
ConAgra Foods, Inc.,
Note 09-15-11 6.750 BBB+ 3,875 4,038,564
Sub Note 09-15-04 7.400 BBB 2,845 3,067,081
Earthgrains Co., (The),
Sr Note 08-01-03 8.375 A+ 4,085 4,394,234
Government -- Foreign 1.83% 26,565,198
Chile, Republic of,
Note (Chile) 01-11-12 (Y) 7.125 A- 2,805 2,879,445
Colombia, Republic of,
Gtd Note (Colombia) 04-09-11 (Y) 9.750 BBB 3,669 3,861,634
Nova Scotia, Province of,
Deb (Canada) 04-01-22 (Y) 8.750 A- 7,500 9,396,000
Quebec, Province of,
Deb (Canada) 09-15-29 (Y) 7.500 A+ 3,215 3,653,269
Saskatchewan, Province of,
Deb (Canada) 12-15-20 (Y) 9.375 A+ 5,000 6,774,850
Government -- United States 17.49% 253,985,760
United States Treasury,
Bond 08-15-17 8.875 AAA 25,342 34,477,031
Bond 05-15-18 9.125 AAA 17,990 25,112,961
Bond 08-15-25 6.875 AAA 21,040 24,652,989
Bond 05-15-30 6.250 AAA 2,815 3,146,635
Bond 02-15-31 5.375 AAA 24,190 24,575,589
Inflation Indexed Note 01-15-07 3.375 AAA 21,188 21,472,467
Note 02-15-05 7.500 AAA 34,689 38,824,623
Note 07-15-06 7.000 AAA 43,655 48,975,235
Note 05-15-08 5.625 AAA 6,905 7,353,825
Note 08-15-10 5.750 AAA 23,695 25,394,405
Government -- U.S. Agencies 14.28% 207,349,169
Federal Home Loan Mortgage Corp.,
30 Yr Pass Thru Ctf 01-01-16 11.250 AAA 328 369,100
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 8,937 8,943,882
15 Yr Pass Thru Ctf 06-01-16 6.000 AAA 5,332 5,404,260
15 Yr Pass Thru Ctf 12-01-12 6.500 AAA 5,972 6,161,341
15 Yr Pass Thru Ctf 09-01-10 to 11-01-14 7.000 AAA 7,460 7,772,218
15 Yr Pass Thru Ctf 02-01-08 7.500 AAA 691 730,655
30 Yr Pass Thru Ctf 04-01-31 6.000 AAA 2,796 2,769,441
30 Yr Pass Thru Ctf 11-01-28 6.500 AAA 2,792 2,832,428
30 Yr Pass Thru Ctf 10-01-23 to 12-01-31*** 7.000 AAA 7,219 7,447,750
30 Yr Pass Thru Ctf 06-01-30 to 02-01-31 7.500 AAA 11,022 11,464,471
Note 01-15-30 7.125 AAA 20,130 22,853,790
Pass Thru Ctf Ser 1997-M8 Class A-1 01-25-22 6.940 AAA 2,849 3,091,580
Financing Corp.,
Bond 02-08-18 9.400 AAA 7,000 9,469,670
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 06-01-26 to 09-15-31*** 6.500 AAA 54,119 55,016,382
30 Yr Pass Thru Ctf 08-15-28 to 08-15-31 7.000 AAA 45,143 46,606,034
30 Yr Pass Thru Ctf 05-15-30 7.500 AAA 7,481 7,802,332
30 Yr Pass Thru Ctf 11-15-22 8.000 AAA 1,739 1,857,930
30 Yr Pass Thru Ctf 07-15-16 to 01-15-25 9.000 AAA 4,359 4,752,821
30 Yr Pass Thru Ctf 11-15-19 to 05-15-21 9.500 AAA 1,256 1,373,268
30 Yr Pass Thru Ctf 06-15-20 to 03-15-25 10.000 AAA 429 482,490
30 Yr Pass Thru Ctf 01-15-16 10.500 AAA 53 60,597
30 Yr Pass Thru Ctf 01-15-16 11.000 AAA 76 86,729
Insurance 2.10% 30,502,786
AXA,
Sub Note (France) 12-15-30 (Y) 8.600 A- 4,080 4,606,038
Equitable Life Assurance Society of the United States,
Surplus Note 12-01-05 (R) 6.950 A+ 3,700 3,934,728
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) 7.625 AA 3,970 4,170,485
MONY Group, Inc. (The),
Sr Note 12-15-05 7.450 A- 3,940 4,139,916
Nationwide Mutual Insurance,
Notes 12-01-31 (R) 8.250 A- 2,650 2,676,500
Sun Canada Financial Co.,
Gtd Sub Note 12-15-07 (R) 6.625 AA- 7,250 7,540,000
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 AA+ 3,110 3,435,119
Leisure 0.73% 10,676,199
Harrah's Operating Co., Inc.,
Gtd Note 06-01-07 7.125 BBB- 3,900 3,976,830
Gtd Sr Sub Note 12-15-05 7.875 BB+ 2,055 2,160,319
HMH Properties, Inc.,
Gtd Sr Sec Note Ser A 08-01-05 7.875 BB 2,790 2,664,450
Waterford Gaming LLC/Waterford Gaming Finance
Corp., Sr Note 03-15-10 (R) 9.500 B+ 1,820 1,874,600
Media 5.44% 78,954,319
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 9.250 B+ 4,750 4,797,500
Sr Note Ser B 07-15-03 8.125 B+ 2,250 2,227,500
AOL Time Warner, Inc.,
Bond 04-15-31 7.625 BBB+ 4,155 4,430,227
British Sky Broadcasting Group Plc,
Gtd Sr Note (United Kingdom) 07-15-09 (Y) 8.200 BB+ 5,690 5,950,033
Century Communications Corp.,
Sr Note 03-01-05 9.500 B+ 1,720 1,685,600
Charter Communications Holdings LLC/Charter
Communications Capital Corp.,
Sr Note 01-15-11 11.125 B+ 1,055 1,134,125
Sr Note 05-15-11 10.000 B+ 1,875 1,959,375
Clear Channel Communications, Inc.,
Sr Note 06-15-05 7.875 BBB- 5,170 5,405,287
Comcast Cable Communications, Inc.,
Sr Note 01-30-11 6.750 BBB 2,760 2,779,127
Continental Cablevision, Inc.,
Sr Note 05-15-06 8.300 A- 5,120 5,606,195
CSC Holdings, Inc.,
Sr Sub Deb 05-15-16 10.500 BB- 1,880 2,096,200
EchoStar DBS Corp.,
Sr Note 02-01-09 9.375 B+ 1,310 1,382,050
Garden State Newspapers, Inc.,
Sr Sub Note 07-01-11 8.625 B+ 2,485 2,410,450
Grupo Televisa S.A.,
Note (Mexico) 09-13-11 (R) (Y) 8.000 BB+ 1,715 1,706,425
Lenfest Communications, Inc.,
Sr Note 11-01-05 8.375 BBB 2,685 2,947,647
Mediacom LLC/Mediacom Capital Corp.,
Sr Note 01-15-13 9.500 B+ 810 862,650
Sr Note Ser B 04-15-08 8.500 B+ 1,435 1,470,875
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 8.250 BBB- 1,805 1,893,391
News America, Inc.,
Gtd Sr Note 04-30-28 7.300 BBB- 2,575 2,425,804
Rogers Cablesystems, Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) 10.000 BBB- 4,880 5,294,800
TCI Communications, Inc.,
Sr Deb 02-15-26 7.875 A- 2,830 2,940,398
Time Warner, Inc.,
Deb 01-15-13 9.125 BBB+ 3,420 4,123,391
Univision Communications, Inc.,
Sr Note 07-15-11 (R) 7.850 BB+ 4,145 4,310,800
Viacom, Inc.,
Gtd Sr Deb 07-30-30 7.875 A- 4,195 4,722,437
Gtd Sr Note 01-30-06 6.400 A- 4,185 4,392,032
Medical 1.44% 20,862,234
Dynacare, Inc.,
Sr Note (Canada) 01-15-06 (Y) 10.750 B+ 3,465 3,672,900
Fresenius Medical Care Capital Trust II,
Gtd Trust Preferred Security 02-01-08 7.875 B+ 3,480 3,514,800
HCA -- The Healthcare Co.,
Note 09-01-10 8.750 BB+ 1,845 2,029,500
Sr Note 06-01-06 7.125 BB+ 3,930 4,051,830
HealthSouth Corp.,
Sr Note 02-01-08 8.500 BBB- 2,085 2,210,100
Quest Diagnostics, Inc.,
Gtd Sr Note 07-12-06 6.750 BBB- 2,820 2,894,284
Tenet Healthcare Corp.,
Sr Note 01-15-05 8.000 BBB 890 991,095
Triad Hospitals, Inc.,
Gtd Sr Note Ser B 05-01-09 8.750 B- 1,390 1,497,725
Metal 0.19% 2,714,608
Newmont Mining Corp.,
Note 05-15-11 8.625 BBB 2,600 2,714,608
Mortgage Banking 6.23% 90,533,366
Asset Securitization Corp.,
Pass Thru Ctf Ser 1997-D4 Class A-1B 04-14-29 7.400 AAA 7,085 7,588,035
Commercial Mortgage Acceptance Corp.,
Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 5,109 5,358,121
ContiMortgage Home Equity Loan Trust,
Pass Thru Ctf Ser 1995-2 Class A-5 08-15-25 8.100 AAA 2,950 2,950,189
Credit Suisse First Boston Mortgage Securities Corp.,
Commercial Mtg Pass Thru Ctf Ser 1998-C1
Class A-1A 12-17-07 6.260 AAA 8,441 8,775,470
Deutsche Mortgage & Asset Receiving Corp.,
Commercial Mtg Pass-Through Ctf Ser 1998-C1
Class C 03-15-08 6.861 A2 3,585 3,684,148
FirstPlus Home Loan Trust,
Pass Thru Ctf Ser 1998-4 Class A-5 01-10-18 6.380 AAA 3,344 3,360,230
GMAC Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 1998-C1 Class A-1 05-15-30 6.411 Aaa 11,359 11,758,499
LB Commercial Conduit Mortgage Trust,
Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 5,394 5,628,026
Morgan (J.P.) Commercial Mortgage Finance Corp.,
Mtg Pass Thru Ctf Ser 1997-C5 Class A-2 09-15-29 7.069 AAA 5,564 5,920,016
Morgan Stanley Capital I, Inc.,
Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 12,480 13,273,379
Morgan Stanley Dean Witter Capital I Trust,
Pass Thru Ctf Ser 2001-IQA Class A-1 12-18-32 4.570 Aaa 12,886 12,820,383
Salomon Brothers Mortgage Securities VII, Inc.,
Mtg Pass Thru Ctf Ser 1997-HUD2 Class A-2
07-25-24 6.750 Aaa 1,778 1,782,254
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1996-D1 Class A-6 02-15-25 7.180 AAA 7,260 7,634,616
Oil & Gas 3.25% 47,250,057
Alberta Energy Co., Ltd.,
Note (Canada) 09-15-30 (Y) 8.125 BBB+ 2,850 3,093,846
Note (Canada) 11-01-31 (Y) 7.375 BBB+ 2,890 2,835,639
Amerada Hess Corp.,
Note 08-15-11 6.650 BBB 4,605 4,654,826
Anadarko Petroleum Corp.,
Deb 05-15-28 7.150 BBB+ 4,330 4,309,649
Apache Finance Canada Corp.,
Gtd Sr Note (Canada) 12-15-29 (Y) 7.750 A- 2,890 3,165,533
Forest Oil Corp.,
Sr Note 06-15-08 8.000 BB 1,695 1,716,188
Louis Dreyfus Natural Gas Corp.,
Note 12-01-07 6.875 BBB+ 2,685 2,802,254
Occidental Petroleum Corp.,
Note 01-15-07+ 5.875 BBB 2,815 2,828,596
Note 01-15-12+ 6.750 BBB 2,890 2,908,929
Sr Deb 09-15-09 10.125 BBB 1,080 1,306,595
Ocean Energy, Inc.,
Gtd Sr Sub Note Ser B 07-15-07 8.875 BB+ 2,220 2,339,813
Petroleum Geo-Services ASA,
Sr Note (Norway) 03-30-28 (Y) 7.125 BBB- 1,425 1,065,059
Santa Fe Snyder Corp.,
Sr Sub Note 06-15-07 8.750 BBB 2,575 2,695,458
Tosco Corp.,
Note 02-15-30 8.125 BBB+ 5,550 6,391,991
Valero Energy Corp.,
Note 06-15-05 8.375 BBB- 1,690 1,835,847
Note 03-15-06 7.375 BBB- 3,110 3,299,834
Paper & Paper Products 1.26% 18,282,366
Georgia-Pacific Corp.,
Sr Note 05-15-06 7.500 BBB- 2,600 2,662,088
International Paper Co.,
Sr Note 07-08-05 8.125 BBB 4,165 4,473,210
Stone Container Corp.,
Sr Note 02-01-11 9.750 B 2,265 2,423,550
Stora Enso Oyj,
Sr Note (Finland) 05-15-11 (Y) 7.375 BBB+ 4,255 4,527,320
Weyerhaeuser Co.,
Note 08-01-06 6.000 A- 4,135 4,196,198
Real Estate Investment Trusts 1.41% 20,477,906
American Health Properties, Inc.,
Note 01-15-07 7.500 BBB+ 2,350 2,411,688
Cabot Industrial Properties, L.P.,
Note 05-01-04 7.125 BBB 3,455 3,584,148
Camden Property Trust,
Sr Note 04-15-04 7.000 BBB 3,800 3,988,898
Healthcare Realty Trust, Inc.,
Sr Note 05-01-11 8.125 BBB- 2,600 2,719,080
iStar Financial, Inc.,
Sr Note 08-15-08 8.750 BB+ 1,085 1,093,137
Liberty Property, L.P.,
Med Term Note 06-05-02 6.600 BBB 3,030 2,991,683
ProLogis Trust,
Sr Note 04-15-04 6.700 BBB+ 3,555 3,689,272
Real Estate Operations 0.11% 1,650,831
EOP Operating, L.P.,
Sr Note 02-15-05 6.625 BBB+ 1,580 1,650,831
Retail 0.80% 11,577,077
Delhaize America, Inc.,
Note 04-15-11 (R) 8.125 BBB- 3,835 4,266,016
Kroger Co.,
Gtd Sr Note 04-01-11 6.800 BBB- 4,540 4,801,141
Toys "R" Us, Inc.,
Note 08-01-11 (R) 7.625 BBB+ 2,520 2,509,920
Telecommunications 5.59% 81,212,489
AT&T Canada Corp.,
Sr Disc Note, Step Coupon (10.750%, 11-01-02)
(Canada) 11-01-07 (A) (Y) Zero BBB 2,850 1,710,000
Sr Note (Canada) 08-15-07 (Y) 12.000 BBB 2,430 1,919,700
AT&T Corp.,
Sr Note 11-15-31 (R) 8.000 BBB+ 3,405 3,378,135
AT&T Wireless Services, Inc.,
Sr Note 03-01-31 8.750 BBB 5,465 6,199,715
Citizens Communications Co.,
Note 05-15-06 8.500 BBB 5,370 5,734,086
Deutsche Telekom International Finance B.V.,
Gtd Bond (Netherlands) 06-15-05 (Y) 7.750 A- 2,325 2,505,118
Gtd Bond (Netherlands) 06-15-30 (Y) 8.250 A- 4,260 4,676,202
Dominion Resources, Inc.,
Sr Note Ser A 06-15-10 8.125 BBB+ 4,255 4,718,412
LCI International, Inc.,
Sr Note 06-15-07 7.250 BBB+ 3,860 3,973,793
Qwest Capital Funding, Inc.,
Gtd Note 02-15-11 7.250 BBB+ 2,840 2,842,641
Singapore Telecommunications Ltd.,
Bond (Singapore) 12-01-31 (R) (Y) 7.375 AA- 3,150 3,205,125
Sprint Capital Corp.,
Gtd Note 01-30-06 7.125 BBB+ 5,470 5,710,571
Gtd Note 11-15-28 6.875 BBB+ 5,525 4,985,208
Telefonos de Mexico S.A. de C.V.,
Sr Note (Mexico) 01-26-06 (Y) 8.250 BB+ 5,590 5,848,538
Telus Corp.,
Note (Canada) 06-01-11 (Y) 8.000 BBB+ 4,185 4,472,761
Verizon Global Funding Corp.,
Note 12-01-30 7.750 A+ 5,615 6,357,022
VoiceStream Wireless Corp.,
Sr Note 09-15-09 11.500 A- 2,640 3,009,600
WorldCom, Inc.,
Bond 05-15-31 8.250 BBB+ 4,230 4,427,118
Note 05-15-06 8.000 BBB+ 5,160 5,538,744
Transportation 2.77% 40,256,148
America West Airlines, Inc.,
Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 B+ 3,260 2,444,915
Burlington Northern Santa Fe Corp.,
Deb 08-15-30 7.950 BBB+ 5,545 6,176,520
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1996-C 10-15-13 9.500 BBB- 4,071 3,175,487
Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA 5,303 4,725,039
Delta Air Lines, Inc.,
Note 12-15-05 7.700 BB 235 213,850
Northwest Airlines, Inc.,
Pass Thru Ctf Ser 1996-1C 01-02-05 10.150 BB 1,580 1,453,763
Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BB+ 3,359 2,821,927
NWA Trust,
Sr Note Ser A 12-21-12 9.250 AA 4,771 4,905,138
Railcar Trust No. 1992-1,
Pass Thru Ser 1992-1 Class A 06-01-04 7.750 AAA 7,550 7,926,083
United Airlines, Inc.,
Pass Thru Ctf Ser 2000-2 Class A-1 04-01-12 7.032 AA 3,582 3,477,522
U.S. Airways, Inc.,
Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 B 4,318 2,935,904
Utilities 10.73% 155,786,733
AES Corp.,
Sr Note 06-01-09 9.500 BB 2,620 2,567,600
Sr Note 09-15-10 9.375 BB 1,110 1,110,000
Sr Sub Note 07-15-06 10.250 B+ 3,570 3,462,900
AES Eastern Energy,
Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 3,700 3,953,228
Beaver Valley Funding Corp.,
Sec Lease Oblig Bond 06-01-17 9.000 BBB- 3,960 4,349,070
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 8.890 BBB- 6,600 7,311,546
Calpine Canada Energy Finance ULC,
Gtd Sr Note (Canada) 05-01-08 (Y) 8.500 BB+ 5,765 5,712,366
Calpine Corp.,
Sr Note 08-15-05 8.250 BB+ 1,685 1,709,549
Sr Note 05-15-06 10.500 BB+ 4,650 4,870,875
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 9.500 BBB 10,220 10,488,275
CMS Energy Corp.,
Sr Note 10-15-07 9.875 BB 1,160 1,270,200
Sr Note Ser B 01-15-04 6.750 BB 3,595 3,602,046
EIP Funding-PNM,
Sec Fac Bond 10-01-12 10.250 BBB- 8,319 8,901,330
El Paso Corporation,
Sr Note 08-01-31 7.800 BBB 4,170 4,070,629
Exelon Generation Co LLC,
Sr Note 06-15-11 (R) 6.950 A- 4,165 4,260,254
GG1B Funding Corp.,
Deb 01-15-11 7.430 BBB- 3,288 3,411,792
Hydro-Quebec,
Gtd Deb Ser FU (Canada) 02-01-12 (Y) 11.750 A+ 5,000 7,225,000
Gtd Deb Ser IF (Canada) 02-01-03 (Y) 7.375 A+ 7,185 7,580,606
Iberdrola International B.V.,
Note 10-01-02 7.500 A+ 8,000 8,296,400
Sr Note (Netherlands) 06-01-03 (R) (Y) 7.125 A+ 8,629 9,042,329
KeySpan Corp.,
Note 11-15-10 7.625 A 4,145 4,596,390
Long Island Lighting Co.,
Deb 03-15-23 8.200 A- 5,615 5,839,600
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R) (Y) 9.625 BB+ 1,191 1,238,704
Niagara Mohawk Power Corp.,
Sec Fac Deb Bond 01-01-18 8.770 Baa2 6,740 7,065,272
Northeast Utilities,
Note Ser A 12-01-06 8.580 BBB 911 974,699
Pinnacle Partners,
Sr Note 08-15-04 (R) 8.830 BBB- 3,830 3,890,066
Pinnacle West Capital Corp.,
Sr Note 04-01-06 6.400 BBB 3,810 3,904,374
PNPP II Funding Corp.,
Deb 05-30-16 9.120 BBB- 4,120 4,648,431
PSEG Energy Holdings, Inc.,
Sr Note 02-15-08 8.625 BBB- 2,685 2,747,346
Republic Services, Inc.,
Sr Note 08-15-11 6.750 BBB 4,150 4,203,576
Sierra Pacific Resources,
Note 05-15-05 8.750 BBB- 1,835 1,934,971
Waterford 3 Funding Corp.,
Sec Lease Oblig Bond 01-02-17 8.090 BBB- 7,133 7,395,616
Xcel Energy, Inc.,
Sr Note 12-01-10 7.000 BBB+ 3,985 4,151,693
NUMBER OF
ISSUER, DESCRIPTION, SHARES OR
MATURITY DATE WARRANTS VALUE
PREFERRED STOCKS AND WARRANTS 1.42% $20,657,818
(Cost $19,960,279)
California Federal Preferred Capital Corp., 9.125%,
Ser A, Preferred Stock 327,190 8,372,792
CSC Holdings, Inc., 11.125% Ser M, Preferred Stock 77,653 8,250,631
CSC Holdings, Inc., 11.750%, Ser H, Preferred Stock 33,520 3,595,020
MetroNet Communications Corp.,
Warrant (Canada) (R) (Y) * 4,625 439,375
INTEREST PAR VALUE
RATE (000S OMITTED) VALUE
SHORT-TERM INVESTMENTS 2.09% $30,312,000
(Cost $30,312,000)
Joint Repurchase Agreement 2.09%
Investment in a joint repurchase agreement
transaction with UBS Warburg, Inc. -- Dated
11-30-01, due 12-03-01 (Secured by U.S. Treasury
Bonds, 5.250% thru 8.125%, due 02-15-29 thru
08-15-19) 2.100% $30,312 30,312,000
TOTAL INVESTMENTS 98.88% $1,435,970,634
OTHER ASSETS AND LIABILITIES, NET 1.12% $16,207,712
TOTAL NET ASSETS 100.00% $1,452,178,346
(A) Cash interest will paid on this obligation at the stated rate
beginning on the stated date.
(R) These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $143,293,075 or 9.87% of
net assets as of November 30, 2001.
(Y) Parenthetical disclosure of a foreign country in the security
description represents country of a foreign issuer; however, the
security is U.S. dollar-denominated.
* Non-income producing security.
** Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investor Services or John Hancock Advisers, Inc.
where Standard & Poor's ratings are not available.
*** A portion of these securities having an aggregate value of
$10,733,825, or 0.74% of the Fund's net assets, has been purchased as
forward commitments -- 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 are 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.
Accordingly, the market value of $11,073,979 of United States Treasury
Note, 7.000%, 07-15-06, has been segregated to cover the forward
commitments.
+ A portion of these securities having an aggregate value of
$5,737,526, or 0.40% of the Fund's net assets, has been purchased on a
when-issued basis. The purchase price and the 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 its when- issued commitments.
Accordingly, the market value of $5,912,255 of United States Treasury
Note, 7.000%, 07-15-06, has been segregated to cover the when-issued
commitments.
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
November 30, 2001
(unaudited)
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 $1,406,901,312) $1,435,970,634
Cash 386
Receivable for investments sold 60,226,595
Receivable for shares sold 1,189,097
Dividends and interest receivable 23,806,944
Other assets 140,777
Total assets 1,521,334,433
LIABILITIES
Payable for investments purchased 67,162,320
Payable for shares repurchased 523,150
Dividends payable 213,148
Payable to affiliates 1,021,121
Other payables and accrued expenses 236,348
Total liabilities 69,156,087
NET ASSETS
Capital paid-in 1,487,078,961
Accumulated net realized loss on investments (53,337,000)
Net unrealized appreciation of investments 29,069,322
Distributions in excess of net investment loss (10,632,937)
Net assets $1,452,178,346
NET ASSET VALUE PER SHARE
Based on net asset values and shares outstanding
Class A ($1,166,642,136 [DIV] 78,013,537 shares) $14.95
Class B ($247,395,300 [DIV] 16,543,361 shares) $14.95
Class C ($38,130,914 [DIV] 2,549,820 shares) $14.95
Class I ($9,996 [DIV] 668 shares) $14.95
MAXIMUM OFFERING PRICE PER SHARE
Class A 1 ($14.95 [DIV] 95.5%) $15.65
Class C ($14.95 [DIV] 99%) $15.10
1 On single retail sales of less than $100,000. On sales of $100,000 or
more and on group sales the offering price is reduced.
See notes to
financial statements.
OPERATIONS
For the period ended
November 30, 2001
(unaudited) 1
This Statement
of Operations
summarizes the
Fund's investment
income earned
and expenses
incurred in oper-
ating the Fund.
It also shows net
gains (losses) for
the period stated.
INVESTMENT INCOME
Interest (including income on securities loaned
of $136,769) $47,154,285
Dividends 624,653
Total investment income 47,778,938
EXPENSES
Investment management fee 3,562,421
Class A distribution and service fee 1,739,756
Class B distribution and service fee 1,164,026
Class C distribution and service fee 161,606
Class A, B and C transfer agent fee 1,753,214
Accounting and legal services fee 149,000
Custodian fee 143,899
Registration and filing fee 54,534
Trustees' fee 41,309
Printing 34,313
Miscellaneous 24,164
Auditing fee 23,025
Legal fee 7,841
Total expenses 8,859,108
Net investment income 38,919,830
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments 8,059,037
Change in unrealized appreciation (depreciation)
on investments 18,481,352
Net realized and unrealized gain 26,540,389
Increase in net assets from operations $65,460,219
1 Semiannual period from 6-1-01 through 11-30-01.
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 PERIOD
ENDED ENDED
5-31-01 11-30-01 1
INCREASE (DECREASE) IN NET ASSETS
From operations
Net investment income $84,683,998 $38,919,830
Net realized gain 5,032,003 8,059,037
Change in net unrealized
appreciation (depreciation) 65,332,336 18,481,352
Increase in net assets
resulting from operations 155,048,337 65,460,219
Distributions to shareholders
From net investment income
Class A (71,799,469) (34,090,386)
Class B (11,680,442) (6,022,394)
Class C (1,204,086) (830,338)
Class I 2 -- (158)
(84,683,997) (40,943,276)
From fund share transactions (5,151,356) 43,367,483
NET ASSETS
Beginning of period 1,319,080,936 1,384,293,920
End of period 3 $1,384,293,920 $1,452,178,346
1 Semiannual period from 6-1-01 through 11-30-01. Unaudited.
2 Class I began operations on 9-4-01.
3 Includes distributions in excess of net investment income of $79,159
and $10,632,937, 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 12-31-96 5-31-97 1 5-31-98 5-31-99 5-31-00 5-31-01 11-30-01 2
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93 $14.69
Net investment income 1.09 0.44 1.05 3 0.97 3 0.96 3 0.92 3 0.42 3
Net realized and unrealized
gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76 0.28
Total from investment
operations 0.59 0.32 1.52 0.48 0.13 1.68 0.70
Less distributions
From net investment income (1.09) (0.44) (1.05) (0.97) (0.96) (0.92) (0.44)
Net asset value,
end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 $14.95
Total return 4 (%) 4.11 2.22 5 10.54 3.11 0.97 12.38 4.80 5
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $1,416 $1,362 $1,328 $1,279 $1,098 $1,140 $1,167
Ratio of expenses to
average net assets (%) 1.14 1.11 6 1.08 1.07 1.11 1.12 1.11 6
Ratio of net investment
income to average
net assets (%) 7.32 7.38 6 6.90 6.35 6.69 6.38 5.60 6,7
Portfolio turnover (%) 123 58 198 228 162 235 89
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
CLASS B SHARES
PERIOD ENDED 12-31-96 5-31-97 1 5-31-98 5-31-99 5-31-00 5-31-01 11-30-01 2
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $15.40 $14.90 $14.78 $15.25 $14.76 $13.93 $14.69
Net investment income 0.98 0.40 0.95 3 0.86 3 0.86 3 0.83 3 0.37 3
Net realized and unrealized
gain (loss) on investments (0.50) (0.12) 0.47 (0.49) (0.83) 0.76 0.28
Total from investment
operations 0.48 0.28 1.42 0.37 0.03 1.59 0.65
Less distributions
Dividends from
net investment income (0.98) (0.40) (0.95) (0.86) (0.86) (0.83) (0.39)
Net asset value,
end of period $14.90 $14.78 $15.25 $14.76 $13.93 $14.69 $14.95
Total return 4 (%) 3.38 1.93 5 9.78 2.39 0.27 11.64 4.44 5
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $134 $133 $166 $239 $197 $218 $247
Ratio of expenses to
average net assets (%) 1.84 1.81 6 1.78 1.77 1.81 1.78 1.81 6
Ratio of net investment
income to average
net assets (%) 6.62 6.68 6 6.18 5.65 6.00 5.71 4.89 6,7
Portfolio turnover (%) 123 58 198 228 162 235 89
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
CLASS C SHARES
PERIOD ENDED 5-31-99 8 5-31-00 5-31-01 11-30-01 2,8
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $15.61 $14.76 $13.93 $14.69
Net investment income 3 0.55 0.85 0.82 0.37
Net realized and unrealized
gain (loss) on investments (0.85) (0.83) 0.76 0.28
Total from investment
operations (0.30) 0.02 1.58 0.65
Less distributions
Dividends from net
investment income (0.55) (0.85) (0.82) (0.39)
Net asset value,
end of period $14.76 $13.93 $14.69 $14.95
Total return 4 (%) 1.95 5 0.28 11.60 4.43 5
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) $21 $24 $26 $38
Ratio of expenses to
average net assets (%) 1.77 6 1.80 1.82 1.81 6
Ratio of net investment
income to average
net assets (%) 5.65 6 6.01 5.66 4.86 6,7
Portfolio turnover (%) 228 162 235 89
See notes to
financial statements.
FINANCIAL
HIGHLIGHTS
CLASS I SHARES
PERIOD ENDED 11-30-01 2,8
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $14.96
Net investment income 3 0.21
Net realized and unrealized
gain on investments 0.01
Total from investment
operations 0.22
Less distributions
Dividends from net
investment income (0.23)
Net asset value,
end of period $14.95
Total return 4 (%) 1.51 5
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in millions) -- 9
Ratio of expenses to
average net assets (%) 0.61 6
Ratio of net investment
income to average
net assets (%) 7.43 6,7
Portfolio turnover (%) 89
1 Effective 5-3-97, the fiscal year end changed from December 31 to May 31.
2 Semiannual period from 6-1-01 through 11-30-01. Unaudited.
3 Based on the average of the shares outstanding at the end of each month.
4 Assumes dividend reinvestment and does not reflect the effect of sales
charges.
5 Not annualized.
6 Annualized.
7 Had the Fund not amortized premiums on debt securities, the annualized
ratio of investment income to average net assets would have been 5.88%,
5.17%, 5.14% and 7.71% for Class A, Class B, Class C and Class I shares,
respectively.
8 Class C shares began operations on 10-1-98. Class I shares began
operations on 9-4-01.
9 Less than $500,000.
See notes to
financial statements.
NOTES TO
STATEMENTS
Unaudited
NOTE A
Accounting policies
John Hancock Bond Fund (the "Fund") is a diversified series of John
Hancock Sovereign Bond Fund, an open-end investment management company
registered under the Investment Company Act of 1940. The investment
objective of the Fund is to generate a high level of current income,
consistent with prudent investment risk, through investment in a
diversified portfolio of bonds and other debt securities.
The Trustees have authorized the issuance of multiple classes of shares
of the Fund, designated as Class A, Class B, Class C and Class I shares.
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, 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. Some securities may be
purchased on a "when-issued" or "forward delivery" basis, which means
that the securities will be delivered to the Fund at a future date,
usually beyond customary settlement date.
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, and transfer agent fees for Class
I shares, 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 Fund had no
borrowing activity under the line of credit during the period ended
November 30, 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
November 30, 2001, the Fund loaned securities having a market value of
$301,230,052, collateralized by securities in the amount of
$303,174,920.
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, the Fund has $55,393,254 of capital
loss carryforwards available, to the extent provided by regulations, to
offset future net realized capital gains. To the extent such
carryforwards are used by the Fund, no capital gain distributions will
be made. The Fund's carryforwards expire as follows: May 31, 2002 --
$9,347,493, May 31, 2004 -- $8,402,805, May 31, 2005 -- $1,183,431, May
31, 2007 -- $619,870, May 31, 2008 -- $15,467,220 and May 31, 2009 --
$20,372,435. Availability of a certain amount of loss carryforwards,
which were acquired on September 15, 1995 in a merger, may be limited in
a given year.
Dividends, interest and distributions
Dividend income on investment securities is recorded on the ex-dividend
date. Interest income on investment securities is recorded on the
accrual basis.
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 equivalent, on an annual basis, to the sum of: (a)
0.50% of the first $1,500,000,000 of the Fund's average daily net asset
value, (b) 0.45% of the next $500,000,000, (c) 0.40% of the next
$500,000,000 and (d) 0.35% of the Fund's average daily net asset value
in excess of $2,500,000,000.
The Fund has Distribution Plans with John Hancock Funds, Inc. ("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 period ended November 30, 2001, JH Funds received net up-front sales
charges of $640,544 with regard to sales of Class A shares. Of this
amount, $41,230 was retained and used for printing prospectuses,
advertising, sales literature and other purposes, $334,188 was paid as
sales commissions to unrelated broker-dealers and $265,126 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 period ended November
30, 2001, JH Funds received net up-front sales charges of $140,257 with
regard to sales of Class C shares. Of this amount, $133,129 was paid as
sales commissions to unrelated broker-dealers and $7,128 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 period ended November 30, 2001,
CDSCs received by JH Funds amounted to $253,332 for Class B shares and
$9,776 for Class C shares.
The Fund has a transfer agent agreement with John Hancock Signature
Services, Inc., an indirect subsidiary of JHLICo. For Class A, B and C
shares, the Fund pays a monthly transfer agent fee based on the number
of shareholder accounts, plus certain out-of-pocket expenses, aggregated
and allocated to each class on the basis of their relative net asset
values. For Class I shares, the Fund pays a monthly transfer agent fee
at an annual rate of 0.05% of the average daily net assets attributable
to Class I shares, 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
period 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 investments 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 5-31-00 PERIOD ENDED 11-30-01 1
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Sold 20,329,913 $292,695,235 4,952,808 $73,961,348
Distributions reinvested 3,885,469 56,285,950 1,796,592 26,862,085
Repurchased (25,386,067) (365,444,508) (6,361,049) (94,798,441)
Net increase (decrease) (1,170,685) ($16,463,323) 388,351 $6,024,992
CLASS B SHARES
Sold 4,030,445 $58,808,128 3,300,471 $49,313,244
Distributions reinvested 438,799 6,362,603 210,982 3,157,557
Repurchased (3,783,675) (54,786,515) (1,804,620) (26,910,767)
Net increase 685,569 $10,384,216 1,706,833 $25,560,034
CLASS C SHARES
Sold 1,373,262 $19,986,436 1,005,944 $15,014,863
Distributions reinvested 53,807 633,249 22,870 343,072
Repurchased (1,370,639) (19,691,934) (240,544) (3,585,541)
Net increase 56,430 $927,751 788,270 $11,772,394
CLASS I SHARES2
Sold -- -- 668 $10,063
Net increase -- -- 668 $10,063
NET INCREASE (DECREASE) (428,686) ($5,151,356) 2,884,122 $43,367,483
1 Semiannual period from 6-1-01 through 11-30-01. Unaudited.
2 Class I shares began operations on 9-4-01.
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 period
ended November 30, 2001, aggregated $1,296,176,503 and $1,197,385,861,
respectively.
The cost of investments owned at November 30, 2001, including short-term
investments, for federal income tax purposes was $1,417,148,596. Gross
unrealized appreciation and depreciation of investments aggregated
$41,421,583 and $22,599,545, respectively, resulting in net unrealized
appreciation of $18,822,038.
NOTE E
Change in accounting principle
Effective June 30, 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 $8,530,333 reduction in the cost of securities
and a corresponding increase in net unrealized appreciation, based on
securities held as of May 31, 2001.
The effect of this change for the period ended November 30, 2001 was to
decrease net investment income by $2,023,445, increase unrealized
appreciation on investments by $1,033,183 and increase net realized gain
on investments by $990,262. 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 November 30, 2001 was as
follows: decrease in net investment income by $0.02 per share, increase
in net realized and unrealized gains by $0.02 per share and decrease in
the ratio of net investment income to average net assets by 0.28%.
The statement of changes in net assets and the financial highlights for
prior periods have not been restated to reflect this change in
presentation.
FOR YOUR
INFORMATION
TRUSTEES
Dennis S. Aronowitz*
Richard P. Chapman, Jr.
William J. Cosgrove*
John M. DeCiccio
Richard A. Farrell*
Maureen R. Ford
Gail D. Fosler
William F. Glavin
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
*Members of the 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
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
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
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
Bond Fund.
210SA 11/01
1/02
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
JOHN HANCOCK ACTIVE BOND 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 Active Bond
Fund ("Active Bond Fund") which the undersigned is (are) entitled to vote at the
Special Meeting of Shareholders (the "Meeting") of Active Bond 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
Active Bond Fund ("Active Bond Fund") and John Hancock Bond Fund ("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 will be distributed proportionately to you and the other
shareholders of Active Bond Fund. Bond Fund will also assume Active
Bond Fund's liabilities.
FOR |_| AGAINST |_| ABSTAIN |_|
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD.
---------------
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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
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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.
23-10 Square Circle Lane
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 Active Bond 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
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.
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Any other business that may properly come before the meeting.
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Voting Instructions
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i Answers have been marked according to the Board's
recommendations. Please change responses as appropriate
before submission.
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John Hancock Institutional Series Trust Proxy PROXY DIRECT TM
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John Hancock
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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 Active Bond 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 BOND FUND
(the "Acquiring Fund", and a series of John Hancock Sovereign Bond Fund)
JOHN HANCOCK ACTIVE BOND 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 Bond
Fund and the Fund that it is acquiring, John Hancock Active Bond 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 3
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 January 1, 2002, of the
Acquiring Fund including audited financial statements as of May 31, 2001
and unaudited financial statements as of November 30, 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 January 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 reorganizaiton 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.
3
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 May 31, 2001 and
unaudited semiannual financial statements as of November 30, 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.
4
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.
5
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John Hancock Bond Fund John Hancock Large Cap Growth Fund
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John Hancock Balanced Fund John Hancock Large Cap Value Fund
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John Hancock Biotechnology Fund John Hancock Massachusetts Tax-Free
Income Fund
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John Hancock Core Equity Fund John Hancock Mid Cap Growth Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock Core Growth Fund John Hancock Money Market Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock Core Value Fund John Hancock Multi Cap Growth Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock California Tax Free Income Fund John Hancock New York Tax-Free Bond Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock European Equity Fund John Hancock Pacific Basin Equities Fund
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John Hancock Financial Industries Fund John Hancock Real Estate Fund
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John Hancock Focused Relative Value Fund John Hancock Regional Bank Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock Global Fund John Hancock Small Cap Growth Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock Growth Trends Fund John Hancock Small Cap Value Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock Government Income Fund John Hancock Sovereign Investors Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock Health Sciences Fund John Hancock Strategic Income Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock High Yield Bond Fund John Hancock Technology Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock High Yield Municipal Bond Fund John Hancock Tax-Free Bond Fund
- ------------------------------------------------------- -----------------------------------------------------
John Hancock Investment Grade Bond Fund John Hancock U.S. Government Cash Reserve
- ------------------------------------------------------- -----------------------------------------------------
John Hancock International Fund John Hancock Large Cap Spectrum Fund
- ------------------------------------------------------- -----------------------------------------------------
Supplement to Statement of Additional Information
THE "DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES" section is
supplemented under the heading "Waiver of Contingent Deferred Sales Charge" as
follows:
Redemptions of Class B and Class C shares made under a periodic withdrawal plan,
or redemptions for fees charged by planners or advisors for advisory services,
as long as your annual redemptions do not exceed 12% of your account value,
including reinvested dividends, at the time you established your periodic
withdrawal plan and 12% of the value of subsequent investments (less
redemptions) in that account at the time you notify Signature Services. (Please
note, this waiver does not apply to periodic withdrawal plan redemptions of
Class A shares that are subject to a CDSC.)
JOHN HANCOCK BOND FUND
Class A, Class B, Class C and Class I Shares
Statement of Additional Information
January 1, 2002
This Statement of Additional Information provides information about John Hancock
Bond Fund (the "Fund"), a diversified open-end investment company, in addition
to the information that is contained in the combined Income Funds' current
Prospectus (the "Prospectus") and in the Fund's current Prospectus for Class I
shares (the "Prospectuses") .
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund.............................................. 2
Investment Objective and Policies..................................... 2
Investment Restrictions............................................... 14
Those Responsible for Management...................................... 16
Investment Advisory and Other Services................................ 21
Distribution Contracts................................................ 23
Sales Compensation.................................................... 25
Net Asset Value....................................................... 27
Initial Sales Charge on Class A and Class C Shares.................... 27
Deferred Sales Charge on Class B and Class C Shares................... 30
Special Redemptions................................................... 34
Additional Services and Programs...................................... 34
Purchases and Redemptions through Third Parties ...................... 36
Description of the Fund's Shares...................................... 36
Tax Status............................................................ 37
Calculation of Performance............................................ 41
Brokerage Allocation.................................................. 43
Transfer Agent Services............................................... 45
Custody of Portfolio.................................................. 45
Independent Auditors.................................................. 45
Appendix A- Description of Investment Risk............................ A-1
Appendix B-Description of Bond Ratings................................ B-1
Financial Statements.................................................. F-1
1
ORGANIZATION OF THE FUND
The Fund is a diversified open-end investment management company organized as a
Massachusetts business trust under the laws of The Commonwealth of
Massachusetts. The Fund was organized in 1984. Prior to October 1, 1998, the
Fund was called John Hancock Sovereign Bond Fund.
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 a 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. There is no assurance that the Fund
will achieve its investment objective. The investment objective is fundamental
and may only be changed with shareholder approval.
The Fund's investment objective is to generate a high level of current income,
consistent with prudent investment risk, through investment in a diversified
portfolio of freely marketable debt securities. The Adviser seeks high current
income consistent with the moderate level of risk associated with a portfolio
consisting primarily of investment grade debt securities.
To pursue this goal, the Fund normally invests at least 80% of the value of the
Fund's Assets in a diversified portfolio of bonds and other debt securities.
With respect to the Fund's investment policy of investing at least 80% of its
Assets in bonds and other debt securities, "Assets" is defined as net assets
plus the amount of any borrowings for investment purposes. Also, with respect to
this 80% investment policy, the Fund will notify shareholders at least 60 days
prior to any change in this policy.
In addition, the Fund contemplates at least 75% of the value of its total assets
will be in (1) debt securities that have, at the time of purchase, a rating
within the four highest grades as determined by Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A or Baa) or Standard & Poor's ("S&P") (AAA, AA, A, or
BBB); (2) debt securities of banks, the U.S. Government and its agencies or
instrumentalities and other issuers which, although not rated as a matter of
policy by either Moody's or S&P, are considered by the Fund to have investment
quality comparable to securities receiving ratings within the four highest
grades; and (3) cash and cash equivalents. Under normal conditions, the 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 options contracts). Debt
securities rated Baa or BBB are considered medium-grade obligations with
speculative characteristics and adverse economic conditions or changing
circumstances may weaken the issuers' capacity to pay interest and repay
principal. The Fund will, when feasible, purchase debt securities which are
non-callable. It is anticipated that under normal conditions, the Fund will not
invest more than 25% of its total assets in U.S. dollar-denominated foreign
securities (excluding U.S. dollar-denominated Canadian securities). The Fund
will diversify its investments among a number of industry groups without
concentration in any particular industry. The Fund's investments, and
consequently its net asset value, will be subject to the market fluctuations and
risks inherent in all securities.
2
The Fund may purchase corporate debt securities bearing fixed or fixed and
contingent interest as well as those which carry certain equity features, such
as conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, or participations based on revenues, sales or
profits. The Fund may purchase preferred stock. The Fund will not exercise any
such conversion, exchange or purchase rights if, at the time, the value of all
equity interests so owned would exceed 10% of the Fund's total assets taken at
market value.
For liquidity and flexibility, the Fund may place up to 20% of its Assets in
investment-grade short-term securities. In abnormal circumstances, such as
situations where the Fund experiences large cash inflows or anticipates
unusually large redemptions, and in an abnormal market, economic, political or
other conditions, the Fund may temporarily invest more than 20% of its Assets in
investment-grade short-term securities, cash, and cash equivalents.
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. Similarly, when such yields increase, the market value of a
portfolio already invested 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.
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 such ratings are
relative and subjective and are not absolute standards of quality. These ratings
will be used by the Fund 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 B contains further information concerning the ratings 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
Participation Interests. Participation interests, which may take the form of
interests in, or assignments of certain loans, are acquired from banks who have
made these loans or are members of a lending syndicate. The Fund's investments
in participation interests may be subject to its 15% limitation on investments
in illiquid securities.
Structured Securities. The Fund may invest in structured securities including
notes, bonds or debentures, the value of the principal of and/or interest on
which is to be determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference. The
terms of the structured securities may provide that in certain circumstances no
principal is due at maturity and, therefore, may result in the loss of the
Fund's investment. Structured securities may be positively or negatively
indexed, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference. Consequently, structured
securities entail a greater degree of market risk than other types of debt
obligations. Structured securities may also be more volatile, less liquid and
more difficult to accurately price than less complex fixed income investments.
3
Lower Rated High Yield Debt Obligations. The Fund may invest up to 25% of the
value of its total assets in fixed income securities rated below Baa by Moody's,
or below BBB by S&P, or in securities which are unrated. The Fund may invest in
securities rated as low as Ca by Moody's or CC by S&P, which may indicate that
the obligations are highly speculative and in default. Lower rated securities
are generally referred to as junk bonds. See the Appendix attached to this
Statement of Additional Information, for the distribution of securities in the
various ratings categories and a description of the characteristics of the
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 Fund may invest in unrated securities which, in the opinion of the
Adviser, offer comparable yields and risks to those securities which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal.
The market price and liquidity of lower rated fixed income securities generally
respond to short-term economic, corporate and market developments to a greater
extent than do higher rated securities. In the case of lower-rated securities,
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.
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 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 the high yield bonds. To the extent that the Fund invests in
these securities, the achievement of the Fund's objective will depend more on
the Adviser's judgment and analysis than would otherwise be the case. In
addition, the Fund's investments in high yield securities may be susceptible to
adverse publicity and investor perceptions, whether or not the perceptions are
justified by fundamental factors. In the past, economic downturns and increases
in interest rates have caused a higher incidence of default by the issuers of
lower-rated securities and may do so in the future, particularly with respect to
highly leveraged issuers. The market prices of zero coupon and payment-in-kind
bonds are affected to a greater extent by interest rate changes, and thereby
tend to be more volatile than securities that pay interest periodically and in
cash. Increasing rate note securities are typically refinanced by the issuers
within a short period of time. The Fund accrues income on these securities for
tax and accounting purposes, which is required to be distributed to
shareholders. Because no cash is received while income accrues on these
securities, the Fund may be forced to liquidate other investments to make the
distributions.
The Fund may acquire individual securities of any maturity and is not subject to
any limits as to the average maturity of its overall portfolio. The longer the
Fund's average portfolio maturity, the more the value of the portfolio and the
net asset value of the Fund's shares will fluctuate in response to changes in
interest rates. An increase in interest rates will generally reduce the value of
the Fund's portfolio securities and the Fund's shares, while a decline in
interest rates will generally increase their value.
Securities of Domestic and Foreign Issuers. The Fund may invest in U.S.
dollar-denominated securities of foreign and United States issuers that are
issued in or outside of the United States. Foreign companies may not be subject
to accounting standards and government supervision comparable to U.S. companies,
and there is often less publicly available information about their operations.
Foreign markets generally provide less liquidity than U.S. markets (and thus
potentially greater price volatility) and typically provide fewer regulatory
protections for investors. Foreign securities can also be affected by political
or financial instability abroad. It is anticipated that under normal conditions,
the Fund will not invest more than 25% of its total assets in U.S.
dollar-denominated foreign securities (excluding U.S. dollar-denominated
Canadian securities).
4
Mortgage-backed and Derivative Securities. Mortgage-backed securities represent
participation interests in pools of adjustable and fixed rate mortgage loans
which are guaranteed by agencies or instrumentalities of the U.S. government.
Unlike conventional debt obligations, mortgage-backed securities provide monthly
payments derived from the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans. The
mortgage loans underlying mortgage-backed securities are generally 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 and prepayment scenarios, the Fund may fail
to recover the full amount of its investment in mortgage-backed securities
notwithstanding any direct or indirect governmental or agency guarantee. Since
faster than expected prepayments must usually be invested in lower yielding
securities, mortgage-backed securities are less effective than conventional
bonds in "locking in" a specified interest rate. In a rising interest rate
environment, a declining prepayment rate may extend the average life of many
mortgage-backed securities. Extending the average life of a mortgage-backed
security increases the risk of depreciation due to future increases in market
interest rates.
The Fund's investments in mortgage-backed securities may include conventional
mortgage passthrough securities and certain classes of multiple class
collateralized mortgage obligations ("CMOs"). In order to reduce the risk of
prepayment for investors, CMOs are issued in multiple classes, each having
different maturities, interest rates, payment schedules and allocations of
principal and interest on the underlying mortgages. Senior CMO classes will
typically have priority over residual CMO classes as to the receipt of principal
and/or interest payments on the underlying mortgages. The CMO classes in which
the Fund may invest include but are not limited to sequential and parallel pay
CMOs, including planned amortization class ("PAC") and target amortization class
("TAC") securities.
Different types of mortgage-backed securities are subject to different
combinations of prepayment, extension, interest rate and/or other market risks.
Conventional mortgage passthrough securities and sequential pay CMOs are subject
to all of these risks, but are typically not leveraged. PACs, TACs and other
senior classes of sequential and parallel pay CMOs involve less exposure to
prepayment, extension and interest rate risk than other mortgage-backed
securities, provided that prepayment rates remain within expected prepayment
ranges or "collars."
Repurchase Agreements. In a repurchase agreement the Fund would 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.
5
Reverse Repurchase Agreements. The Fund may also enter into reverse purchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that the Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
are considered to be borrowings by the Fund. Reverse repurchase agreements
involve the risk that the market value of securities purchased by the Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. The Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting their repurchase. To minimize various risks associated with
reverse repurchase agreements, the Fund will establish and maintain 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, the Fund will not enter
into reverse repurchase agreements or borrow money, except from banks as a
temporary measure for extraordinary emergency purposes in amounts not to exceed
33 1/3% of the Fund's total assets (including the amount borrowed) taken at
market value. The Fund will not use leverage to attempt to increase income. The
Fund will not purchase securities while outstanding borrowings exceed 5% of the
Fund's 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 the procedures established by the of Trustees, the
Adviser will monitor the creditworthiness of the banks involved.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of the 1933 Act ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act.
The Fund will not invest more than 15% limit on 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 in illiquid investments. The Trustees may
adopt guidelines and delegate to the Adviser the daily function of determining
the monitoring and liquidity of restricted investments. The Trustees, however,
will retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor the Fund's liquidity and
availability of information. This investment practice could have the effect of
increasing the level of liquidity in the Fund if qualified institutional buyers
become for a time uninterested in purchasing these restricted securities.
Options on Securities and Securities Indices. The Fund may purchase and write
(sell) call and put options on any securities in which it may invest or on any
securities index based on securities in which it may invest. These options may
be listed on national domestic securities exchanges or traded in the
over-the-counter market. The Fund may write covered put and call options and
purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities written by the Fund
obligates the Fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. A put option on securities written by a Fund obligates the Fund to
purchase specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
6
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. Writing covered call options may deprive the Fund of the
opportunity to profit from an increase in the market price of the securities in
its portfolio. Writing covered put options may deprive the Fund of the
opportunity to profit from a decrease in the market price of the securities to
be acquired for its portfolio.
All call and put options written by the Funds are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities in a
segregated account with a value at least equal to the Fund's obligation under
the option, (ii) entering into an offsetting forward commitment and/or (iii)
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position. A written call option on securities is typically covered by
maintaining the securities that are subject to the option in a segregated
account. The Fund may cover call options on a securities index by owning
securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts") in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities exceeded the
sum of the exercise price, the premium paid and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities at a specified price during the option
period. The purchase of protective puts is designed to offset or hedge against a
decline in the market value of the Fund's portfolio securities. Put options may
also be purchased by the Fund for the purpose of affirmatively benefiting from a
decline in the price of securities which it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
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
7
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities markets.
Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates or securities prices, the Fund
may purchase and sell futures contracts, and purchase and write call and put
options on these futures contracts. The Fund may also enter into closing
purchase and sale transactions with respect to any of these contracts and
options. The futures contracts may be based on various securities (such as U.S.
Government securities), securities indices and any other financial instruments
and indices. All futures contracts entered into by the Fund are traded on U.S.
exchanges or boards of trade that are licensed, regulated or approved by the
Commodity Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Fund may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures contracts are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
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, 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 that would adversely affect the value of the Fund's portfolio
securities. Such futures contracts may include contracts for the future delivery
of securities held by the Fund or securities with characteristics similar to
those of the Fund's portfolio securities.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities, to alter the
investment characteristics of portfolio securities or to gain or increase its
exposure to a particular securities market.
Options on Futures Contracts. The Fund may purchase and write options on futures
for the same purposes as its transactions in futures contracts. The purchase of
put and call options on futures contracts will give the Fund the right (but not
the obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
purchaser of an option on a futures contract, the Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its risk
of loss in the event of an unfavorable price movement to the loss of the premium
and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, the Fund becomes obligated, in exchange for the premium (upon exercise
of the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
the Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
9
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related options
transactions either for bona fide hedging purposes or to seek to increase total
return as permitted by the CFTC. To the extent that the Fund is using futures
and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that the Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Fund to purchase securities, require the Fund to establish a
segregated account consisting of cash or liquid securities in an amount equal to
the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and a portfolio position which is intended to be protected,
the desired protection may not be obtained and the Fund may be exposed to risk
of loss.
Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
10
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.
Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. Covered rolls are not treated as
a borrowing or other senior security and will be excluded from the calculation
of the Fund's borrowings 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.
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 servicers to retain possession of the underlying obligations. If the
servicer 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.
11
Swaps, Caps, Floors and Collars. As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars and
floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an 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
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness 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 entitlements
with respect to swap, cap, collar or floor transactions.
Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in- kind,
delayed and zero coupon bonds. These are securities issued at a discount from
their face value because interest payments are typically postponed until
maturity. The amount of the discount rate varies depending on factors including
the time remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. A
portion of the discount with respect to stripped tax-exempt securities or their
coupons may be taxable. The market prices in pay-in-kind, delayed and zero
coupon bonds generally are more volatile than the market prices of
interest-bearing securities and are likely to respond to a greater degree to
changes in interest rates than interest-bearing securities having similar
maturities and credit quality. The Fund's investments in pay-in-kind, delayed
and zero coupon bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "TAX STATUS."
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 described as part of a restructuring plan created by U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally, commercial bank
debt). In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund (the
"IMF"). The Brady Plan facilitates the exchange of commercial bank debt for
newly issued bonds (known as Brady Bonds). The World Bank and the IMF provide
12
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 the IMF debtor nations are required
to 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 seek to 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 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 which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. Although Brady Bonds may be collateralized
by U.S. Government securities, repayment of principal and interest is not
guaranteed by the U.S. Government.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the securities involved in the transaction. As a
result, the Fund may incur a loss or, in the event of the borrower's bankruptcy,
the Fund may be delayed in or prevented from liquidating the collateral. It is a
fundamental policy of the Fund not to lend portfolio securities having a total
value exceeding 33 1/3% of its total assets.
Rights and Warrants. The Fund may purchase warrants and rights which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price, subject to the Fund's Investment
Restrictions. Generally, warrants and stock purchase rights do not carry with
them the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants and rights may be considered
to entail greater investment risk than certain other types of investments. In
addition, the value of warrants and rights does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not
exercised on or prior to their expiration date. Investment in warrants and
rights increases the potential profit or loss to be realized from the investment
of a given amount of the Fund's assets as compared with investing the same
amount in the underlying stock.
13
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.
The Fund intends to use short-term trading of securities as a means of managing
its portfolio to achieve its investment objective. The Fund, in reaching a
decision to sell one security and purchase another security at approximately the
same time, will take into account a number of factors, including 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. The success of
short-term trading will depend upon the ability of the Fund 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
significantly less than the profits and other benefits which will accrue to
shareholders.
The portfolio turnover rate will depend on a number of factors, including the
fact that the Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, the Fund intends to limit its short-term trading so that less than
30% of the Fund's gross annual income (including all dividend and interest
income and gross realized capital gains, both short and long-term, without being
offset for realized capital losses) will be derived from gross realized gains on
the sale or other disposition of securities held for less than three months.
This limitation, which must be met by all mutual funds in order to obtain such
Federal tax treatment, at certain times may prevent the Fund from realizing
capital gains on some securities held for less than three months.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without approval of a majority of the Fund's outstanding voting
securities which, as used in the Prospectus and this Statement of Additional
Information, means approval by the lesser of (1) 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 paragraphs (2), (6)
and (7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts and repurchase agreements
entered into in accordance with the Fund's investment policy, 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.
14
(2) Borrow money, except from banks as a temporary measure for
extraordinary emergency purposes in amounts not to exceed 33 1/3% of the Fund's
total assets (including the amount borrowed) taken at market value. The Fund
will not use leverage to attempt to increase income. The Fund will not purchase
securities while outstanding borrowings exceed 5% of the Fund's total assets.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if such pledging,
mortgaging or hypothecating does not exceed 33 1/3% of the Fund's total assets
taken at market value.
(4) Act as an underwriter, except to the extent that, in connection
with the disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the 1933 Act.
(5) Purchase or sell real estate or any interest therein, except that
the Fund may invest in securities of corporate or governmental entities secured
by real estate or marketable interests therein or issued by companies that
invest in real estate or interests therein.
(6) Make loans, except that the Fund (1) may lend portfolio securities
in accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements, and
(3) purchase all or a portion of an issue of publicly distributed debt
securities, bank loan participation interests, bank certificates of deposit,
bankers' acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments and
options on such futures contracts, 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.
(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
(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.
In connection with the lending of portfolio securities under item (6) above,
such loans must at all times be fully collateralized by cash or securities of
the U.S. Government or its agencies or instrumentalities and the Fund's
custodian must take possession of the collateral either physically or in book
entry form. Any cash collateral will consist of short-term high quality debt
instruments. Securities used as collateral must be marked to market daily.
15
Non-fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval: The Fund may not:
(a) Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under the management of the Adviser to
save commissions or to average prices among them is not deemed to result in a
securities trading account.
(b) Purchase securities on margin or make short sales, except margin
deposits in connection with transactions in options, futures contracts, options
on futures contracts and other arbitrage transactions 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 that the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities and in connection with transactions involving
forward foreign currency exchange transactions.
(c) Invest for the purpose of exercising control over or management of
any company.
(d) Invest more than 15% of its net assets in illiquid securities.
(e) Purchase a security if, as a result, (i) more than 10% of the
Fund's total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total outstanding voting
securities of any one investment company, or (iii) more than 5% of the Fund's
total assets would be invested in the securities of any one investment company.
These limitations do not apply to (a) the investment of cash collateral,
received by the Fund in connection with lending the Fund's portfolio securities,
in the securities of open-end investment companies or (b) the purchase of shares
of any investment company in connection with a merger, consolidation,
reorganization or purchase of substantially all of the assets of another
investment company. Subject to the above percentage limitations, the Fund may,
in connection with the John Hancock Group of Funds Deferred Compensation Plan
for Independent Trustees/Directors, purchase securities of other investment
companies within the John Hancock Group of Funds.
If a percentage restriction 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.
16
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees of the Trust, who elect
officers who are responsible for the day-to-day operations of the Fund and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Fund are also Officers and Directors of the Adviser or Officers
and Directors of the Fund's principal distributor, John Hancock Funds, Inc.
("John Hancock Funds").
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
Maureen R. Ford * Trustee, Chairman, Executive Vice President John
101 Huntington Avenue President and Chief Hancock Financial Services, Inc.,
Boston, MA 02199 Executive Officer John Hancock Life Insurance
March 1950 (1,2) 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
John Hancock Place Investment Officer John Hancock
P.O. Box 111 Financial Services, Inc.; Director,
Boston, MA 02117 Executive Vice President and Chief
July 1948 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).
Dennis S. Aronowitz Trustee Professor of Law, Emeritus, Boston
101 Huntington Avenue University School of Law (as of
Boston, MA 02199 1996); Director, Brookline Bancorp.
June 1931
Richard P. Chapman, Jr. Trustee (1) Chairman, President, and Chief
101 Huntington Avenue Executive Officer, Brookline
Boston, MA 02199 Bancorp. (lending); Trustee,
February 1935 Northeastern University
(education); Director, Depositors
Insurance Fund, Inc. (insurance).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
17
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
William J. Cosgrove Trustee Vice President, Senior Banker and
101 Huntington Avenue Senior Credit Officer, Citibank,
Boston, MA 02199 N.A. (retired September 1991);
January 1933 Executive Vice President, Citadel
Group Representatives, Inc.;
Trustee, the Hudson City Savings
Bank (since 1995).
Richard A. Farrell Trustee President of Farrell, Healer & Co.,
101 Huntington Avenue (venture capital management firm)
Boston, MA 02199 (since 1980); Prior to 1980, headed
November 1932 the venture capital group at Bank
of Boston Corporation.
Gail D. Fosler Trustee Senior Vice President and Chief
101 Huntington Avenue Economist, The Conference Board
Boston, MA 02199 (non-profit economic and business
December 1947 research); Director, Unisys Corp.;
Director H.B. Fuller Company; and
DBS Holdings (Singapore) (Banking
and Financial Services); Director,
National Bureau of Economic
Research (academic).
William F. Glavin Trustee President Emeritus, Babson College
101 Huntington Avenue (as of 1997); Vice Chairman, Xerox
Boston, MA 02199 Corporation (until June 1989);
March 1932 Director, Reebok, Inc. (since 1994)
and Inco Ltd.
Dr. John A. Moore Trustee President and Chief Executive
101 Huntington Avenue Officer, Institute for Evaluating
Boston, MA 02199 Health Risks, (nonprofit
February 1939 institution) (since September
1989).
Patti McGill Peterson Trustee Executive Director, Council for
101 Huntington Avenue International Exchange of Scholars
Boston, MA 02199 (since January 1998), Vice
May 1943 President, Institute of
International Education (since
January 1998); Senior Fellow,
Cornell Institute of Public
Affairs, Cornell University (until
December 1997); President Emerita
of Wells College and St. Lawrence
University; Director, Niagara
Mohawk Power Corporation (electric
utility).
John W. Pratt Trustee Professor of Business
101 Huntington Avenue Administration Emeritus, Harvard
Boston, MA 02199 University Graduate School of
September 1931 Business Administration (as of June
1998).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
18
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
William L. Braman Executive Vice Executive Vice President and Chief
101 Huntington Avenue President and Chief Investment Officer, the Adviser and
Boston, MA 02199 Investment Officer (2) each of the John Hancock Funds;
December 1953 Executive Vice President and Chief
Investment Officer, Barring Asset
Management, London UK (until May
2000).
Richard A. Brown Senior Vice President Senior Vice President and Chief
101 Huntington Avenue and Chief Financial Financial Officer of the Adviser,
Boston, MA 02199 Officer (2) 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 Senior Vice President and Chief
101 Huntington Avenue President, Secretary Legal Officer the Adviser; John
Boston, MA 02199 and Chief Legal Hancock Funds; Vice President
March 1950 Officer Signature Services (until May
2000), The Berkeley Group, NM
Capital and SAMCorp.
William H. King Vice President and Vice President and Assistant
101 Huntington Avenue Treasurer Treasurer, the Adviser; Vice
Boston, MA 02199 President and Treasurer, John
July 1952 Hancock Funds; Assistant Treasurer,
John Hancock Funds (until June
2001).
Thomas H. Connors Vice President and Vice President and Compliance
101 Huntington Avenue Compliance 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.
19
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. Ms. Ford and Mr. DeCiccio, each a
non-Independent Trustee, and each of the officers of the Fund are interested
persons of the Adviser, are compensated by the Adviser and/or its affiliates and
receive no compensation from the Fund for their services.
Aggregate Total Compensation From the
Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
- -------------------- ---------------- ---------------------------
Dennis S. Aronowitz $ 8,551 $ 75,000
Richard P. Chapman, Jr.* 8,973 78,000
William J. Cosgrove* 8,141 72,000
Leland O. Erdahl+ 3,216 72,100
Richard A. Farrell 8,385 75,000
Gail D. Fosler 8,307 68,000
William F. Glavin* 7,689 64,000
Dr. John A. Moore* 8,319 72,100
Patti McGill Peterson 7,849 70,350
John W. Pratt 8,141 72,000
----------- ----------
Total $77,571 $718,550
(1) Compensation is for the fiscal year ended May 31, 2001.
(2) Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 2000. As of this date, there were sixty-nine
funds in the John Hancock Fund Complex, with each of these Independent Trustees
serving on thirty-one funds.
+As of February 28, 2001, Mr. Erdahl resigned as Trustee of the Complex.
* As of December 31, 2000, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $85,948, Mr. Cosgrove was $218,258, Mr. Glavin was $317,363 and for
Dr. Moore was $263,160 under the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
As of September 25, 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 beneficially owned 5% of or more of the
outstanding shares of the Funds listed below:
20
Percentage of Total
Outstanding Shares of
Name and Address of Shareholders Class of Shares the Class of the Fund
- -------------------------------- ----------------- ---------------------
MLPF&S For The Sole B 23.25%
Benefit of Its Customers
Attn Fund Administration 97C84
4800 Deer Lake Drive East
Jacksonville FL 32246-6484
MLPF&S For The Sole C 42.47%
Benefit of Its Customers
Attn Fund Administration
4800 Deer Lake Drive East
Jacksonville FL 32246-6484
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 the 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 more 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 Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Fund's shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including 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 expenses of
the Fund (including an allocable portion of the cost of the Adviser's employees
rendering such services to the Fund); the compensation and expenses of Trustees
who are not otherwise affiliated with the Trust, the Adviser or any of their
affiliates; expenses of Trustees' and shareholders' meetings; trade association
memberships; insurance premiums; and any extraordinary expenses.
21
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser monthly a fee based on a stated percentage of the average of the daily
net assets of the Fund as follows:
Average Daily Net Assets Annual Rate
------------------------ -----------
First $1,500,000,000 0.50%
Next $500,000,000 0.45%
Next $500,000,000 0.40%
Amount Over $2,500,000,0000 0.35%
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to re-impose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
For the fiscal years ended May 31, 1999, 2000 and 2001, the Adviser received
fees of $7,686,223, $7,206,180 and $6,760,696, respectively.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser or its affiliates 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 the purchase or sale of
securities by the Adviser for the Fund for other funds or clients, for which the
Adviser renders investment advice, arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for the
respective funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
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 its 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 the
obligations and duties under the Advisory Agreement.
Under the Advisory Agreement, the Fund may use the name "John Hancock" or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or the Life
Company may grant the nonexclusive right to use the name "John Hancock" or any
similar name to any other corporation or entity, including but not limited to
any investment company of which the Life Company or any subsidiary or affiliate
thereof or any successor to the business of any subsidiary or affiliate thereof
shall be the investment adviser.
The continuation of the Advisory Agreement and Distribution Agreement was
approved by all of the Trustees. The Advisory Agreement, and the Distribution
Agreement discussed below, 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.
22
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 ended May 31, 1999, 2000 and 2001, the
Fund paid the Adviser $226,136, $276,177 and $262,846, 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),
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 class of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock Funds. 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 Fund which are continually offered at net asset value next
determined, plus any applicable sales charge, if any. In connection with the
sale of Fund shares, John Hancock Funds and Selling Brokers receive compensation
from a sales charge imposed, in the case of Class A and Class C shares, at the
time of sale. In the case of Class B or Class C shares, the broker receives
compensation immediately but John Hancock Funds is compensated on a deferred
basis.
Total underwriting commissions for sales of the Fund's Class A shares for the
fiscal years ended May 31, 1999, 2000 and 2001 was $1,782,697, $825,833 and
$1,043,537, respectively. Of such amounts $137,960, $72,056 and $105,641, were
retained by John Hancock Funds for 1999, 2000 and 2001. Total underwriting
commissions for sales of the Fund's Class C shares for the period from May 1,
2000 to May 31, 2000 and for the fiscal year May 31, 2001 was $9,774 and
$167,416, respectively. Of such amounts no commissions were retained by John
Hancock Funds. The remainder of the underwriting commissions were reallowed to
Selling Broker .
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "Investment Company Act"). Under the Plans, the Fund will pay
distribution and service fees at an aggregate annual rate of up to 0.30% for
Class A shares and 1.00% for Class B and Class C shares of the Fund's average
daily net assets attributable to shares of that class. However, the service fee
will not exceed 0.25% of the Fund's average daily net assets attributable to
each class of shares. The distribution fees will be used to reimburse the John
Hancock Funds for its distribution expenses, including but not limited to: (i)
initial and ongoing sales compensation to Selling Brokers and others (including
affiliates of the John Hancock Funds) engaged in the sale of Fund shares; (ii)
marketing, promotional and overhead expenses incurred in connection with the
distribution of Fund shares; and (iii) with respect to Class B and Class C
shares only, interest expenses on unreimbursed distribution expenses. The
service fees will be used to compensate Selling Brokers and others for providing
personal and account maintenance services to shareholders. In the event that
John Hancock Funds is not fully reimbursed for payments or expenses they incur
23
under the Class A Plan, these expenses will not be carried beyond twelve months
from the date they were incurred. Unreimbursed expenses under the Class B and
Class C Plans will be carried forward together with interest on the balance of
these unreimbursed expenses. The Fund does not treat the unreimbursed expenses
under the Class B and Class C Plans as a liability of the Fund because the
Trustees may terminate the Class B and/or Class C Plan at any time with no
additional liability for these expenses to the shareholders and the Fund. For
the fiscal year ended May 31, 2001, an aggregate of $6,911,125 of distribution
expenses or 3.38% of the average net assets of the Class B shares of the Fund,
was not reimbursed or recovered by John Hancock Funds through the receipt of
deferred sales charges or Rule 12b-1 fees in prior periods. For the fiscal year
ended May 31, 2001, an aggregate of $0 of distribution expenses or 0% of the
average net assets of the Class C shares of the Fund, was not reimbursed or
recovered by John Hancock Funds through the receipt of deferred sales charges or
Rule 12b-1 fees.
The Plans and all amendments were approved by the Trustees, including a majority
of the Trustees who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plans (the
"Independent Trustees"), by votes cast in person at meetings called for the
purpose of voting on these Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty (a) by vote of a majority of the Independent Trustees, (b) by a vote of
a majority of the Fund's outstanding shares of the applicable class in each case
upon 60 days' written notice to John Hancock Funds, and (c) automatically in the
event of assignment. The Plans further provide that they may not be amended to
increase the maximum amount of the fees for the services described therein
without the approval of a majority of the outstanding shares of the class of the
Fund which has voting rights with respect to the Plan. Each Plan provides that
no material amendment to the Plans will be effective unless it is approved by a
vote of a majority of the Trustees and the Independent Trustees of the Fund. The
holders of Class A, Class B and Class C shares have exclusive voting rights with
respect to the Plan applicable to their respective class of shares. In adopting
the Plans the Trustees concluded that, in their judgment, there is a reasonable
likelihood that the Plans will benefit the holders of the applicable class of
shares of the Fund.
Class I shares of the Fund are not subject to any distribution plan. Expenses
associated with the obligation of John Hancock Funds to use its best efforts to
sell Class I shares will be paid by the Adviser or by John Hancock Funds and
will not be paid from the fees paid under Class A, Class B or Class C Plans.
Amounts paid to John Hancock Funds by any class of shares of the Fund will not
be used to pay the expenses incurred with respect to any other class of shares
of the Fund; provided, however, that expenses attributable to the Fund as a
whole will be allocated, to the extent permitted by law, according to a formula
based upon gross sales dollars and/or average daily net assets of each such
class, as may be approved from time to time by vote of a majority of the
Trustees. From time to time, the Fund may participate in joint distribution
activities with other Funds and the costs of those activities will be borne by
each Fund in proportion to the relative net asset value of the participating
Funds.
During the fiscal year ended May 31, 2001, the Fund paid John Hancock Funds the
following amounts of expenses in connection with their services for the Fund.
24
Expense Items
-------------
Printing and Interest
Mailing of Carrying or
Prospectus to Compensation Expenses of John Other Finance
Advertising New Shareholders to Selling Brokers Hancock Funds Charges
----------- ---------------- ------------------ ---------------- -------------
Class A $332,612 $13,960 $2,048,678 $983,451 $ 0
Class B $287,154 $10,313 $ 980,297 $675,194 $18,468
Class C $ 24,735 $ 1,176 $ 112,976 $ 73,873 $ 0
SALES COMPENSATION
As part of their business strategies, the Fund, along with John Hancock Funds,
pays 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.
The two primary sources of broker compensation payments for Class A, Class B and
Class C are (1) the12b-1 fees that are paid out of the Fund's assets and (2)
sales charges paid by investors. The sales charges and 12b-1 fees are detailed
in the prospectus and under "Distribution Contracts" in this Statement of
Additional Information. The portions of these expenses that are paid to
financial services firms are shown on the next page. For Class I shares, 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.
Whenever you purchase Class A, Class B or Class C shares, the financial services
firm receives a reallowance/payment, as described below. The firm also receives
the first year's 12b-1 service fee at this time. Beginning with the second year
after an investment is made, the financial services firm receives an annual
12b-1 service fee of 0.25% of its total eligible fund net assets. This fee is
paid quarterly in arrears by the Fund.
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.
25
Broker Receives Broker Receives
Sales charge Maximum 12b-1Service Total Broker
Paid by investors Reallowance fee(% of net Compensation (1)
Class A investments (% of offering price) (% of offering price) investment) (3) (% of offering price)
- ------------------- --------------------- --------------------- --------------- ---------------------
Up to $99,999 4.50% 3.76% 0.25% 4.00%
$100,000 - $249,999 3.75% 3.01% 0.25% 3.25%
$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%
$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%
Investments of Class A
shares of $1 million or more (4)
- --------------------------------
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1M - $5M above that -- 0.25% 0.25% 0.50% (2)
Next $1 or more above that -- 0.00% 0.25% 0.25% (2)
Broker Receives
Broker Receives 12b-1 Service
Maximum fee Total Broker
Reallowance (% of net Compensation (1)
Class B investments (% of offering price) investment) (3) (% of offering price)
- ------------------- --------------------- --------------- --------------------
All investments 3.75% 0.25% 4.00%
Broker Receives
Broker Receives 12b-1
Maximum Service fee Total Broker
Reallowance (% of net Compensation (1)
Class C investments (% of offering price) investment) (3) (% of offering price)
- ------------------- --------------------- --------------- ---------------------
Over $1,000,000 or amounts -- 0.75% 0.25% 1.00%
purchased at NAV
All other amounts 1.00% 1.75% 0.25% 2.00%
Broker Receives
Broker Receives 12b-1
Maximum Service fee Total Broker
Reallowance (% of net Compensation (1)
Class I investments (% of offering price) investment) (3) (% of offering price)
- ------------------- --------------------- --------------- ---------------------
All other amounts -- 0.00% 0.00% 0.00% (5)
(1) Broker percentages and 12b-1 service fee percentages are calculated from
different amounts, and therefore may not equal total broker compensation
percentages if combined using simple addition.
(2) For Group Investment Program sales, the maximum total broker compensation
for investments of $1 million or more is 1.00% of the offering price (one year
CDSC of 1.00% applies for each sale).
(3) After first year broker receives 12b-1 service fees quarterly in arrears.
(4) John Hancock Funds may reduce aggregate investments by the amount of recent
redemptions.
26
(5) 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 Class I shares
of the Fund. This payment may be up to 0.15% of the amount invested.
CDSC revenues collected by John Hancock Funds may be used to pay broker
commissions when there is no initial sales charge.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of the Fund's shares,
the following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of a Fund's NAV. If quotations
are not readily available, or the value has been materially affected by the
events occurring after closing of a foreign market, assets are valued by a
method that Trustees believe accurately reflects fair value.
The NAV of 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, a Fund's portfolio securities may trade and the NAV of the Fund's
redeemable securities may be significantly affected on days when a shareholder
has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A AND CLASS C SHARES
Shares of the Fund are offered at a price equal to their net asset value plus a
sales charge which, at the option of the purchaser, may be imposed either at the
time of purchase (the "initial sales charge alternative") or on a contingent
deferred basis (the "deferred sales charge alternative"). The fund no longer
issues share certificates. Shares are electronically recorded. The Trustees
reserve the right to change or waive the Fund's minimum investment requirements
and to reject any order to purchase shares (including purchase by exchange) when
in the judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A and Class C shares of the
Fund are described in the Prospectus. Methods of obtaining reduced sales charges
referred to generally in the Prospectus are described in detail below. In
calculating the sales charge applicable to current purchases of Class A shares
of the Fund, the investor is entitled to accumulate current purchases with the
27
greater of the current value (at offering price) of the Class A shares of the
Fund owned by the investor or, if John Hancock Signature Services, Inc.
("Signature Services") is notified by the investor's dealer or the investor at
the time of the purchase, the cost of the Class A shares owned.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or contingent deferred sales charge ("CDSC") to various individuals and
institutions as follows:
o A Trustee or officer of the Trust; a Director or officer of the Adviser and
its affiliates, sub-adviser or Selling Brokers; employees or sales
representatives of any of the foregoing; retired officers, employees or
Directors of any of the foregoing; a member of the immediate family
(spouse, children, grandchildren, mother, father, sister, brother,
mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew
and same-sex domestic partner) of any of the foregoing; or any fund,
pension, profit sharing or other benefit plan for the individuals described
above.
o A broker, dealer, financial planner, consultant or registered investment
advisor that has entered into a signed agreement with John Hancock Funds
providing specifically for the use of Fund shares in fee-based investment
products or services made available to their clients.
o A former participant in an employee benefit plan with John Hancock funds,
when he or she withdraws from his or her plan and transfers any or all of
his or her plan distributions directly to the Fund.
o A member of a class action lawsuit against insurance companies who is
investing settlement proceeds.
o Retirement plans participating in Merrill Lynch servicing programs, if the
Plan has more than $3 million in assets or 500 eligible employees at the
date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement. See your Merrill Lynch financial consultant for further
information.
o Retirement plans investing through the PruArray Program sponsored by
Prudential Securities.
o Pension plans transferring assets from a John Hancock variable annuity
contract to the Fund pursuant to an exemptive application approved by the
Securities Exchange Commission.
o Participant directed defined contribution plans with at least 100 eligible
employees at the inception of the Fund account, may purchase Class A shares
with no initial sales charge. However, if the shares are redeemed within 12
months after the end of the calendar year in which the purchase was made, a
CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,000 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
Class C shares may be offered without a front-end sales charge to:
o Investments of redemption proceeds from a non-John Hancock mutual fund.
28
o Group Retirement plan products for which John Hancock Signature Services
performs recordkeeping and administrative services. (These plans include
403(b), Simple IRA, SEP and SARSEP plans.) Also included are plans formerly
record kept by John Hancock Signature Services (including 401(k)).
o Group Retirement plan products sold through third party administrators
under the John Hancock SELECT retirement plan program. (These plans include
401(k), Money Purchase and Profit Sharing plans.)
o An investor who buys through a Merrill Lynch omnibus account. However, a
CDSC may apply if the shares are sold within 12 months of purchase.
Class A and Class C shares may also be purchased without an initial sales charge
in connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
Combination Privilege. In calculating the sales charge applicable to purchases
of Class A shares made at one time, the purchases will be combined to reduce
sales charges if made by (a) an individual, his or her spouse and their children
under the age of 21, purchasing securities for his or their own account, (b) a
trustee or other fiduciary purchasing for a single trust, estate or fiduciary
account, and (c) groups which qualify for the Group Investment Program (see
below). A company's (not an individual's) qualified and non-qualified retirement
plan investments can be combined to take advantage of this privilege. Further
information about combined purchases, including certain restrictions on combined
group purchases, is available from Signature Services or a Selling Broker's
representative.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount being invested but also
the investor's purchase price or current account value of the Class A shares of
all John Hancock funds which carry a sales charge already held by such person.
Class A shares of John Hancock money market funds will only be eligible for the
accumulation privilege if the investor has previously paid a sales charge on the
amount of those shares. Retirement plan investors may include the value of Class
B shares if Class B shares held are greater than $1 million. Retirement plans
must notify Signature Services to utilize. A company's (not an individual's)
qualified and non-qualified retirement plan investments can be combined to take
advantage of this privilege.
Group Investment Program. Under the Combination and Accumulation Privileges, all
members of a group may combine their individual purchases of Class A shares to
potentially qualify for breakpoints in the sales charge schedule. This feature
is provided to any group which (1) has been in existence for more than six
months, (2) has a legitimate purpose other than the purchase of mutual fund
shares at a discount for its members, (3) utilizes salary deduction or similar
group methods of payment, and (4) agrees to allow sales materials of the fund in
its mailings to members at a reduced or no cost to John Hancock Funds.
Letter of Intention. Reduced sales charges are also applicable to investments in
Class A shares made pursuant to a Letter of Intention (the "LOI"), which should
be read carefully prior to its execution by an investor. The Fund offers two
options regarding the specified period for making investments under the LOI. All
investors have the option of making their investments over a specified period of
thirteen (13) months. Investors who are using the Fund as a funding medium for a
qualified retirement plan, however, may opt to make the necessary investments
called for by the LOI over a forty-eight (48) month period. These retirement
plans include traditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b)
(including TSAs) SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit
Sharing and Section 457 plans. An individual's non-qualified and qualified
29
retirement plans investments cannot be combined to satisfy an LOI of 48 months.
Such an investment (including accumulations and combinations but not including
reinvested dividends) must aggregate $100,000 or more invested during the
specified period from the date of the LOI or from a date within ninety (90) days
prior thereto, upon written request to Signature Services. The sales charge
applicable to all amounts invested under the LOI is computed as if the aggregate
amount intended to be invested had been invested immediately. If such aggregate
amount is not actually invested, the difference in the sales charge actually
paid and the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made within the specified period
(either 13 or 48 months) the sales charge applicable will not be higher than
that which would have applied (including accumulations and combinations) had the
LOI been for the amount actually invested.
The LOI authorizes Signature Services to hold in escrow sufficient Class A
shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow Class A shares will be released. If the total investment specified in
the LOI is not completed, the Class A shares held in escrow may be redeemed and
the proceeds used as required to pay such sales charge as may be due. By signing
the LOI, the investor authorizes Signature Services to act as his or her
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
Because Class I shares are sold at net asset value without the imposition of any
sales charge, none of the privileges described under these captions are
available to Class I investors.
DEFERRED SALES CHARGE ON CLASS B and CLASS C SHARES
Investments in Class B shares are purchased at net asset value per share without
the imposition of an initial sales charge so the Fund will receive the full
amount of the purchase payment.
Contingent Deferred Sales Charge. Class B and Class C shares which are redeemed
within six years or one year of purchase, respectively, will be subject to a
CDSC at the rates set forth in the Prospectus as a percentage of the dollar
amount subject to the CDSC. The charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
Class B or Class C shares being redeemed. No CDSC will be imposed on increases
in account value above the initial purchase prices, including all shares derived
from reinvestment of dividends or capital gains distributions.
Class B shares are not available to retirement plans that had more than 100
eligible employees at the inception of the Fund account.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of both Class B and Class C
shares, all payments during a month will be aggregated and deemed to have been
made on the first day of the month.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C, or those you acquired through dividend and
30
capital gain reinvestment, and next from the shares you have held the longest
during the six-year period for Class B shares. For this purpose, the amount of
any increase in a share's value above its initial purchase price is not regarded
as a share exempt from CDSC. Thus, when a share that has appreciated in value is
redeemed during the CDSC period, a CDSC is assessed only on its initial purchase
price.
When requesting a redemption for a specific dollar amount please indicate if you
require the proceeds to equal the dollar amount requested. If not indicated,
only the specified dollar amount will be redeemed from your account and the
proceeds will be less any applicable CDSC.
Example:
You have purchased 100 Class B shares at $10 per share. The second year after
your purchase, your investment's net asset value per share has increased by $2
to $12, and you have gained 10 additional shares through dividend reinvestment.
If you redeem 50 shares at this time your CDSC will be calculated as follows:
oProceeds of 50 shares redeemed at $12 per share (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to
CDSC (dividend reinvestment) (120.00)
-------
oAmount subject to CDSC $280.00
*The appreciation is based on all 100 shares in the account not just
the shares being redeemed.
Proceeds from the CDSC are paid to John Hancock Funds and are used in whole or
in part by John Hancock Funds to defray its expenses related to providing
distribution-related services to the Funds in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to select
Selling Brokers for selling Class B and Class C shares. The combination of the
CDSC and the distribution and service fees facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of the purchase.
Waiver of Contingent Deferred Sales Charge. The CDSC will be waived on
redemptions of Class B and Class C shares and of Class A shares that are subject
to CDSC, unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Funds' right to liquidate your
account if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
* Redemptions of Class B (but not Class C) shares made under a periodic
withdrawal plan or redemptions for fees charged by planners or
advisors for advisory services, as long as your annual redemptions do
not exceed 12% of your account value, including reinvested dividends,
at the time you established your periodic withdrawal plan and 12% of
the value of subsequent investments (less redemptions) in that
account at the time you notify Signature Services. (Please note, this
waiver does not apply to periodic withdrawal plan redemptions of
Class A shares that are subject to a CDSC.)
31
* Redemptions by Retirement plans participating in Merrill Lynch
servicing programs, if the Plan has less than $3 million in assets or
500 eligible employees at the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement. See your Merrill Lynch
financial consultant for further information.
* Redemptions of Class A shares by retirement plans that invested
through the PruArray Program sponsored by Prudential Securities.
* Redemptions of Class A shares made after one year from the inception
date of a retirement plan at John Hancock.
For retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLE
IRAs, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money Purchase
Pension Plan, Profit-Sharing Plan and other plans as described in the Internal
Revenue Code) unless otherwise noted.
* Redemptions made to effect mandatory or life expectancy distributions
under the Internal Revenue Code. (Waiver based on required, minimum
distribution calculations for John Hancock Mutual Fund IRA assets
only.)
* Returns of excess contributions made to these plans.
* Redemptions made to effect distributions to participants or
beneficiaries from employer sponsored retirement plans under section
401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k)
Plans), 457 and 408 (SEPs and SIMPLE IRAs of the Internal Revenue Code
* Redemptions from certain IRA and retirement plans that purchased shares
prior to October 1, 1992 and certain IRA plans that purchased shares
prior to May 15, 1995.
Please see matrix for some examples.
32
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), MPP, Rollover
PSP) 457 & 408
(SEPs & Simple
IRAs)
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Death or Disability Waived Waived Waived Waived Waived
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Over 70 1/2 Waived Waived Waived Waived for 12% of account
required value annually
minimum in periodic
distributions*or payments
12% of account
value annually
in periodic
payments
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Between 59 1/2 and Waived Waived Waived Waived for Life 12% of account
70 1/2 Expectancy or value annually
12% of account in periodic
value annually payments
in periodic
payments
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account
(Class B only) annuity payments annuity annuity annuity value annually
(72t) or 12% of payments (72t) payments (72t) payments (72t) in periodic
account value or 12% of or 12% of or 12% of payments
annually in account value account value account value
periodic payments annually in annually in annually in
periodic periodic periodic
payments payments payments
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Loans Waived Waived N/A N/A N/A
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Termination of Plan Not Waived Not Waived Not Waived Not Waived N/A
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Hardships Waived Waived Waived N/A N/A
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Qualified Domestic Waived Waived Waived N/A N/A
Relations Orders
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Termination of Waived Waived Waived N/A N/A
Employment Before
Normal Retirement Age
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
Return of Excess Waived Waived Waived Waived N/A
- ----------------------- ------------------ ---------------- ---------------- ----------------- ----------------
*Required minimum distributions based on John Hancock Mutual Fund IRA assets
only.
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
33
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.
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Shares of the Fund which are subject to a CDSC may be exchanged into
shares of any of the other John Hancock funds that are subject to a CDSC without
incurring the CDSC; however, the shares acquired in an exchange will be subject
to the CDSC schedule of the shares acquired if and when such shares are redeemed
(except that shares exchanged into John Hancock 500 Index Fund will retain the
exchanged fund's CDSC schedule). For purposes of computing the CDSC payable upon
redemption of shares acquired in an exchange, the holding period of the original
shares is added to the holding period of the shares acquired in an exchange.
If a retirement plan exchanges the plan's Class A account in its entirety from
the Fund to a non-John Hancock investment, the one-year CDSC applies.
If a shareholder exchanges Class B shares purchased prior to January 1, 1994 for
Class B shares of any other John Hancock fund, the acquired shares will continue
to be subject to the CDSC schedule that was in effect when the exchanged shares
were purchased.
The Fund reserves the right to require that previously exchanged shares (and
reinvested dividends) be in the Fund for 90 days before a shareholder is
permitted a new exchange.
The Fund may refuse any exchange order. The Fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares of another for Federal Income Tax purposes. An exchange may
result in a taxable gain or loss. See "TAX STATUS".
Systematic Withdrawal Plan. The Fund permits the establishment of a Systematic
Withdrawal Plan. Payments under this plan represent proceeds arising from the
redemption of Fund shares. Since the redemption price of the Fund shares may be
more or less than the shareholder's cost, which may result in realization of
gain or loss for purposes of Federal, state and local income taxes. The
maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund could be disadvantageous to a shareholder because
of the initial sales charge payable on such purchases of Class A shares and the
34
CDSC imposed on redemptions of Class B and Class C shares and because
redemptions are taxable events. Therefore, a shareholder should not purchase
shares at the same time a Systematic Withdrawal Plan is in effect. The Fund
reserves the right to modify or discontinue the Systematic Withdrawal Plan of
any shareholder on 30 days' prior written notice to such shareholder, or to
discontinue the availability of such plan in the future. The shareholder may
terminate the plan at any time by giving proper notice to Signature Services.
Monthly Automatic Accumulation Program ("MAAP"). The program is explained in the
Prospectus. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month indicated.
The privilege of making investments through the MAAP may be revoked by Signature
Services without prior notice if any investment is not honored by the
shareholder's bank. The bank shall be under no obligation to notify the
shareholder as to the non-payment of any checks.
The program may be discontinued by the shareholder either by calling Signature
Services or upon written notice to Signature Services which is received at least
five (5) business days prior to the order date of any investment.
Reinstatement or Reinvestment Privilege. If Signature Services is notified prior
to reinvestment, a shareholder who has redeemed Fund shares may, within 120 days
after the date of redemption, reinvest without payment of a sales charge any
part of the redemption proceeds in shares of the same class of the Fund or
another John Hancock fund, subject to the minimum investment limit of that fund.
The proceeds from the redemption of Class A shares may be reinvested at net
asset value without paying a sales charge in Class A shares of the Fund or in
Class A shares of any John Hancock fund. If a CDSC was paid upon a redemption, a
shareholder may reinvest the proceeds from this redemption at net asset value in
additional shares of the class from which the redemption was made. The
shareholder's account will be credited with the amount of any CDSC charged upon
the prior redemption and the new shares will continue to be subject to the CDSC.
The holding period of the shares acquired through reinvestment will, for
purposes of computing the CDSC payable upon a subsequent redemption, include the
holding period of the redeemed shares.
To protect the interests of other investors in the Fund, the Fund may cancel the
reinvestment privilege of any parties that, in the opinion of the Fund, are
using market timing strategies or making more than seven exchanges per owner or
controlling party per calendar year. Also, the Fund may refuse any reinvestment
request.
The Fund may change or cancel its reinvestment policies at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "TAX
STATUS."
Retirement plans participating in Merrill Lynch's servicing programs:
- ---------------------------------------------------------------------
Class A shares are available at net asset value for plans with $3 million in
plan assets or 500 eligible employees at the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement. If the plan does not meet either
of these limits, Class A shares are not available.
35
For participating retirement plans investing in Class B shares, shares will
convert to Class A shares after eight years, or sooner if the plan attains
assets of $5 million (by means of a CDSC-free redemption/purchase at net asset
value).
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, Inc. (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, without
further action by shareholders. As of the date of this Statement of Additional
Information, the Trustees have not authorized any additional series of the Fund,
other than the Fund, although they may do so in the future. The Declaration of
Trust also authorizes the Trustees to classify and reclassify the shares of the
Fund, or any new series of the Trust, into one or more classes. The Trustees
have authorized the issuance of four classes of shares of the Fund, designated
as Class A, Class B, Class C and Class I.
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 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 of class of
shares will bear any class expenses properly allocable to that class of shares,
subject to the conditions the Internal Revenue Service imposes with respect to
the multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
36
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the Trust. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts, obligations or affairs of the Fund. The
Declaration of Trust also provides for indemnification out of the Fund's assets
for all losses and expenses of any shareholder held personally liable by reason
of being or having been a shareholder. The Declaration of Trust also provides
that no series of the Trust shall be liable for the liabilities of any other
series. Furthermore, no fund included in this Fund's prospectus shall be liable
for the liabilities of any other John Hancock Fund. Liability is therefore
limited to circumstances in which the Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
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.
TAX STATUS
The 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, 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.
37
The Fund will be subject to a 4% non-deductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from the Fund's "investment company taxable
income," they will be taxable as ordinary income; and if they are paid from the
Fund's "net capital gain," they will be taxable as capital gain. (Net capital
gain is the excess (if any) of net long-term capital gain over net short-term
capital loss, and investment company taxable income is all taxable income and
capital gains, other than net capital gain, after reduction by deductible
expenses.) Some distributions may be paid in January but may be taxable to
shareholders as if they had been received on December 31 of the previous year.
The tax treatment described above will apply without regard to whether
distributions are received in cash or reinvested in additional shares of the
Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
The amount of the Funds net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities and/or engage in option, futures or forward transactions
that will generate capital gains or to enter into options or futures
transactions. At the time of an investor's purchase of Fund shares, a portion of
the purchase price is often attributable to realized or unrealized appreciation
in the Fund's portfolio. Consequently, subsequent distributions on these shares
from such appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) in a transaction that is treated as a sale
for tax purposes, a shareholder 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. 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 ninety (90) days
after their purchase to the extent Class A shares of the Fund or another John
Hancock fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. This disregarded charge will
result in an increase in the shareholder's tax basis in the shares subsequently
acquired. Also, any loss realized on a redemption or exchange may be disallowed
to the extent the shares disposed of are replaced with other shares of the Fund
within a period of sixty- one (61) days beginning thirty (30) days before and
ending thirty (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.
38
Although its present intention is to distribute, at least annually, all net
capital gain, if any, the Fund reserves the right to retain and reinvest all or
any portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net capital gain realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Upon proper designation of this amount by
the Fund, each shareholder would be treated for Federal income tax purposes as
if the Fund had distributed to him on the last day of its taxable year his pro
rata share of such excess, and he had paid his pro rata share of the taxes paid
by the Fund and reinvested the remainder in the Fund. Accordingly, each
shareholder would (a) include his pro rata share of such excess as capital gain
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the Fund, and (c) be entitled
to increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of this excess and his pro rata share of these taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
capital loss in any year to offset net capital gains, if any, during the eight
years following the year of the loss. To the extent subsequent net capital gains
are offset by such losses, they would not result in Federal income tax liability
to the Fund and, as noted above, would not be distributed to shareholders. The
Fund has $55,393,254 of capital loss carryforwards available, to the extent
provided by regulations, to offset future net realized capital gains. These
carryforwards expire at various times and amounts from 2002 through 2009.
Dividends and capital gain distributions from the Fund will not qualify for the
dividends-received deduction for corporations.
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 may be subject to withholding and other taxes imposed by foreign
countries with respect to the Fund's investments in certain foreign securities,
if any. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes in some cases. Because more than 50% of the Fund's assets
at the close of any taxable year will generally not consist of stocks or
securities of foreign corporations, the Fund will generally be unable to pass
through such taxes to its shareholders, who will therefore generally not be
entitled to any foreign tax credit or deduction with respect to their investment
in the Fund. The Fund will deduct such taxes in determining the amount it has
available for distribution to shareholders.
The Fund is required to accrue income on any debt securities that have more than
a de minimus amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market rules applicable to certain options and futures contracts may also
require the Fund to recognize gain within a concurrent receipt of cash. However,
the Fund must distribute to shareholders for each taxable year substantially all
of its net income and net capital gains, including such income or gain, to
qualify as a regulated investment company and avoid liability for any federal
income or excise tax. Therefore, the Fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash, or borrow cash,
to satisfy these distribution requirements.
39
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent the Fund's distributions are
derived from interest on (or, in the case of intangibles 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.
The Fund may be required to account for its transactions in forward rolls or
swaps, caps, floors and collars in a manner that, under certain circumstances,
may limit the extent of its participation in such transactions. Additionally,
the Fund may be required to recognize gain, but not loss, if a swap or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. The Fund may have to sell portfolio securities
under disadvantageous circumstances to generate cash, or borrow cash, to satisfy
these distribution requirements.
The 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 Fund. Tax
rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount, or market discount, when and to what
extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Fund, in
the event it invests in such securities, in order to reduce the risk of
distributing insufficient income to preserve its status as a regulated
investment company and seek to avoid becoming subject to Federal income or
excise tax.
Certain options and futures transactions undertaken by the Fund may cause the
Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, some of the Fund's losses on its transactions involving options and
futures contracts and/or offsetting or successor portfolio positions may be
deferred rather than being taken into account currently in calculating the
Fund's taxable income or gain. Certain of such transactions may also cause the
Fund to dispose of investments sooner than would otherwise have occurred. These
40
transactions may thereafter affect the amount, timing and character of the
Fund's distributions to shareholders. Some of the applicable tax rules may be
modified if the Fund is eligible and chooses to make one or more of certain tax
elections that may be available. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options and
futures transactions in order to seek to minimize any potential adverse tax
consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain 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 Fund
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty), on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8, 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 advisors regarding such treatment and the application of foreign taxes to an
investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
The Fund anticipates that, provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ending May 31, 2001, the yield on Class A, Class B and
Class C shares of the Fund was 7.23%, 6.87% and 6.79%, respectively. The average
annual total return of the Class A shares of the Fund for the 1 year, 5 year and
10 year periods ended May 31, 2001 was 7.30%, 6.13% and 7.32%, respectively.
The average total return of Class B shares of the Fund for the 1 year and 5
years and since inception on November 23, 1993 was 6.64%, 6.07% and 5.81%,
respectively.
The average total return of Class C shares of the Fund for the 1 year period and
since inception on October 1, 1998 was 9.50% and 3.15%, respectively
The Fund may advertise yield, where appropriate. The Fund's yield is computed by
dividing net investment income per share determined for a 30-day period by the
maximum offering price per share (which includes the full sales charge, where
applicable) on the last day of the period, according to the following standard
formula:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
41
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV where applicable).
Total return is computed by finding the average annual compounded rate of return
over the 1 year, 5 year and 10 year periods that would equate the initial amount
invested to the ending redeemable value according to the following formula:
n _____
T = \ /ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of hypothetical $1,000 investment
made at the beginning of the 1 year, 5 year and 10 year
periods.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC applied at the end of the period, respectively. This calculation assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A shares
or the CDSC on Class B or Class C shares into account. Excluding the Fund's
sales charge on Class A shares and the CDSC on Class B or Class C shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield and
total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on fixed income mutual funds in the United States. Ibottson
and Associates, CDA Weisenberger and F.C. Towers are also used for comparison
purposes, as well as the Russell and Wilshire Indices. Comparisons may also be
made to bank certificates of deposit ("CD's") which differ from mutual funds,
such as the Fund, in several ways. The interest rate established by the
sponsoring bank is fixed for the term of a CD. There are penalties for early
withdrawal from CDs, and the principal on a CD is insured.
42
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,
etc. may also be utilized. The Fund's promotional and sales literature may make
reference to the Fund's "beta." Beta reflects the market-related risk of the
Fund by showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates, and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Debt securities are generally traded on a net basis through
dealers acting for their own account as principals and not as brokers; no
brokerage commissions are payable on such 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
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Fund as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser of the Fund, and
their value and expected contribution to the performance of the Fund. It is not
possible to place a dollar value on information and services to be received from
brokers and dealers, since it is only supplementary to the research efforts of
the Adviser. The receipt of research information is not expected to reduce
significantly the expenses of the Adviser. The research information and
43
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's officers will be primarily responsible for
the allocation of the Fund's brokerage business, the policies 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 May 31, 1999, 2000 and 2001,
negotiated brokerage commissions were $23,247, $24,185 and $1,232, respectively.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the fiscal year end May 31, 2001
the Fund did not pay commissions to compensate any brokers for research services
such as industry, economic and company reviews and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of 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 Affiliated Brokers. For the fiscal years ended May 31, 1999, 2000 and
2001, the Fund did not execute any portfolio transactions with Affiliated
Brokers.
Signator may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the Investment Company Act. Commissions paid
to an Affiliated Broker must be at least as favorable as those which the
Trustees believe to be contemporaneously charged by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold. A transaction would not be placed with an Affiliated Broker if the Fund
would have to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers except for accounts for which the Affiliated Broker
acts as a clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the Investment Company
Act) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser,
which is affiliated with the Affiliated Brokers, has, as an investment adviser
to the Fund, the obligation to provide investment management services, which
includes elements of research and related investment skills, such research and
related skills will not be used by the Affiliated Brokers as a basis for
negotiating commissions at a rate higher than that determined in accordance with
the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. 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.
44
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 as
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., 1 John Hancock Way, Suite 1000, Boston,
Massachusetts 02217-1000, a wholly owned indirect subsidiary of the Life
Company, is the transfer and dividend paying agent for the Fund. The Fund pays
Signature Services an annual fee of $21.00 for each Class A shareholder account,
$23.50 for each Class B shareholder account and $22.50 for each Class C
shareholder account. For Class A, B and C, the Fund also pays certain
out-of-pocket expenses. These expenses are charged to the Fund by account,
aggregated and allocated to each class on the basis of their relative net asset
values. The Fund pays Signature Services an annual fee of 0.05% of 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, Foreign Custody Manager and fund accounting services.
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, incorporated by reference 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.
45
APPENDIX A- Description of Investment Risk
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities and
investment practices. You may find the most concise description of the fund's
risk profile in the prospectus.
A fund is permitted to utilize -- within limits established by the trustees --
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief definitions of
certain associated risks with them, with examples of related securities and
investment practices included in brackets. See the "Investment Objectives and
Policies" and "Investment Restrictions" sections of this Statement of Additional
Information for a description of this Fund's investment policies. The fund
follows certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the fund will earn income or
show a positive total return over any period of time -- days, months or years.
TYPES OF INVESTMENT RISK
Correlation risk The risk that changes in the value of a hedging instrument will
not match those of the asset being hedged (hedging is the use of one investment
to offset the effects of another investment). Incomplete correlation can result
in unanticipated risks. (e.g., currency contracts, futures and related options,
options on securities and indices, swaps, caps, floors and collars).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. (e.g., non- investment-grade debt securities, borrowing; reverse
repurchase agreements, covered mortgage dollar roll transactions, repurchase
agreements, securities lending, brady bonds, foreign debt securities, in-kind,
delayed and zero coupon debt securities, asset-backed securities,
mortgage-backed securities, participation interest, options on securities,
structured securities and swaps, caps floors and collars).
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.(e.g., foreign debt
securities, currency contracts, swaps, caps, floors and collars).
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.(e.g. mortgage-backed securities and
structured securities).
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values. (e.g.,
non-investment-grade debt securities, covered mortgage dollar roll transactions,
brady bonds, foreign debt securities, in-kind, delayed and zero coupon debt
securities, asset-backed securities, mortgage-backed securities, participation
interest, swaps, caps, floors and collars).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.
borrowing; reverse repurchase agreements, covered mortgage dollar roll
transactions, when-issued securities and forward commitments, currency
contracts, financial futures and options; securities and index options,
structured securities, swaps, caps, floors and collars).
A-1
o Hedged When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the
fund also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
While hedging can reduce or eliminate losses, it can also reduce or
eliminate gains.
o Speculative To the extent that a derivative is not used as a hedge, the fund
is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance. (e.g. non-investment-grade debt securities, restricted and illiquid
securities, mortgage-backed securities, participation interest, currency
contracts, futures and related options; securities and index options, structured
securities, swaps, caps, floors and collars).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
stocks and bonds and the mutual funds that invest in them. (e.g. covered
mortgage dollar roll transactions, short-term trading, when-issued securities
and forward commitments, brady bonds, foreign debt securities, in-kind, delayed
and zero coupon debt securities, restricted and illiquid securities, rights and
warrants, financial futures and options; and securities and index options,
structured securities).
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments.(e.g. covered mortgage dollar roll transactions, when-issued
securities and forward commitments, currency contracts, financial futures and
options; securities and securities and index options).
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
(e.g., brady bonds and foreign debt securities).
Prepayment risk The risk that unanticipated prepayments may occur during periods
of falling interest rates, reducing the value of mortgage-backed securities.
(e.g., mortgage backed securities).
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for. (e.g., non-investment-grade debt
securities, participation interest, structured securities, swaps, caps, floors
and collars).
A-2
APPENDIX B- Description of Bond Ratings
Moody's describes its lower ratings for corporate bonds as follows:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterized
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represented obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's describes its three highest ratings for commercial paper as follows:
Issuers rated P-1 (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations. P-1 repayment capacity will
normally be evidenced by the following characteristics: (1) leading market
positions in well- established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with moderate reliance on
debt and ample asset protections; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
B-1
Standard & Poor's describes its lower ratings for corporate bonds as follows:
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C, D Debt rated 'BB', 'B', 'CCC', 'CC', 'C' and 'D' is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
'BB' indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
D The rating 'D' is typically applied when payments on an obligation are not
made on the date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such grace
period. The 'D' rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments n an obligation are
jeopardized.
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.
B-2
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Issuers rated P-2 (or related supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated P-3 (or supporting institutions) have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
B-3
FINANCIAL STATEMENTS
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
- --------------------------------------------------------------------------------
Active Bond Fund
Dividend Performers Fund
Medium Capitalization Growth Fund
Small Capitalization Value Fund
Focused Small Cap Growth Fund
(formerly Small Capitalization Growth Fund)
International Equity 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 summary Active Bond Fund 4
of goals, strategies, risks,
performance and expenses. Dividend Performers Fund 6
Medium Capitalization Growth Fund 8
Small Capitalization Value Fund 10
Focused Small Cap Growth Fund 12
International Equity Fund 14
Policies and instructions for Your account
opening, maintaining and
closing an account in any Who can buy shares 16
institutional fund. Opening an account 16
Buying shares 17
Selling shares 18
Transaction policies 20
Dividends and account policies 20
Business structure 21
Further information on the Financial highlights 22
institutional 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
Active Bond Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks a high rate of total return consistent with prudent
investment risk. To pursue this goal, the fund normally invests 80% of assets in
a diversified portfolio of investment-grade debt securities. These include
corporate bonds and debentures as well as U.S. government and agency securities.
Most of these securities are investment-grade, although the fund may invest up
to 20% of assets in junk bonds rated as low as CC/Ca and their unrated
equivalents. There is no limit on the fund's average maturity.
In managing the fund's portfolio, the managers concentrate on sector allocation,
industry allocation and securities selection: deciding which types of bonds and
industries to emphasize at a given time, and then which individual bonds to buy.
When making sector and industry allocations, the managers try to anticipate
shifts in the business cycle, using top-down analysis to determine which sectors
and industries may benefit over the next 12 months.
In choosing individual securities, the managers use bottom-up research to find
securities that appear comparatively undervalued. The managers look at bonds of
all different quality levels and maturities from many different issuers. These
may include bonds of foreign governments and companies which are usually U.S.
dollar-denominated.
The fund uses a disciplined, risk-controlled approach to fixed income
management. The fund may invest in mortgage-related securities and certain other
derivatives (investments whose value is based on indexes, securities or
currencies). The fund intends to keep its exposure to interest rate movements
generally in line with that of the markets in which it invests.
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal conditions, the fund may temporarily invest in investment-grade
short-term securities. In these and other cases, the fund might not achieve its
goal.
================================================================================
PORTFOLIO MANAGERS
James K. Ho, CFA
- ---------------------------------------
Executive vice president of adviser
Joined team in 1995
Joined adviser in 1985
Began business career in 1977
Benjamin A. Matthews
- ---------------------------------------
Vice president of adviser
Joined team in 1995
Joined adviser in 1995
Began business career in 1970
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
4.82% 10.38% 8.97% -0.41% 11.51%
2001 total return as of March 31: 2.91%
Best quarter: Q4 '00, 4.24% Worst quarter: Q1 '96, -0.93%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Fund Index
1 year 11.51% 11.85%
5 year 6.96% 6.24%
Life of fund - began 3/30/95 7.59% 7.76%
Index: Lehman Brothers Government/Credit Bond Index, an unmanaged index of U.S.
government, U.S. corporate and Yankee bonds.
4
MAIN RISKS
[Clip Art] The major factors that influence this fund's performance are interest
rates and credit risk. When interest rates rise, bond prices generally fall. An
increase in the fund's average maturity will normally increase its sensitivity
to changes in interest rates.
The fund could lose money if the credit ratings of any bonds it owns are
downgraded or the issuers default. In general, lower-rated bonds have higher
credit risks. If certain sectors or investments do not perform as the fund
expects, it could underperform its peers or lose money.
To the extent that the fund makes investments with additional risks, those risks
could increase volatility or reduce performance:
o Junk bonds and foreign securities may make the fund more sensitive to
market or economic shifts in the U.S. and abroad.
o If interest rate movements cause the fund's mortgage-related and callable
securities to be paid off substantially earlier or later than expected,
the fund's share price or yield could be hurt.
o In a rising interest rate environment, higher-risk securities and
derivatives could become harder to value or to sell at a fair price.
o Certain derivatives could produce disproportionate losses.
Any U.S. government guarantees on individual securities in the portfolio do not
apply to these securities' market value or current yield, or to fund shares.
The fund may trade securities actively, which could 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 0.50%
Other expenses 1.56%
Total fund operating expenses 2.06%
Expense reimbursement (at least until 6/30/02) 1.46%
Net annual operating expenses 0.60%
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
frames. 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
- --------------------------------------------------------------------------------
$61 $504 $973 $2,273
FUND CODES
- ---------------------------------------
Ticker JHABX
CUSIP 410132203
Newspaper ActiveBd
JH fund number 421
5
Dividend Performers Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital with income as a secondary
objective. To pursue this goal, the fund normally invests at least 80% of assets
in a diversified portfolio of U.S. stocks with market capitalizations within the
range of the Standard & Poor's 500 Stock Index. On May 31, 2001, that range was
$730 million to $482 billion.
The managers normally invest at least 80% of assets in "dividend performers."
These are companies that have typically increased their dividend payments
over time, or which the managers believe demonstrate the potential for above-
average stability of growth of earnings and dividends.
In managing the 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 industry-wide 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 market capitalizations.
The fund may not invest more than 5% of assets, at time of purchase, in any one
security. The fund typically invests in U.S. companies but may invest in
American Depositary Receipts. It may also make limited use of certain
derivatives (investments whose value is based on indexes).
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal conditions, the fund may temporarily invest in U.S. government
securities with maturities of up to three years and more than 10% of assets in
cash or cash equivalents. In these and other cases, the fund might not achieve
its goal.
================================================================================
PORTFOLIO MANAGERS
John F. Snyder, III
- ---------------------------------------
Executive vice president of adviser
Joined team in 1995
Joined adviser in 1991
Began business career in 1971
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
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
18.56% 34.33% 17.95% 13.38% -0.62%
2001 total return as of March 31: -12.01%
Best quarter: Q4 '98, 20.75% Worst quarter: Q3 '98, -11.46%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Fund Index
1 year -0.62% -9.10%
5 year 16.18% 18.33%
Life of fund - began 3/30/95 17.29% 20.27%
Index: Standard &Poor's 500 Index, an unmanaged index of 500 stocks.
6
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to movements
in the stock market.
The fund's investment strategy will influence performance significantly.
Large-capitalization stocks could fall out of favor, causing the fund to
underperform funds that focus on small- or medium-capitalization stocks.
Similarly, if individual securities do not perform as the management team
expects, 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 Certain derivatives could produce disproportionate losses.
o Foreign investments carry additional risks, including inadequate or
inaccurate financial information and social or political instability.
o In a down market, higher-risk securities and derivatives could become
harder to value or to sell at a fair price.
================================================================================
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 0.60%
Other expenses 0.51%
Total fund operating expenses 1.11%
Expense reimbursement (at least until 6/30/02) 0.41%
Net annual operating expenses 0.70%
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
frames. 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
- --------------------------------------------------------------------------------
$72 $312 $572 $1,315
FUND CODES
- ---------------------------------------
Ticker JHDPX
CUSIP 410132104
Newspaper DivPerf
JH fund number 442
7
Medium Capitalization Growth Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term capital appreciation. To pursue this goal,
the fund normally invests at least 80% of assets in stocks of
medium-capitalization companies -- companies in the capitalization range of the
Russell Midcap Growth Index. On May 31, 2001, that range was $50 million to $21
billion.
In managing the portfolio, the managers seek to identify promising sectors for
investment. The managers consider broad economic trends, demographic factors,
technological changes, consolidation trends and legislative initiatives.
Quantitative screens identify companies with at least 15% annual earnings
growth, expanding profit margins and projected price/earnings ratios below their
earnings growth rate.
The managers conduct fundamental analysis to identify companies with a dominant
market position and a strong management team. Before investing, the managers
look for a specific catalyst for growth, such as a new product or business
reorganization. The management team generally maintains personal contact with
the senior management of the companies in which the fund invests.
The fund may invest up to 10% of assets in foreign securities. It may also use
certain derivatives (investments whose value is based on indexes or currencies).
The fund may not invest more than 5% of assets, at time of purchase, in any one
security.
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal conditions, the fund may temporarily invest in U.S. government
securities with maturities of up to three years and more than 10% of assets in
cash or cash equivalents. 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.
================================================================================
PORTFOLIO MANAGERS
Team responsible for day-to-day
investment management
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
31.55% 3.61% 7.35% 60.19% -13.11%
2001 total return as of March 31: -29.64%
Best quarter: Q4 '99, 45.24% Worst quarter: Q3 '98, -20.97%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Fund Index
1 year -13.11% -11.75%
5 year 15.29% 17.77%
Life of fund - began 4/11/95 17.03% 19.14%*
Index: Russell Midcap Growth Index, an unmanaged index containing those stocks
from the Russell Midcap Index with a greater-than-average growth orientation.
* Index figure as of 3/31/95.
8
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to movements
in the stock market.
Stocks of medium-capitalization companies may be more volatile than those of
larger companies. Similarly, medium-capitalization stocks are generally traded
in lower volumes than large-capitalization stocks.
The fund's investment strategy will influence performance significantly.
Medium-capitalization stocks could fall out of favor, causing the fund to
underperform funds that focus on other types of stocks. Also, growth stocks as a
group could fall out of favor with the market, causing the fund to underperform
funds that focus on value stocks. Similarly, if industries or individual
securities do not perform as the management team expects, 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 In a down market, higher-risk securities and derivatives could become
harder to value or to sell at a fair price.
o Certain derivatives could produce disproportionate losses.
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, 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 0.37%
Total fund operating expenses 1.17%
Expense reimbursement (at least until 6/30/02) 0.27%
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
frames. 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 $345 $618 $1,396
FUND CODES
- ---------------------------------------
Ticker HMSGX
CUSIP 410132401
Newspaper MdCapGr
JH fund number 439
9
Small Capitalization Value Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks capital appreciation. To pursue this goal, the fund
normally invests at least 80% of assets in stocks of small-capitalization
companies -- companies in the capitalization range of the Russell 2000 Index. On
May 31, 2001, that range was $10 million to $4.9 billion.
In managing the portfolio, the managers emphasize a value-oriented approach to
individual stock selection. With the aid of proprietary financial models, the
management team looks for companies that are selling at what appear to be
substantial discounts to their long-term value. These companies often have
identifiable catalysts for growth,
such as new products, business reorganizations or mergers.
The managers use fundamental financial analysis of individual companies to
identify those with substantial cash flows, reliable revenue streams and strong
competitive positions. The strength of companies' management teams is also a key
selection factor. The fund diversifies across industry sectors. The fund may not
invest more than 5% of assets, at time of purchase, in any one security.
The fund invests primarily in stocks of U.S. companies, but may invest up to 15%
of assets in a basket of foreign securities and bonds rated as low as CC/Ca and
their unrated equivalents. (Bonds rated below BBB/Baa are considered junk
bonds.)
The fund may make limited use of certain derivatives (investments whose value is
based on indexes or currencies).
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal conditions, the fund may temporarily invest 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.
================================================================================
PORTFOLIO MANAGERS
Timothy E. Quinlisk, CFA
- ---------------------------------------
Senior vice president of adviser
Joined fund team in 1998
Joined adviser in 1998
Analyst at Hagler, Mastrouita & Hewitt (1997-1998)
Analyst at State Street Global
Advisors (1995-1997)
Began business career in 1985
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 1990
R. Scott Mayo, CFA
- ---------------------------------------
Second vice president of adviser
Joined fund team in 2000
Joined adviser in 1998
Analyst at Morgan Stanley (1998)
Analyst at Grantham, Mayo & Van Otterloo (1993-1996)
Began business career in 1993
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
15.60% 29.12% 0.29% 101.91% -4.30%
2001 total return as of March 31: -2.92%
Best quarter: Q4 '99, 46.48% Worst quarter: Q3 '98, -22.63%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Fund Index 1 Index 2
1 year -4.30% -3.02% 22.83%
5 year 23.67% 10.31% 12.60%
Life of fund - began 4/19/95 21.74% 12.80% 14.48%
Index 1: Russell 2000 Index, an unmanaged index of 2,000 U.S.
small-capitalization stocks.
Index 2: Russell 2000 Value Index, an unmanaged index containing those stocks
from the Russell 2000 Index with a value orientation.
10
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to movements
in the stock market. Because the fund concentrates on small-capitalization
companies, its performance may be more volatile than that of a fund that invests
primarily in larger companies.
Stocks of smaller companies are more risky than those of larger companies. Many
of these companies are young and have a limited track record. Because their
businesses frequently rely on narrow product lines and niche markets, they can
suffer severely from isolated business setbacks.
The fund's investment strategy will influence performance significantly.
Small-capitalization stocks could fall out of favor, causing the fund to
underperform funds that focus on other types of stocks. Also, value stocks as a
group could fall out of favor with the market, causing the fund to underperform
funds that focus on growth stocks. Similarly, if industries or individual
securities do not perform as the management team expects, 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 In a down market, derivatives and other higher-risk securities could
become harder to value or to sell at a fair price; this risk could also
affect small-capitalization stocks, especially those with low trading
volumes.
o Certain derivatives could produce disproportionate losses.
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, inadequate or inaccurate financial
information and social or political instability.
o The credit rating of any bonds held by the fund could be downgraded, or
the issuer could default. Bond prices generally fall when interest rates
rise. Junk bond prices can fall on bad news about the economy, an industry
or a company.
================================================================================
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 0.35%
Total fund operating expenses 1.05%
Expense reimbursement (at least until 6/30/02) 0.25%
Net annual operating expenses 0.80%
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
frames. 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
- --------------------------------------------------------------------------------
$82 $309 $554 $1,256
FUND CODES
- ---------------------------------------
Ticker JHFVX
CUSIP 410132500
Newspaper SmCpVal
JHfund number 437
11
Focused Small Cap Growth Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund normally invests at least 80% of assets in stocks of small-capitalization
companies -- companies in the capitalization range of the Russell 2000 Growth
Index. On May 31, 2001, that range was $10 million to $4.9 billion. The fund
utilizes a focused investment strategy and will typically concentrate its
investments in 50 to 70 companies.
In managing the portfolio, the managers look for companies in the emerging
growth phase of development that are not yet widely recognized. The fund also
may invest in established companies that, because of new management, products or
opportunities, offer the possibility of accelerating earnings.
In choosing individual securities, the managers use fundamental financial
analysis to identify rapidly growing companies. The managers favor companies
that dominate their market niches or are poised to become market leaders. They
look for strong senior management teams and coherent business strategies. They
generally maintain personal contact with the senior management of the companies
the fund invests in.
The fund may invest in preferred stock and other types of equities, and may
invest up to 10% of assets in foreign securities.
The fund may also make limited use of certain derivatives (investments whose
value is based on indexes or currencies). The fund may not invest more than 5%
of assets, at time of purchase, in any one security.
Under normal conditions, the fund may not invest more than 10% of assets in cash
or cash equivalents.
In abnormal conditions, the fund may temporarily invest in U.S. government
securities with maturities of up to three years and more than 10% of assets in
cash or cash equivalents. 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.
================================================================================
PORTFOLIO MANAGERS
Bernice S. Behar, CFA
- ---------------------------------------
Senior vice president of adviser
Joined team in 1996
Joined adviser in 1991
Began business career in 1986
Anurag Pandit, CFA
- ---------------------------------------
Vice president of adviser
Joined fund team in 1996
Joined adviser in 1996
Equity analyst at Loomis Sayles
(1992-1996)
Began business career in 1984
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
- --------------------------------------------------------------------------------
1997 1998 1999 2000
14.86% 16.54% 77.12% -23.10%
2001 total return as of March 31: -28.76%
Best quarter: Q4 '99, 47.34% Worst quarter: Q3 '98, -21.25%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Class I Index
1 year -23.10% -22.43%
Life of Class I - began 5/2/96 16.86% 4.58%
Index: Russell 2000 Growth Index, an unmanaged index containing those stocks
from the Russell 2000 Index with a greater-than-average growth orientation.
12
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to movements
in the stock market. Because the fund concentrates on smaller companies, its
performance may be more volatile than that of a fund that invests primarily in
larger companies. In addition, the fund focuses on a limited number of
companies, which could cause greater fluctuations in share price than would
occur in a more diversified fund.
Stocks of smaller companies are more risky than those of larger companies. Many
of these companies are young and have a limited track record. Because their
businesses frequently rely on narrow product lines and niche markets, they can
suffer severely from isolated business setbacks.
The fund's investment strategy will influence performance significantly.
Small-company stocks could fall out of favor, causing the fund to underperform
funds that focus on other types of stocks. Also, growth stocks as a group could
fall out of favor with the market, causing the fund to underperform funds that
focus on value stocks. To the extent the fund invests in a given industry, its
performance will be hurt if that industry performs poorly. Similarly, if the
individual securities do not perform as the management team expects, 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 In a down market, derivatives and other higher-risk securities could
become harder to value or to sell at a fair price; this risk could also
affect small-capitalization stocks, especially those with low trading
volumes.
o Certain derivatives could produce disproportionate losses.
o Foreign investments carry additional risks, including potentially
unfavorable currency exchange rates, 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 1.28%
Total fund operating expenses 2.08%
Expense reimbursement (at least until 6/30/02) 1.14%
Net annual operating expenses 0.94%
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
frames. 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
- --------------------------------------------------------------------------------
$95 $541 $1,012 $2,317
FUND CODES
Class I
- ---------------------------------------
Ticker JCGYX
CUSIP 410132856
Newspaper --
JHfund number 418
13
International Equity Fund
GOAL AND STRATEGY
[Clip Art] The fund seeks long-term growth of capital. To pursue this goal, the
fund normally invests at least 80% of assets in stocks of foreign companies. The
fund may invest up to 30% of assets in emerging markets as classified by Morgan
Stanley Capital International (MSCI). The fund does not maintain a fixed
allocation of assets, either with respect to securities type or geography.
In managing the portfolio, the managers focus on a "bottom-up" analysis on the
financial conditions and competitiveness of individual foreign companies. In
analyzing specific companies for possible investment, the managers ordinarily
look for several of the following characteristics that will enable the companies
to compete successfully in their respective markets:
o above-average per share earnings growth
o high return on invested capital
o a healthy balance sheet
o sound financial and accounting policies and overall financial strength
o strong competitive advantages
o effective research, product development and marketing
The managers consider whether to sell a particular security when any of those
factors materially changes. The managers allocate the fund's assets among
securities of countries that are expected to provide the best opportunities for
meeting the fund's investment objective.
Although the fund invests primarily in common stocks, it may invest in virtually
any type of equity security. To manage risk, the fund does not invest more than
5% of assets, at time of purchase, in any one security. The fund may use certain
derivatives (investments whose value is based on indexes, securities or
currencies).
In abnormal conditions, the fund may temporarily invest more than 20% 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
Nicholas-Applegate
Capital Management
- ---------------------------------------
U.S.-based team responsible for
day-to-day investment management
since December 2000
Supervised by the adviser
Founded in 1984
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
8.49% -7.34% 18.77% 34.52% -25.60%
2001 total return as of March 31: -18.99%
Best quarter: Q4 '99, 26.62% Worst quarter: Q3 '98, -17.16%
- --------------------------------------------------------------------------------
Average annual total returns -- for periods ending 12/31/00
- --------------------------------------------------------------------------------
Fund Index
1 year -25.60% -16.34%
5 year 3.62% 4.89%
Life of fund - began 3/30/95 4.29% 5.86%
Index: MSCI All Country World Ex-U.S. Free Index, an unmanaged index of freely
traded stocks of foreign companies.
14
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to movements
in the stock market.
Foreign investments are more risky than domestic investments. Investments in
foreign securities may be affected by fluctuations in currency exchange rates,
incomplete or inaccurate financial information on companies, social instability
and political actions ranging from tax code changes to governmental collapse.
These risks are more significant in emerging markets.
The fund's investment strategy will influence performance significantly. If the
fund invests in countries or regions that experience economic downturns,
performance could suffer. Similarly, if the individual securities or industries
do not perform as the management team expects, 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 Emerging market securities, derivatives and other higher-risk securities can
be hard to value or to sell at a fair price.
o Certain derivatives could produce disproportionate losses.
================================================================================
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 0.90%
Other expenses 2.59%
Total fund operating expenses 3.49%
Expense reimbursement (at least until 6/30/02) 2.49%
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
frames. 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 $839 $1,598 $3,599
FUND CODES
- ---------------------------------------
Ticker JHIEX
CUSIP 410132609
Newspaper IntlEq
JHfund number 448
15
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.
16 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 account
financial representative, or statement. If no slip is
mail them to Signature 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 shares
o You may only exchange for of other institutional funds or
shares of other institutional Class I shares.
funds or Class I shares.
By wire
[Clip Art] o Deliver your completed o Instruct your bank to wire the
application to your financial amount of your investment to:
representative or mail it to First Signature Bank & Trust
Signature Services. Account # 900022260
Routing # 211475000
o Obtain your account number by
calling your financial Specify the fund name(s), your
representative or Signature share class, your account number
Services. and the name(s) in which the
account is registered. Your bank
o Instruct your bank to wire the may charge a fee to wire funds.
amount of your investment to:
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 17
- --------------------------------------------------------------------------------
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, your
must be made by letter. account number, your share
class, the name(s) in which the
o Certain requests will require account is registered and the
a Medallion signature dollar value or number of shares
guarantee. Please refer to you wish to sell.
"Selling shares in writing".
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 any o To verify that the telephone
amount. redemption privilege is in place
on an account, or to request the
o Requests by phone to sell up forms to add it to an existing
to $5 million (accounts with account, call Signature
telephone redemption 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.
18 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 UGMA/UTMA o Letter of instruction.
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 proprietorship, o Letter of instruction.
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 of o Letter of instruction signed by
survivorship whose co-tenants are deceased. surviving tenant.
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, guardians and o Call 1-888-972-8696 for
other sellers or account types not listed instructions.
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 19
- --------------------------------------------------------------------------------
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 Active Bond Fund declares income dividends daily and pays them
monthly. Your income dividends begin accruing the day after payment is received
by the fund and continue through the day your shares are actually sold. Dividend
Performers Fund declares and pays any income dividends quarterly. All other
funds declare and pay any income dividends annually. Capital gains, if any, are
typically 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.
20 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 for the International Equity Fund Nicholas-Applegate Capital
Management, 600 West Broadway, Suite 2900, San Diego, California 92101.
Management fees The management fees paid to the investment adviser by the John
Hancock institutional funds last fiscal year are as follows:
- --------------------------------------------------------------------------------
Fund % of net assets
- --------------------------------------------------------------------------------
Active Bond 0.00%
Dividend Performers 0.25%
Medium Capitalization Growth 0.42%
Small Capitalization Value 0.02%
Focused Small Cap Growth 0.00%
International Equity 0.00%
YOUR ACCOUNT 21
- --------------------------------------------------------------------------------
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.
Active Bond 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 $8.64 $8.54 $8.83 $8.59 $8.14
Net investment income (loss)(1) 0.60 0.59 0.56 0.58 0.56
Net realized and unrealized gain (loss) on investments (0.09) 0.34 (0.02) (0.43) 0.47
Total from investment operations 0.51 0.93 0.54 0.15 1.03
Less distributions:
Dividends from net investment income (0.60) (0.59) (0.56) (0.58) (0.56)
Distributions in excess of net investment income -- --(2) --(2) --(2) --
Distributions from net realized gain on investments sold (0.01) (0.05) (0.22) (0.02) --
Total distributions (0.61) (0.64) (0.78) (0.60) (0.56)
Net asset value, end of period $8.54 $8.83 $8.59 $8.14 $8.61
Total investment return(3,4) (%) 6.17 11.25 6.24 1.83 13.11
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 2,191 5,158 5,686 4,222 6,805
Ratio of expenses to average net assets (%) 0.60 0.60 0.60 0.60 0.60
Ratio of adjusted expenses to average net assets(5,6) (%) 4.05 2.64 2.33 2.93 2.03
Ratio of net investment income (loss) to average net assets (%) 7.10 6.78 6.36 6.88 6.74
Portfolio turnover rate (%) 136 230 356 301 327
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Total investment return assumes dividend reinvestment.
(4) Total returns would have been lower had certain expenses not been reduced
during the periods shown.
(5) Does not take into consideration expense redutions during the periods
shown.
(6) Adjusted expenses as a percentage of average net assets are expected to
decrease as the net assets of the fund grow.
- --------------------------------------------------------------------------------
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 years ended
February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would
have been 2.72%, 9.21%, 4.51%, (0.50%) and 11.68%, respectively.
22 FINANCIAL HIGHLIGHTS
Dividend Performers 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 $10.15 $11.91 $14.92 $14.46 $13.51
Net investment income (loss)(1) 0.21 0.18 0.15 0.11 0.10
Net realized and unrealized gain (loss) on investments 1.92 3.92 1.04 0.60 0.45
Total from investment operations 2.13 4.10 1.19 0.71 0.55
Less distributions:
Dividends from net investment income (0.18) (0.17) (0.15) (0.11) (0.11)
Distributions from net realized gain on investments sold (0.19) (0.92) (1.50) (1.55) (2.81)
Total distributions (0.37) (1.09) (1.65) (1.66) (2.92)
Net asset value, end of period $11.91 $14.92 $14.46 $13.51 $11.14
Total investment return(2,3) (%) 21.26 35.55 7.97 4.17 2.94
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 8,668 20,884 17,743 14,863 6,202
Ratio of expenses to average net assets (%) 0.70 0.70 0.70 0.70 0.70
Ratio of adjusted expenses to average net assets(4,5) (%) 1.89 1.02 0.95 1.05 1.08
Ratio of net investment income (loss) to average net assets (%) 1.94 1.31 0.95 0.71 0.73
Portfolio turnover rate (%) 37 77 64 46 58
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) Total returns would have been lower had certain expenses not been reduced
during the periods shown.
(4) Does not take into consideration expense redutions during the periods
shown.
(5) Adjusted expenses as a percentage of average net assets are expected to
decrease as the net assets of the fund grow.
- --------------------------------------------------------------------------------
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 years ended
February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would
have been 20.07%, 35.23%, 7.72%, 3.82% and 2.56%, respectively.
FINANCIAL HIGHLIGHTS 23
Medium Capitalization Growth 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 $10.69 $12.67 $13.51 $10.99 $21.10
Net investment income (loss)(1) 0.01 --(2) (0.02) (0.05) (0.07)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 2.02 2.06 (0.68) 10.71 (7.44)
Total from investment operations 2.03 2.06 (0.70) 10.66 (7.51)
Less distributions:
Dividends from net investment income -- --(2) -- -- --
Distributions from net realized gain on investments sold (0.05) (1.22) (1.72) (0.55) (3.33)
Distributions in excess of net realized gain on investments sold -- -- (0.10) -- --
Total distributions (0.05) (1.22) (1.82) (0.55) (3.33)
Net asset value, end of period $12.67 $13.51 $10.99 $21.10 $10.26
Total investment return(3,4) (%) 19.00 17.39 (5.34) 98.13 (38.23)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 29,085 40,302 16,687 36,893 11,499
Ratio of expenses to average net assets (%) 0.90 0.90 0.90 0.90(7) 0.90
Ratio of adjusted expenses to average net assets(5,6) (%) 1.42 1.10 1.11 1.28 1.15
Ratio of net investment income (loss) to average net assets (%) 0.06 0.03 (0.13) (0.37) (0.40)
Portfolio turnover rate (%) 281 341 116 153 181
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Total investment return assumes dividend reinvestment.
(4) Total returns would have been lower had certain expenses not been reduced
during the periods shown.
(5) Does not take into consideration expense reductions during the periods
shown.
(6) Adjusted expenses as a percentage of average net assets are expected to
decrease as the net assets of the fund grow.
(7) Expense ratio does not include interest expense due to bank loans, which
amounted to 0.01% for the year ended February 29, 2000.
- --------------------------------------------------------------------------------
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 years ended
February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would
have been 18.48%, 17.19%, (5.55%), 97.75% and (38.48%), respectively.
24 FINANCIAL HIGHLIGHTS
Small Capitalization Value 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 $9.09 $9.38 $11.74 $9.16 $18.09
Net investment income (loss)(1) 0.14 0.07 0.05 0.05 (0.04)
Net realized and unrealized gain (loss) on investments 1.08 3.65 (1.23) 10.96 (2.18)
Total from investment operations 1.22 3.72 (1.18) 11.01 (2.22)
Less distributions:
Dividends from net investment income (0.12) (0.10) (0.04) (0.06) (0.03)
Distributions from net realized gain on investments sold (0.81) (1.26) (1.20) (2.02) (3.71)
Distributions in excess of net realized gain on investments sold -- -- (0.16) -- --
Total distributions (0.93) (1.36) (1.40) (2.08) (3.74)
Net asset value, end of period $9.38 $11.74 $9.16 $18.09 $12.13
Total investment return(2,3) (%) 13.78 41.81 (9.46) 124.33 (10.14)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 6,011 9,549 7,418 24,259 30,183
Ratio of expenses to average net assets (%) 0.80 0.80 0.80 0.80 0.80
Ratio adjusted expenses to average net assets(4,5) (%) 1.83 1.42 1.46 1.48 1.04
Ratio of net investment income (loss) to average net assets (%) 1.46 0.62 0.45 0.37 (0.25)
Portfolio turnover rate (%) 96 216 126 104 109
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) 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.
(5) Adjusted expenses as a percentage of average net assets are expected to
decrease as the net assets of the fund grow.
- --------------------------------------------------------------------------------
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 years ended
February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would
have been 12.75%, 41.19%, (10.12%), 123.65% and (10.38%), respectively.
FINANCIAL HIGHLIGHTS 25
Focused Small Cap Growth Fund
Figures audited by Deloitte & Touche LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
Class I - Period ended: 2/97(1) 2/98 2/99 2/00 2/01(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $8.50 $9.24 $11.74 $11.65 $24.43
Net investment income (loss)(3) 0.03 (0.03) (0.07) (0.09) (0.10)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 0.73 2.53 0.61 15.13 (11.92)
Total from investment operations 0.76 2.50 0.54 15.04 (12.02)
Less distributions:
Dividends from net investment income (0.02) --(4) -- -- --
Distributions from net realized gain on investments sold -- -- (0.63) (2.26) (1.92)
Total distributions (0.02) --(4) (0.63) (2.26) (1.92)
Net asset value, end of period $9.24 $11.74 $11.65 $24.43 10.49
Total investment return (5,6) (%) 8.89(7) 27.07 4.67 136.18 (50.27)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 999 3,102 2,453 8,908 5,458
Ratio of expenses to average net assets (%) 0.90(8) 0.90 0.90 0.90 0.90
Ratio of adjusted expenses to average net assets(9,10) (%) 16.24(8) 4.05 4.12 3.19 2.04
Ratio of net investment income (loss) to average net assets (%) 0.35(8) (0.25) (0.60) (0.57) (0.56)
Portfolio turnover rate (%) 92 117 125 238 242
(1) Began operations on May 2, 1996.
(2) Effective November 15, 2000, existing shares of the fund were designated
Class I shares.
(3) Based on the average of the shares outstanding at the end of each month.
(4) Less than $0.01 per share.
(5) Total investment return assumes dividend reinvestment.
(6) Total returns would have been lower had certain expenses not been reduced
during the periods shown.
(7) Not annualized.
(8) Annualized.
(9) Does not take into consideration expense redutions during the periods
shown.
(10) Adjusted expenses as a percentage of average net assets are expected to
decrease as the net assets of the fund grow.
- --------------------------------------------------------------------------------
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 years ended
February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would
have been (6.45%), 23.92%, 1.45%, 133.89% and (51.41%), respectively.
26 FINANCIAL HIGHLIGHTS
International Equity 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 $9.24 $9.35 $9.63 $10.18 $13.33
Net investment income (loss)(1) 0.12 0.06 0.07 0.07 0.04
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.14 0.23 0.59 3.83 (4.63)
Total from investment operations 0.26 0.29 0.66 3.90 (4.59)
Less distributions:
Dividends from net investment income (0.10) (0.01) (0.07) (0.07) (0.04)
Distributions in excess of net investment income -- -- (0.04) (0.04) --
Distributions from net realized gain on investments sold (0.05) -- -- (0.64) (0.47)
Total distributions (0.15) (0.01) (0.11) (0.75) (0.51)
Net asset value, end of period $9.35 $9.63 $10.18 $13.33 $8.23
Total investment return(2,3) (%) 2.79 3.07 6.88 38.84 (34.85)
Ratios and supplemental data
Net assets, end of period (000s omitted) ($) 4,204 7,983 7,805 12,848 5,859
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(4,5) (%) 3.32 2.02 2.73 2.86 3.46
Ratio of net investment income (loss) to average net assets (%) 1.26 0.60 0.69 0.59 0.43
Portfolio turnover rate (%) 68 125 83 139 238
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) 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.
(5) Adjusted expenses as a percentage of average net assets are expected to
decrease as the net assets of the fund grow.
- --------------------------------------------------------------------------------
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 years ended
February 28, 1997, 1998, 1999, February 29, 2000 and February 28, 2001 would
have been 0.47%, 2.05%, 5.15%, 36.98 and (37.31%), respectively.
FINANCIAL HIGHLIGHTS 27
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. KB0PN 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
31
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
Active Bond Fund
Dividend Performers Fund
Medium Capitalization Growth Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund
International Equity 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 Active Bond Fund 4
John Hancock Dividend Performers Fund 7
John Hancock Medium Capitalization Growth Fund 10
John Hancock Small Capitalization Growth Fund 13
John Hancock Small Capitalization Value Fund 16
John Hancock International Equity Fund 19
3) Financial Statements 22
4) Notes to Financial Statements 60
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
CUSTODIANS
International Equity Fund
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Active Bond Fund
Dividend Performers Fund
Medium Capitalization Growth Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund
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
SUB-INVESTMENT ADVISER
International Equity Fund
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, CA 92101
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 JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND
BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER
[A 3" x 2" photo at bottom middle of page of John Hancock Active Bond
Fund. Caption below reads "Fund management team leader Jim Ho."]
John Hancock
Active Bond Fund
Fund produces solid gains in an uneasy market
For bond investors, this past year proved generally hospitable, though
at times the market experienced extreme unease. The past 12 months were
marked by price surges in the U.S. Treasury arena and bouts of extreme
weakness in the corporate sector. Economic growth and inflation were
primary concerns for all. In late summer, after dubious signs of
slowing, the economy finally responded to the Fed's earlier campaign of
interest-rate increases. This past January, fearing too much of a
slowdown, the Fed changed tack and cut interest rates twice.
"...this past
year proved
generally
hospitable..."
Strong performance
John Hancock Active Bond Fund benefited from investment flexibility and
intensive credit research. For the year ended February 28, 2001, the
Fund produced a total return of 13.11% at net asset value. This compares
with the 11.80% return of the average corporate debt A-rated fund,
according to Lipper, Inc. The Fund's benchmark, the Lehman Brothers
Government/Corporate Bond Index, posted a total return of 13.51% in the
same period. Historical performance information can be found on page
six.
Defensive investments emphasized
At the fiscal year's outset, it became increasingly clear the economy
would heavily influence stock- and bond-market performance. The
possibility of an economic slowdown or even a recession prompted
investors to worry about corporations' missing their earnings targets
and defaulting on debt. Any hint of financial woe or pullback in profit
growth sent investors running for cover many times during the period,
with the worst of the credit spread widening happening in October and
November.
Not surprisingly, many dot-com millionaires sought safer havens for the
profits they had already made, turning to the relative safety of
higher-quality fixed-income investments such as U.S. Treasury securities
and mortgage-backed issues. After the plunge in stock and bond prices
last March, we anticipated that volatility would continue. With this in
mind, we focused our attention on higher-quality securities and on
corporate industry sectors that tend to be relatively insulated from
economic changes.
[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 7% with 0% at the bottom and
14% at the top. The first bar represents the 13.11% total return for
John Hancock Active Bond Fund. The second bar represents the 11.80%
total return for Average corporate debt A-rated fund. The third bar
represents the 13.51% total return for Lehman Brothers
Government/Corporate Bond Index. A note below the chart reads "The total
return for John Hancock Active Bond Fund is at net asset value with all
distributions reinvested. The average corporate debt A-rated fund is
tracked by Lipper, Inc. See the following page for historical
performance information."]
We added to the Fund's position in U.S. Treasury securities, spreading
our holdings across the maturity spectrum. We also boosted the Fund's
stake in mortgage-backed and agency issues such as Ginnie Mae and Fannie
Mae. We made no major bets on interest-rate movements, keeping the
portfolio's duration, or interest-rate sensitivity, relatively neutral
throughout much of the fiscal year.
In the corporate sector, individual credit selection -- and avoidance --
became a key driver of Fund performance. Our practice of regularly
monitoring credits enabled us to avoid some troubled securities
altogether and move out of others before yields skyrocketed and prices
plummeted. We avoided such issues as Xerox and Crown, Cork & Seal and
sold FINOVA, Pacific Gas, Southern California Energy and Dillard's
before the brunt of their downturns. We also trimmed our high-yield
exposure, particularly telecommunications issues, and targeted somewhat
recession- resistant industries such as defense, utilities, healthcare,
media and energy. Noteworthy performers include Verizon, KeySpan, Tenet
Healthcare, HCA -- The Healthcare Co. and Amerada Hess.
"...stringent
analysis and
prudence will
continue to
dictate
portfolio
composition."
Rate cuts point toward recovery
The Fed's recent rate cuts -- and the possibility of more to come --
spurred a rebound in credit-sensitive securities. The yield curve has
begun to steepen and credit spreads (the difference in yields between
bonds of different quality) have narrowed. Believing that yields do not
have much more room to fall, we recently began moving assets into
shorter-term Treasury securities and shortened the portfolio's duration
slightly. We have also selectively increased the Fund's high-yield
weighting, purchasing such holdings as Crown Castle International and
Nextel Communications (which we had sold in the fall.) We've initiated
positions in cyclical issues, such as Stone Container, and bolstered the
portfolio's stake in financial companies that stand to benefit from
lower interest rates. These include Bank One Corp., CIT Group and Heller
Financial.
While it appears a recovery may be under way, experience tells us it
could be long and drawn out and that caution is necessary. An economic
slowdown means more financially weak companies and jittery markets.
Therefore, stringent analysis and prudence will continue to dictate
portfolio composition.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE FIVE INCEPTION
YEAR YEARS (3/30/95)
----- ----- ---------
Cumulative Total Returns 13.11% 44.49% 56.18%
Average Annual Total Returns(1) 13.11% 7.64% 7.83%
YIELD
As of February 28, 2001
SEC 30-DAY
YIELD
----------
John Hancock Active Bond Fund 5.93%
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
Active Bond 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 Lehman Brothers Government/ Corporate
Bond Index -- an unmanaged index that measures the performance of U.S.
government bonds, U.S. corporate bonds and Yankee bonds. It is not
possible to invest in an index. Past performance is no guarantee of
future results.
[Line chart with the heading John Hancock Active Bond 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
Lehman Brothers Government/Corporate Bond Index and is equal to $394,747
as of February 28, 2001. The second line represents the value of the
hypothetical $250,000 investment made in the John Hancock Active Bond
Fund on March 30, 1995 and is equal to $390,524 as of February 28, 2001.]
BY JOHN F. SNYDER, III, PORTFOLIO MANAGEMENT TEAM LEADER AND
PETER M. SCHOFIELD, CFA, PORTFOLIO MANAGER
[A 3" x 2" photo at bottom middle of page of John Hancock Dividend Performers
Fund. Caption below reads "Fund management team leader John Snyder."]
John Hancock
Dividend Performers Fund
Tech stocks lead market down as economy slows
As the Fund's year began last March, the stock market was about to
undergo a major shift. Technology stocks, which led the market up in
1999, had risen to exorbitant valuation levels just as the economy began
to soften after a series of interest-rate hikes. As a result, the
tech-heavy NASDAQ Composite Index started a descent that lasted most of
the year, ending down 54.18% by the end of February. New economy stocks
gave way to the old, and value stocks finally overtook growth stocks, as
investors ended their tech-at-any-price mania and returned to the kinds
of companies that the Fund favors -- those with stable earnings growth
and reasonable valuations. But the overall market remained choppy
nonetheless, as many companies reported earnings disappointments and
warned of slower revenue growth. The year ended in red ink for the broad
market, with the Standard & Poor's 500 Index returning -8.20% for the
12 months ended February 28, 2001.
Fund outperforms market
With our main focus primarily on "dividend performer" companies that
have a 10-year history of rising dividends, the Fund managed to
outperform the market. For the year ended February 28, 2001, John
Hancock Dividend Performers Fund posted a total return of 2.94% at net
asset value. That was lower, however, than the 6.63% return of the
average large-cap value fund, according to Lipper, Inc. Historical
performance information can be found on page nine. Although we were
underweighted in technology versus the S&P 500 Index, which served us
well, our tech overweight versus our peer group held back our relative
performance. Being underweighted in the solid-performing utilities
sector also ate into relative performance.
"As investors
turned away
from technol-
ogy stocks,
the more
defensive,
less expensive
areas
benefited."
Defensive names help
As investors turned away from technology stocks, the more defensive,
less expensive areas benefited. These included health care, where our
overweight helped performance with such holdings as Baxter
International. Consumer staples also had a strong showing, with PepsiCo
and Philip Morris among our top performers. Bestfoods and Nabisco were
also boosted by takeovers.
[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 -10% at the bottom
and 10% at the top. The first bar represents the 2.94% total return for
John Hancock Dividend Performers Fund. The second bar represents the
6.63% total return for Average large-cap value fund. The third bar
represents the -8.20% total return for S&P 500 Index. A note below the
chart reads "The total return for John Hancock Dividend Performers Fund
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
market will
undoubtedly
remain
under stress
in the near
term."
Financial stocks were lifted by the growing prospect of lower interest
rates, an environment that favors this rate-sensitive sector. Some of
our larger holdings were among this group and they were main
contributors to performance, including mortgage guarantors Fannie Mae
and Freddie Mac, consumer finance company Household International and
insurers Aflac and American International Group. With the Federal
Reserve launching a campaign of lowering rates to prevent the economy
from stalling, we added to our financial stake as the year progressed.
Technology hurts
As with the market in general, our technology stocks went from being our
biggest contributor last year to our main detractor this year. Even
quality names such as Nortel Networks, Cisco Systems, Sun Microsystems
and Intel could not avoid the carnage, especially in the fall when tech
stocks were hit particularly hard by earnings disappointments. In fact,
after this latest downdraft, we selectively bought some high-quality
technology names, since their long-range prospects remain good and their
valuations had fallen to compelling levels. These included Texas
Instruments and AOL Time Warner.
A look ahead
With the economy slowing and earnings warnings abounding, the market
will undoubtedly remain under stress in the near term. We believe the
market's focus will stay on companies with stable earnings growth that
will outperform the market, and reasonable valuations -- exactly the
kinds of stocks the Fund targets. In this environment, we will continue
to maintain a mix of financial stocks, which should benefit from lower
rates; defensive health-care and consumer staples names, and technology
stocks that have the biggest rebound potential.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE FIVE INCEPTION
YEAR YEARS (3/30/95)
----- ------ --------
Cumulative Total Returns 2.94% 90.28% 133.64%
Average Annual Total Returns(1) 2.94% 13.73% 15.42%
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
Dividend Performers 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 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. Past performance is no guarantee of future
results.
[Line chart with the heading John Hancock Dividend Performers 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 500 Index and is equal to $684,041 as
of February 28, 2001. The second line represents the value of the
hypothetical $250,000 investment made in the John Hancock Dividend
Performers Fund on March 30, 1995 and is equal to $584,117 as of
February 28, 2001.]
BY BARBARA FRIEDMAN, CFA, PORTFOLIO MANAGEMENT TEAM LEADER
[A 2" x 3" photo at bottom middle of page of John Hancock Medium
Capitalization Growth Fund. Caption below reads "Fund management team
leader Barbara Friedman."]
John Hancock
Medium Capitalization
Growth Fund
Growth stocks sink as corporate and consumer spending slow
The stock market reached new highs early last year, shortly before
rising interest rates and the prospect of an economic slowdown sent
leading technology stocks sliding. Value stocks moved into favor,
benefiting sectors like utilities, financials, health care and energy.
Although interest rates stabilized over the summer, concerns about the
economy's rapid deceleration caused further deterioration in technology
and telecommunications stock prices. During the fall and winter, the
downturn spread. Mid-cap growth stocks, which had previously held up
well because of their strong earnings and reasonable valuations,
collapsed late in the year. The Russell Mid Cap Growth Index closed
February 2001 with a disappointing 12-month return of -36.23%.
"We also
began
focusing on
companies
that would
be among
the first
to benefit
from an
economic
rebound..."
Performance review
In this difficult environment, John Hancock Medium Capitalization Growth
Fund maintained its disciplined focus on mid-size companies with strong
earnings growth prospects. For the year ended February 28, 2001, the
Fund returned -38.23% at net asset value. By comparison, the average
mid-cap growth fund returned -35.25% over the same period, according to
Lipper, Inc. Historical performance information can be found on page 12.
Tech tumbles
During the year, the Fund's largest stake remained in technology, where
stock prices declined by 50% for the period. We reduced our technology
investments to a market weight by last fall, but remained focused on the
faster-growth areas of data storage and fiber optics -- names like
Brocade Communications Systems and Aeroflex -- which got hit hard late
in the year. In addition, companies like Lexmark International, a
printer manufacturer (which we sold), and software companies like
Parametric Technology also suffered as the economic outlook dimmed. An
exception was E-Tek Dynamics, a leading producer of fiber-optic equipment
that did well when it was bought out over the summer.
[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 10% with -40% at the bottom
and 0% at the top. The first bar represents the -38.23% total return for
John Hancock Medium Capitalization Growth Fund. The second bar
represents the -35.25% total return for Average mid-cap growth fund. The
third bar represents the -36.23% total return for Russell Midcap Growth
Index. A note below the chart reads "The total return for John Hancock
Medium Capitalization Growth Fund is at net asset value with all
distributions reinvested. The average mid-cap growth fund is tracked by
Lipper, Inc. See the following page for historical performance information."]
Telecom and radio hurt
The Fund also maintained a sizable stake in competitive local exchange
carriers (CLECs) like Global Crossing, McLeodUSA, XO Communications
(formerly NEXTLINK), and Allegiance Telecom. Funding concerns at
selected CLECs devastated the entire sector last summer, unfairly
squeezing companies like ours that remained fully funded with strong
execution on their business plans. Dobson Communications, a rural direct
television provider, and Scientific-Atlanta, a leading producer of
digital set-top boxes for cable television, also suffered in this
negative environment. Radio stocks declined significantly in
anticipation of a huge slowdown in ad spending in 2001, causing us to
sell all except market leader Clear Channel Communications.
Energy cut; finance boosted
In the fall, we reduced our energy stake, including top-performing oil
service stocks like Baker-Hughes, Weatherford International and
Transocean Sedco Forex (which acquired R&B Falcon). We also took profits
in health care, eliminating strong performers like Stryker, which makes
medical devices. We held on, however, to other top contributors like
Waters, a company that makes analytical equipment for drug companies, as
well as Allergan, a drug company that specializes in eye diseases. We
also began focusing on companies that would be among the first to
benefit from an economic rebound, including Ambac Financial Group, a
municipal bond insurer; Mellon Financial, a bank with significant
fee-based income; and USA Education, an education loan company that we
recently sold. All benefited performance, as did transaction processors
like Concord EFS, Fiserv and SunGard Data Systems. We also added to our
retail stake, buying names like Bed Bath & Beyond, Talbots and TJX.
"The Fund's
assets span
a wide array
of sectors
with a focus
on the
strongest
mid caps
in each
industry..."
Cautious outlook
We expect the environment over the next six months to be one of
uncertainty and continued volatility. The Federal Reserve began to cut
interest rates this past January, but no one knows exactly how long it
will take for these rate cuts to stimulate economic activity. Currently,
earnings disappointments are on the rise and the outlook for earnings
and revenue growth in the second half of the year remains murky. We
believe that whenever a rebound comes, both mid-cap stocks and the Fund
should benefit. The Fund's assets span a wide array of sectors with a
focus on the strongest mid caps in each industry -- companies that
should be among the first to snap back in an economic recovery.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE FIVE INCEPTION
YEAR YEARS (4/11/95)
----- ----- ---------
Cumulative Total Returns (38.23%) 61.84% 103.88%
Average Annual Total Returns(1) (38.23%) 10.11% 12.87%
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
Medium Capitalization Growth 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 Russell Midcap Growth
Index -- an unmanaged index that contains those Russell Midcap
securities with a greater-than-average growth orientation. It is not
possible to invest in an index. Past performance is no guarantee of
future results.
[Line chart with the heading John Hancock Medium Capitalization Growth
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 Russell Midcap Growth Index and is equal to $598,655 as
of February 28, 2001. The second line represents the value of the
hypothetical $250,000 investment made in the John Hancock Medium
Capitalization Growth Fund on April 11, 1995 and is equal to $509,712 as
of February 28, 2001.]
BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGEMENT TEAM LEADER,
AND ANURAG PANDIT, CFA, PORTFOLIO MANAGER
[A 2" x 2" photo at bottom middle of page of John Hancock Small
Capitalization Growth Fund. Caption below reads "Fund management team
leader Bernice Behar."]
John Hancock
Small Capitalization
Growth Fund
Growth stocks fall from favor as technology stocks plummet
Small-cap growth stocks sank under the weight of falling technology and
telecommunications stocks over the last 12 months. Growing earnings
concerns in the face of a slowing economy caused investors to flee these
high-priced stocks, sending the tech-heavy NASDAQ Composite Index down
54.18% for the year despite a summer rally. Investors became more
focused on valuations and on more defensive segments of the market like
health care, financial and energy stocks, and value replaced growth as
the place to be. The result was a huge gap in performance between the
two major indexes that track small-cap stocks. For the year ended
February 28, 2001, the Russell 2000 Value Index gained 21.97%, while the
Russell 2000 Growth Index lost 40.75%.
Tech hurts performance
For the year ended February 28, 2001, John Hancock Small Capitalization
Growth Fund posted a total return of -50.27% at net asset value,
compared with the -30.68% return of the average small-cap growth fund,
according to Lipper, Inc.
"In June,
we began a
restructur-
ing of the
Fund's
portfolio..."
While we were underweighted in technology versus our benchmark Russell
2000 Growth Index, we remained overweighted versus our peer group and
that hurt relative performance, as a growing number of companies
announced earnings disappointments and forecast slower growth. Tech and
telecom companies suffered from growing inventories and slowing demand
for all types of equipment and services just as the economy started to
ebb. This group, including semiconductor, software and telecom-related
companies, handed us some of our biggest disappointments, including
M-Systems Flash Disk Pioneers, a wireless semiconductor company;
WatchGuard, which provides Internet security solutions to small and
mid-size companies; and PRI Automation, a supplier of advanced
automation systems and software to the semiconductor industry.
[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 10% with -60% at the bottom
and 0% at the top. The first bar represents the -50.27% total return for
John Hancock Small Capitalization Growth Fund. The second bar represents
the -30.68% total return for Average small-cap growth fund. The third
bar represents the -40.75% total return for Russell 2000 Growth Index. A
note below the chart reads "The total return for John Hancock Small
Capitalization Growth Fund is at net asset value with all distributions
reinvested. The average small-cap growth fund is tracked by Lipper, Inc.
See the following page for historical performance information."]
"...small-cap
growth
stock
valuation
levels have
become
more
attractive..."
Ad slowdown hits consumer cyclicals
Our overweighting in consumer cyclical companies -- especially anything
related to advertising -- also hurt our performance, as advertising by
Internet companies dried up. The group includes broadcasters such as
Radio One and media, advertising and even Internet analytical software
companies like Accrue Software, which helps companies understand their
Internet strategies.
Fund restructuring
In June, we began a restructuring of the Fund's portfolio to adopt a
more concentrated approach. This provides us with the opportunity to act
in a more aggressive manner on our convictions about both individual
companies and sectors. We reduced the number of holdings from 180 to
around 60, redeploying assets into high-quality companies that we
believe have the best potential for success in the current environment.
While this helped us in the summer rally, it hurt us on the downside
later, which is typical of a more focused portfolio -- greater
short-term swings on both the up and down sides. That was especially
true for some of the telecom service providers that we added or held
onto in January and February, such as WinStar Communications, AirGate
PCS and SBA Communications.
As part of the restructuring, we eliminated most of our positions in the
lagging Internet software sector and increased our stake in health-care
companies, which were 22% of net assets by the end of February. At first
we focused on biotechnology companies and later took profits after these
stocks rose significantly. We then moved into the more defensive area of
health-care services. Our top holding by the end of the period was
Rightchoice Managed Care, an HMO which stands to benefit from a more
favorable environment for government expense reimbursements.
A look ahead
In the short term, we expect small-cap stocks to remain volatile while
the economy slows and companies adjust their earnings downward. We're
more optimistic further out, however, as small-cap growth stock
valuation levels have become more attractive and companies will have a
better chance of beating lowered expectations, especially in a falling
interest-rate environment. Historically, small-cap stocks have been some
of the first to recover from an economic slump, because they have the
potential to provide the strongest earnings growth.
- ---------------------------------------------------------------------
See the prospectus for the the risks of investing in small-cap stocks.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE INCEPTION
YEAR (5/2/96)
---------- ----------
Cumulative Total Returns (50.27%) 70.09%
Average Annual Total Returns(1) (50.27%) 11.63%
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
Small Capitalization Growth 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 Russell 2000 Index and
the Russell 2000 Growth Index. The Russell 2000 Index is an unmanaged
small-cap index comprised of 2,000 U.S. stocks. The Russell 2000 Growth
Index is an unmanaged index containing Russell 2000 Index stocks with a
greater-than-average growth orientation. It is not possible to invest in
an index. Past performance is no guarantee of future results.
[Line chart with the heading John Hancock Small Capitalization Growth
Fund, representing the growth of a hypothetical $250,000 investment over
the life of the fund. Within the chart are three lines. The first line
represents the value of the hypothetical $250,000 investment made in the
John Hancock Small Capitalization Growth Fund on May 2, 1996 and is equal
to $425,236 as of February 28, 2001. The second line represents the
Russell 2000 Index and is equal to $362,582 as of February 28, 2001. The
third line represents the Russell 2000 Growth Index and is equal to
$289,179 as of February 28, 2001.]
BY TIMOTHY E. QUINLISK, CFA, PORTFOLIO MANAGEMENT TEAM LEADER,
R. SCOTT MAYO, CFA, AND JAMES S. YU, CFA, PORTFOLIO MANAGER
[A 2" x 3" photo at bottom middle of page of John Hancock Small
Capitalization Value Fund. Caption below reads "Fund management team
leader Tim Quinlisk."]
John Hancock Small
Capitalization Value Fund
Market volatility leads to renewed focus on valuation
Rising interest rates pushed investors out of expensive technology names
last spring and into more value-oriented sectors. Small-cap stocks,
particularly financials, utilities and energy, benefited. During the
summer and fall, telecommunications and technology stocks posted steep
declines, as the slowing economy caused capital markets to tighten and
demand to weaken. While growth sectors took hard hits, small-cap value
stocks held up well. But in the fourth quarter, gross domestic product
figures came in much lower than expected, causing a broad market
downturn. In an effort to revive economic growth, the Federal Reserve
cut interest rates early in the New Year. But continued economic
uncertainty, along with a growing number of earnings disappointments,
kept most market indexes in negative territory.
"Among our
strongest
performers
were less
economi-
cally
sensitive
names..."
Performance review
John Hancock Small Capitalization Value Fund posted a -10.14% total
return at net asset value for the year ended February 28, 2001. This
beat the -16.84% return posted by the Russell 2000 Index, but trailed
the -6.96% return of the average small-cap core fund, according to
Lipper, Inc. Historical performance information can be found on page 18.
The Fund's strong stock selection and value orientation helped
performance relative to the index. But above-average stakes in both
technology and telecommunications caused the Fund to lag its peer group.
Staying the course
We found some of the greatest value opportunities this past year in the
telecommunications sector, where investors indiscriminately punished
strong and weak companies. Increased competition and difficulty funding
the build-out of new high-speed networks chopped many telecom stock
prices in half. We added to our stakes in companies like NTELOS
(formerly CFW Communications) and CTC Communications Group -- newcomers
that continue to execute on their plans for adding subscribers and
building out access lines. We also held on to investments like ANTEC,
which provides telephone services over cable, even as a pullback in
capital spending dampened near-term prospects.
[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 6% with -18% at the bottom
and 0% at the top. The first bar represents the -10.14% total return for
John Hancock Small Capitalization Value Fund. The second bar represents
the -6.96% total return for Average small-cap core fund. The third bar
represents the -16.84% total return for Russell 2000 Index. A note below
the chart reads "The total return for John Hancock Small Capitalization
Value Fund is at net asset value with all distributions reinvested. The
average small-cap core fund is tracked by Lipper, Inc. See the following
page for historical performance information."]
Riding with technology
In the technology sector, we also maintained or added to investments on
weakness, including Wind River Systems, the leading supplier of software
for embedded microprocessor systems, and Electronics for Imaging, a
company that supplies software used in office equipment. E-commerce
consulting firms like Viant and Xpedior tumbled, but we held on,
believing that huge pent-up demand will re-ignite the stocks. We also
kept our investment in Bell & Howell, a company that develops software
solutions to help clients like libraries access information more
efficiently. The stock declined sharply, but should benefit as the
company sells its non-core assets to focus on information services. In a
related area, Pegasus Communications, a direct satellite television
provider, tumbled when expected industry consolidation was postponed.
Benefiting from defensive stocks
Among our strongest performers were less economically sensitive names
like Corinthian Colleges and Career Education, both of which own and
operate for-profit colleges that benefited from growing enrollment
trends. Other defensive names that did well included Valassis
Communications, which does freestanding ad inserts for Sunday
newspapers, and Heidrick & Struggles International, a leading executive
search firm that we sold when it reached our price target. Covance, a
contract research organization serving the pharmaceutical industry,
benefited from restructuring and an improved health-care outlook. Some
of our capital goods companies, including Amphenol, which makes
connectors, also turned in strong results, thanks to solid demand.
Finally, AC Nielsen, a market research company, was recently bought out
at a premium.
"The great
value oppor-
tunities, in
our opinion,
are now in
beaten-down
technology
stocks."
Looking ahead
The future looks uncertain as earnings growth outlooks continue to erode
in this slower economic environment. Our strategy is to position the
Fund for the return of the economy's operating leverage. We feel that
traditional value sectors -- like financials, utilities and energy --
have run their course. The great value opportunities, in our opinion,
are now in beaten-down technology stocks. We're focusing there, as well
as in stocks that should do well in a slower growth environment, such as
NOVA, a large transaction processor that serves small to mid-size
businesses. We'll continue to look for opportunities to buy good
businesses like these whose stocks are selling at cheap prices.
- ---------------------------------------------------------------------
See the prospectus for a discussion of the risks of investing in
small-cap stocks.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE FIVE INCEPTION
YEAR YEARS (4/19/95)
------ ------- ---------
Cumulative Total Returns (10.14%) 194.46% 219.83%
Average Annual Total Returns(1) (10.14%) 24.11% 21.93%
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
Small Capitalization Value 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 Russell 2000 Index -- an
unmanaged, small-cap index comprised of 2,000 U.S stocks. It is not
possible to invest in an index. Past performance is no guarantee of
future results.
[Line chart with the heading John Hancock Small Capitalization Value
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 value of the hypothetical $250,000 investment made in the
John Hancock Small Capitalization Value Fund on April 19, 1995 and is
equal to $799,565 as of February 28, 2001. The second line represents
the Russell 2000 Index and is equal to $492,921 as of February 28,
2001.]
BY LORETTA MORRIS AND RANDY KAHN
FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
International Equity Fund
Volatility afflicts overseas markets
On December 14, 2000, Nicholas-Applegate Capital Management assumed
management responsibility for the Fund under a new subadvisory agreement
that shareholders will be asked to formally approve in an upcoming proxy
solicitation. Founded in 1984, Nicholas-Applegate is a recognized leader
in U.S. equity, global and international equity management and currently
manages more than $35 billion for institutional and individual
investors.
By nearly every measure, the 12-month period ended February 28, 2001 was
a challenging one for international stock investors. An abnormally high
level of volatility stemming from a slowdown in economic growth, a
deceleration in corporate earnings and a rise in energy prices sent the
global equity markets lower practically across the board.
The contagion that began to spread early last year during the selloff of
technology, media and telecommunications (TMT) stocks continued to
linger in 2001. Contributing to the ongoing weakness was a tightening
bias by central banks worldwide in 2000. All told, there were nearly
130 interest-rate hikes in 2000, and the cumulative effect of tighter
monetary policy ultimately precipitated a sharp slowdown in global
growth.
Japan was especially hard hit by the investor rotation out of TMT
stocks, since at its February 2000 peak this sector represented over 40%
of Japanese stock-market capitalization. By February 2001, the country
appeared to be sinking deeper into recession, and its chief index, the
Nikkei, was on the verge of declining to a 15-year low. Meanwhile, tight
monetary conditions in Europe served to dampen corporate spending,
consumer credit growth, auto sales and the housing market.
"On
December
14, 2000,
Nicholas-
Applegate
Capital
Management
assumed
manage'
ment..."
Fund performance
In this difficult environment, John Hancock International Equity Fund
returned -34.85% at net asset value for the 12-month period ended
February 28, 2001. That compares with a return of -21.16% for the
average international fund, according to Lipper, Inc., and the -18.18%
return of the MSCI All Country World Free ex-U.S. Index. See page 21 for
historical performance information.
The Fund's underperformance stemmed in large part from investments in
the volatile TMT sectors. Although overweighted versus the MSCI index,
the Fund had a lighter weighting than its peers when tech stocks
skyrocketed early last year. After boosting the TMT stake, the Fund was
hit by having an overweighted position as the stocks came back down to
earth. The Fund was particularly hard-hit by significant declines in
telecommunications companies in the U.K. and Mexico.
[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 10% with -40% at the bottom
and 0% at the top. The first bar represents the -34.85% total return for
John Hancock International Equity Fund. The second bar represents the
- -21.16% total return for Average international fund. The third bar
represents the -18.18% total return for MSCI All Country World Free
Ex-U.S. Index. A note below the chart reads "The total return for John
Hancock International Equity Fund is at net asset value with all
distributions reinvested. The average international fund is tracked by
Lipper, Inc. See the following page for historical performance information."]
"...we will
continue to
focus on
companies
with out-
standing
fundamen-
tals..."
New management: Strategies and changes
On December 14, 2000, Nicholas-Applegate Capital Management assumed
management of the Fund. The cornerstone of our investment philosophy
rests on identifying companies possessing three attributes: they are
poised to benefit from positive change such as innovation or
higher-than-expected earnings; they are positioned to sustain this
positive change over time; and they are beginning to be recognized by
the market through rising stock prices. In addition, we regularly assess
political, economic, monetary and technology factors in each country and
help to determine whether to overweight or underweight specific
countries in the portfolio.
Since assuming management of the Fund, we have gradually transitioned
the portfolio to be consistent with our investment approach, paring the
number of holdings to build larger positions in fewer companies. We also
further reduced the Fund's exposure to the volatile technology sector
and began cutting holdings in Japan, as the prospects for growth there
remain dim. In its place, we have identified more attractive
opportunities in the United Kingdom, where growth rates are projected to
be solid in 2001.
Looking ahead
Many of the uncertainties that plagued the world's markets in 2000 may
linger in 2001. Technology stocks could remain under pressure in the
coming quarters, as valuations for many of this sector's leaders remain
high. In addition, although global central banks have begun to reduce
interest rates, the lagged effects of their tightenings should continue
to slow world activity well into 2001, according to an analysis by
International Strategy and Investment, an economic data and research
firm. Going forward, we will continue to focus on companies with
outstanding fundamentals, in the belief that their strengths will
ultimately be recognized by the markets.
- ---------------------------------------------------------------------
International investing involves special risks such as political,
economic and currency risks, and differences in accounting standards
and financial reporting.
A LOOK AT PERFORMANCE
For the period ended February 28, 2001
SINCE
ONE FIVE INCEPTION
YEAR YEARS (3/30/95)
----- ----- -----
Cumulative Total Returns (34.85%) 2.43% 12.47%
Average Annual Total Returns(1) (34.85%) 0.48% 2.01%
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
International Equity 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 Morgan Stanley Capital International
(MSCI) All Country World Free Ex-U.S. Index -- an unmanaged index that
measures the performance of both developed and emerging foreign stock
markets. The index represents freely traded stocks. It is not possible
to invest in an index. Past performance is no guarantee of future
results.
[Line chart with the heading John Hancock International Equity 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 MSCI All Country World Free Ex-U.S. Index and is equal to
$355,151 as of February 28, 2001. The second line represents the value
of the hypothetical $250,000 investment made in the John Hancock
International Equity Fund on March 30, 1995 and is equal to $281,186 as
of February 28, 2001.]
FINANCIAL STATEMENTS
John Hancock Funds -- Institutional Series Trust
Statements of Assets and Liabilities
February 28, 2001
- ----------------------------------------------------------------------------------------------------------
ACTIVE DIVIDEND MEDIUM
BOND PERFORMERS CAPITALIZATION
FUND FUND GROWTH FUND
----------------- ----------------- -----------------
Assets:
Investments at value -- Note C:
Bonds (cost -- $6,219,298, none and
none, respectively) $6,388,770 -- --
Common stocks (cost -- none, $5,098,709
and $11,013,857, respectively) -- $6,122,039 $11,270,366
Warrants (cost -- $103, none and none,
respectively) 970 -- --
Short-term investments (cost --
$387,000, $109,000 and $428,000,
respectively) 387,000 109,000 428,000
Corporate savings account 705 331 590
----------------- ----------------- -----------------
6,777,445 6,231,370 11,698,956
Receivable for investments sold 72,338 -- 300,244
Dividends and interest receivable 76,302 9,917 2,535
Other assets 512 1,735 3,680
----------------- ----------------- -----------------
Total Assets 6,926,597 6,243,022 12,005,415
- ----------------------------------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 69,504 -- 454,913
Payable for shares repurchased 9,975 -- 5,803
Dividends payable 3,358 -- --
Payable to John Hancock Advisers, Inc.
and affiliates 2,132 9,712 6,109
Accounts payable and accrued expenses 36,415 31,003 39,737
----------------- ----------------- -----------------
Total Liabilities 121,384 40,715 506,562
- ----------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 6,803,914 4,107,506 10,644,410
Accumulated net realized gain (loss) on
investments, financial futures
contracts and foreign currency
transactions (166,078) 1,060,523 599,986
Net unrealized appreciation of
investments 170,339 1,023,330 256,509
Undistributed (distributions in excess
of) net investment income (2,962) 10,948 (2,052)
----------------- ----------------- -----------------
Net Assets $6,805,213 $6,202,307 $11,498,853
==========================================================================================================
Net Asset Value Per Share:
(Based on 790,144, 556,604 and
1,120,973 shares, respectively, of
beneficial interest outstanding --
unlimited number of shares authorized
with no par value) $8.61 $11.14 $10.26
==========================================================================================================
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 Assets and Liabilities (continued)
February 28, 2001
- ----------------------------------------------------------------------------------------------------------
SMALL SMALL INTERNATIONAL
CAPITALIZATION CAPITALIZATION EQUITY
GROWTH FUND VALUE FUND FUND
----------------- ----------------- -----------------
Assets:
Investments at value -- Note C:
Common stocks and warrants (cost --
$5,545,155, $32,424,457 and
$5,222,120, respectively) $5,170,562 $30,703,773 $5,058,956
Preferred stocks (cost -- none, none
and $70,749, respectively) -- -- 62,959
Short-term investments (cost --
$297,000, $26,000 and $1,516,471,
respectively) 297,000 26,000 1,516,471
Corporate savings account 829 448 --
----------------- ----------------- -----------------
5,468,391 30,730,221 6,638,386
Cash -- -- 21,401
Foreign currency, at value (cost --
none, none and $67,454, respectively) -- -- 67,446
Receivable for forward foreign currency
exchange contracts purchased -- -- 105
Receivable for investments sold 37,334 84,938 166,044
Dividends and interest receivable 46 3,650 14,446
Deferred organization expenses 714 -- --
Receivable from John Hancock Advisers,
Inc. and affiliates 7,494 -- --
Other assets 479 1,113 1,156
----------------- ----------------- -----------------
Total Assets 5,514,458 30,819,922 6,908,984
- ----------------------------------------------------------------------------------------------------------
Liabilities:
Payable for open forward foreign
currency exchange contracts sold -- -- 263
Payable for investments purchased 23,141 582,638 132,140
Payable for shares repurchased 411 2,533 1,544
Payable for securities on loan -- -- 844,471
Payable to John Hancock Advisers, Inc.
and affiliates -- 12,064 7,397
Accounts payable and accrued expenses 32,500 39,265 63,777
----------------- ----------------- -----------------
Total Liabilities 56,052 636,500 1,049,592
- ----------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 7,097,867 31,030,185 7,286,654
Accumulated net realized gain (loss) on
investments, financial futures
contracts and foreign currency
transactions (1,264,576) 874,987 (1,214,255)
Net unrealized depreciation of
investments and foreign currency
transactions (374,593) (1,720,684) (171,606)
Distributions in excess of net
investment income (292) (1,066) (41,401)
----------------- ----------------- -----------------
Net Assets $5,458,406 $30,183,422 $5,859,392
==========================================================================================================
Net Asset Value Per Share:
(Based on 520,388, 2,489,110 and
712,203 shares, respectively, of
beneficial interest outstanding --
unlimited number of shares authorized
with no par value) $10.49 $12.13 $8.23
==========================================================================================================
See notes to financial statements.
Statement of Operations
Year ended February 28, 2001
- ----------------------------------------------------------------------------------------------------------
ACTIVE DIVIDEND MEDIUM
BOND PERFORMERS CAPITALIZATION
FUND FUND GROWTH FUND
----------------- ----------------- -----------------
Investment Income:
Interest (including income from
securities loaned of none, none and
$13,642, respectively) $394,594 $45,185 $104,462
Dividends (net of foreign withholding
tax of none, $593 and $301,
respectively) 7,235 141,055 36,606
----------------- ----------------- -----------------
401,829 186,240 141,068
----------------- ----------------- -----------------
Expenses:
Investment management fee 27,380 77,983 224,846
Custodian fee 36,563 10,978 35,721
Registration and filing fees 17,723 12,590 12,093
Auditing fee 17,800 18,625 19,225
Printing 7,161 5,482 7,095
Transfer agent fee 2,738 6,498 14,052
Accounting and legal services fee 1,045 2,436 5,315
Miscellaneous 325 1,128 1,800
Organization expense 131 132 230
Trustees' fees 169 170 1,460
Legal fees 66 86 37
Interest expense -- 3,830 1,365
----------------- ----------------- -----------------
Total Expenses 111,101 139,938 323,239
- ----------------------------------------------------------------------------------------------------------
Less Expense Reductions (78,188) (48,786) (70,047)
- ----------------------------------------------------------------------------------------------------------
Net Expenses 32,913 91,152 253,192
- ----------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 368,916 95,088 (112,124)
- ----------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss)
on Investments, Financial Futures
Contracts and Foreign Currency Transactions:
Net realized gain on investments sold 15,289 2,388,602 2,260,504
Net realized loss on financial futures
contracts -- (7,744) --
Net realized gain on foreign currency
transactions 3,483 -- --
Change in net unrealized appreciation
(depreciation) of investments 305,118 (1,416,018) (12,919,604)
Change in net unrealized appreciation
(depreciation) of financial futures
contracts -- 59,771 --
Change in net unrealized appreciation
(depreciation) of foreign currency
transactions (323) -- --
----------------- ----------------- -----------------
Net Realized and Unrealized Gain (Loss)
on Investments, Financial Futures
Contracts and Foreign Currency
Transactions 323,567 1,024,611 (10,659,100)
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $692,483 $1,119,699 ($10,771,224)
==========================================================================================================
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 (losses) for the period stated.
See notes to financial statements.
Statement of Operations (continued)
Year ended February 28, 2001
- ----------------------------------------------------------------------------------------------------------
SMALL SMALL INTERNATIONAL
CAPITALIZATION CAPITALIZATION EQUITY
GROWTH FUND VALUE FUND FUND
----------------- ----------------- -----------------
Investment Income:
Interest (including income from
securities loaned of $9,214, $9,082
and $6,649, respectively) $25,333 $80,636 $34,453
Dividends (net of foreign withholding
tax of none, none and $17,877,
respectively) 1,570 67,132 110,146
----------------- ----------------- -----------------
26,903 147,768 144,599
----------------- ----------------- -----------------
Expenses:
Investment management fee 62,735 189,558 90,945
Custodian fee 39,371 24,015 206,240
Registration and filing fees 24,865 19,158 16,574
Auditing fee 15,550 18,025 18,431
Organization expense 4,079 219 130
Printing 5,604 5,487 6,435
Miscellaneous 789 1,399 773
Transfer agent fee 3,921 13,540 5,052
Accounting and legal services fee 1,491 5,168 1,913
Trustees' fees 265 1,186 412
Interest expense 1,355 4,798 2,992
Legal fees -- 251 --
----------------- ----------------- -----------------
Total Expenses 160,025 282,804 349,897
- ----------------------------------------------------------------------------------------------------------
Less Expense Reductions (89,398) (66,011) (248,764)
- ----------------------------------------------------------------------------------------------------------
Net Expenses 70,627 216,793 101,133
- ----------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (43,724) (69,025) 43,466
- ----------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss)
on Investments, Financial Futures
Contracts and Foreign Currency Transactions:
Net realized gain (loss) on investments
sold (1,172,422) 6,208,030 (440,411)
Net realized loss on financial futures
contracts -- (132,737) --
Net realized gain (loss) on foreign
currency transactions -- 3,027 (729,497)
Change in net unrealized appreciation
(depreciation) of investments (3,958,158) (8,772,416) (3,005,518)
Change in net unrealized appreciation
(depreciation) of foreign currency
transactions -- -- 415
----------------- ----------------- -----------------
Net Realized and Unrealized Loss on
Investments, Financial Futures
Contracts and Foreign Currency
Transactions (5,130,580) (2,694,096) (4,175,011)
- ----------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting
from Operations ($5,174,304) ($2,763,121) ($4,131,545)
==========================================================================================================
See notes to financial statements.
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
ACTIVE BOND DIVIDEND PERFORMERS
FUND FUND
--------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 2001 FEBRUARY 29, 2000 FEBRUARY 28, 2001
----------------- ----------------- ----------------- -----------------
Increase in Net Assets:
From Operations:
Net investment income $342,798 $368,916 $120,862 $95,088
Net realized gain (loss) on
investments sold, financial
futures contracts and foreign
currency transactions (167,990) 18,772 1,960,778 2,380,858
Change in net unrealized
appreciation (depreciation) of
investments, financial futures
contracts and foreign currency
transactions (88,968) 304,795 (1,240,327) (1,356,247)
----------------- ----------------- ----------------- -----------------
Net Increase in Net Assets
Resulting from Operations 85,840 692,483 841,313 1,119,699
----------------- ----------------- ----------------- -----------------
Distributions to Shareholders: *
Dividends from net investment
income (342,798) (370,991) (125,515) (100,614)
Distributions in excess of net
investment income (47) -- -- --
Distributions from net realized
gain on investments sold (11,387) -- (1,568,997) (2,068,903)
----------------- ----------------- ----------------- -----------------
Total Distributions to
Shareholders (354,232) (370,991) (1,694,512) (2,169,517)
----------------- ----------------- ----------------- -----------------
From Portfolio Share Transactions: **
Shares sold 3,005,999 4,430,138 5,626,668 4,639,407
Shares issued to shareholders in
reinvestment of distributions 351,436 366,504 1,694,964 2,169,758
----------------- ----------------- ----------------- -----------------
3,357,435 4,796,642 7,321,632 6,809,165
Less shares repurchased (4,552,479) (2,535,098) (9,348,646) (14,419,671)
----------------- ----------------- ----------------- -----------------
Net Increase (Decrease) (1,195,044) 2,261,544 (2,027,014) (7,610,506)
----------------- ----------------- ----------------- -----------------
Net Assets:
Beginning of period 5,685,613 4,222,177 17,742,844 14,862,631
----------------- ----------------- ----------------- -----------------
End of period (including
undistributed (distribution in
excess of) net investment income
of ($1,213), ($2,963), $16,484
and $10,948 respectively) $4,222,177 $6,805,213 $14,862,631 $6,202,307
================= ================= ================= =================
* Distributions to Shareholders:
Per share dividends from net
investment income $0.5791 $0.5579 $0.1106 $0.1073
----------------- ----------------- ----------------- -----------------
Per share distributions in excess
of net investment income $0.0001 -- -- --
----------------- ----------------- ----------------- -----------------
Per share distributions from net
realized gain on investments sold $0.0206 -- $1.5543 $2.8091
----------------- ----------------- ----------------- -----------------
** Analysis of Portfolio
Share Transactions:
Shares sold 358,987 535,238 375,404 320,516
Shares issued to shareholders in
reinvestment of distributions 42,197 44,172 116,345 183,485
----------------- ----------------- ----------------- -----------------
401,184 579,410 491,749 504,001
Less shares repurchased (544,753) (307,954) (618,694) (1,047,503)
----------------- ----------------- ----------------- -----------------
Net Increase (Decrease) (143,569) 271,456 (126,945) (543,502)
================= ================= ================= =================
The Statement of Changes in Net Assets shows how the value of each
Fund's net assets has changed since the previous period. The difference
reflects net investment income, any investment and foreign currency
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.
Statement of Changes in Net Assets (continued)
- ---------------------------------------------------------------------------------------------------------------------------
MEDIUM CAPITALIZATION SMALL CAPITALIZATION
GROWTH FUND GROWTH FUND
--------------------------------------- ---------------------------------------
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 loss ($76,769) ($112,124) ($23,200) ($43,724)
Net realized gain (loss) on
investments sold 4,019,150 2,260,504 1,195,121 (1,172,422)
Change in net unrealized
appreciation (depreciation) of
investments 12,122,951 (12,919,604) 3,128,562 (3,958,158)
----------------- ----------------- ----------------- -----------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 16,065,332 (10,771,224) 4,300,483 (5,174,304)
----------------- ----------------- ----------------- -----------------
Distributions to Shareholders: *
Distributions from net realized
gain on investments sold (808,355) (4,552,005) (579,250) (853,819)
----------------- ----------------- ----------------- -----------------
From Portfolio Share Transactions: **
Shares sold 13,799,897 23,310,057 9,505,733 8,114,648
Shares issued to shareholders in
reinvestment of distributions 802,909 4,512,270 579,258 856,091
----------------- ----------------- ----------------- -----------------
14,602,806 27,822,327 10,084,991 8,970,739
Less shares repurchased (9,653,548) (37,893,065) (7,350,836) (6,392,389)
----------------- ----------------- ----------------- -----------------
Net Increase (Decrease) 4,949,258 (10,070,738) 2,734,155 2,578,350
----------------- ----------------- ----------------- -----------------
Net Assets:
Beginning of period 16,686,585 36,892,820 2,452,791 8,908,179
----------------- ----------------- ----------------- -----------------
End of period (including
distributions in excess of net
investment income of $1,664,
$2,052, $59 and $292,
respectively) $36,892,820 $11,498,853 $8,908,179 $5,458,406
================= ================= ================= =================
* Distributions to Shareholders:
Per share distributions from net
realized gain on investments sold $0.5502 $3.3259 $2.2594 $1.9194
----------------- ----------------- ----------------- -----------------
** Analysis of Portfolio
Share Transactions:
Shares sold 887,756 1,245,050 558,531 432,156
Shares issued to shareholders in
reinvestment of distributions 46,642 366,810 32,488 70,365
----------------- ----------------- ----------------- -----------------
934,398 1,611,860 591,019 502,521
Less shares repurchased (703,733) (2,239,222) (436,856) (346,807)
----------------- ----------------- ----------------- -----------------
Net Increase (Decrease) 230,665 (627,362) 154,163 155,714
================= ================= ================= =================
See notes to financial statements.
Statement of Changes in Net Assets (continued)
- ---------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION INTERNATIONAL
VALUE FUND EQUITY FUND
--------------------------------------- ---------------------------------------
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 (loss) $45,648 ($69,025) $50,863 $43,466
Net realized gain (loss) on
investments sold, financial
futures contracts and foreign
currency transactions 3,502,891 6,078,320 855,747 (1,169,908)
Change in net unrealized
appreciation (depreciation) of
investments and foreign currency
transactions 6,887,323 (8,772,416) 2,049,079 (3,005,103)
----------------- ----------------- ----------------- -----------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 10,435,862 (2,763,121) 2,955,689 (4,131,545)
----------------- ----------------- ----------------- -----------------
Distributions to Shareholders: *
Dividends from net investment
income (52,590) (49,153) (50,863) (32,472)
Distributions in excess of net
investment income -- -- (28,356) --
Distributions from net realized
gain on investments sold (1,849,452) (6,670,587) (475,044) (387,846)
----------------- ----------------- ----------------- -----------------
Total Distributions to
Shareholders (1,902,042) (6,719,740) (554,263) (420,318)
----------------- ----------------- ----------------- -----------------
From Portfolio Share Transactions: **
Shares sold 12,736,754 17,123,240 5,684,244 5,627,681
Shares issued to shareholders in
reinvestment of distributions 1,902,123 6,721,015 554,265 420,270
----------------- ----------------- ----------------- -----------------
14,638,877 23,844,255 6,238,509 6,047,951
Less shares repurchased (6,332,233) (8,436,558) (3,596,999) (8,484,719)
----------------- ----------------- ----------------- -----------------
Net Increase (Decrease) 8,306,644 15,407,697 2,641,510 (2,436,768)
----------------- ----------------- ----------------- -----------------
Net Assets:
Beginning of period 7,418,122 24,258,586 7,805,087 12,848,023
----------------- ----------------- ----------------- -----------------
End of period (including
undistributed (distributions in
excess of) net investment income
of $48,651, ($1,066), ($78,887)
and ($41,401) respectively) $24,258,586 $30,183,422 $12,848,023 $5,859,392
================= ================= ================= =================
* Distributions to Shareholders:
Per share dividends from net
investment income $0.0575 $0.0273 $0.0688 $0.0391
----------------- ----------------- ----------------- -----------------
Per share distributions in excess
of net investment income -- -- $0.0383 --
----------------- ----------------- ----------------- -----------------
Per share distributions from net
realized gain on investments sold $2.0232 $3.7103 $0.6428 $0.4683
----------------- ----------------- ----------------- -----------------
** Analysis of Portfolio
Share Transactions:
Shares sold 857,366 1,077,952 464,681 469,845
Shares issued to shareholders in
reinvestment of distributions 124,240 611,557 44,555 45,781
----------------- ----------------- ----------------- -----------------
981,606 1,689,509 509,236 515,626
Less shares repurchased (449,846) (541,612) (312,613) (766,906)
----------------- ----------------- ----------------- -----------------
Net Increase (Decrease) 531,760 1,147,897 196,623 (251,280)
================= ================= ================= =================
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Active Bond Fund
Financial Highlights
Selected data for a share of beneficial interest
outstanding throughout each period indicated, investment returns, key
ratios and supplemental data are listed as follows:
- -----------------------------------------------------------------------------------------------------------------------
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 $8.64 $8.54 $8.83 $8.59 $8.14
------------- ------------- ------------- ------------- -------------
Net Investment Income (1) 0.60 0.59 0.56 0.58 0.56
Net Realized and Unrealized
Gain (Loss) on Investments (0.09) 0.34 (0.02) (0.43) 0.47
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 0.51 0.93 0.54 0.15 1.03
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income (0.60) (0.59) (0.56) (0.58) (0.56)
Distributions in Excess of
Net Investment Income -- -- (2) -- (2) -- (2) --
Distributions from Net
Realized Gain on
Investments Sold (0.01) (0.05) (0.22) (0.02) --
------------- ------------- ------------- ------------- -------------
Total Distributions (0.61) (0.64) (0.78) (0.60) (0.56)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $8.54 $8.83 $8.59 $8.14 $8.61
============= ============= ============= ============= =============
Total Investment Return
(3,4) 6.17% 11.25% 6.24% 1.83% 13.11%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $2,191 $5,158 $5,686 $4,222 $6,805
Ratio of Expenses to Average
Net Assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of Adjusted Expenses
to Average Net Assets (5,6) 4.05% 2.64% 2.33% 2.93% 2.03%
Ratio of Net Investment
Income to Average Net
Assets 7.10% 6.78% 6.36% 6.88% 6.74%
Portfolio Turnover Rate 136% 230% 356% 301% 327%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Total investment return assumes dividend reinvestment.
(4) Total returns would have been lower had certain expenses not been
reduced during the periods shown.
(5) Does not take into consideration expense reductions during the
periods shown.
(6) Adjusted expenses as a percentage of average net assets are expected
to decrease as the net assets of the Fund grow.
The Financial Highlights summarizes the impact of the following factors
on a single share for each period indi cated: net investment income,
gains (losses), dividends and total investment return of the Fund. It
shows how the Fund's net asset value for a share has changed since the
end of the previous period. 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 -- Dividend Performers Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout
each period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- -----------------------------------------------------------------------------------------------------------------------
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 $10.15 $11.91 $14.92 $14.46 $13.51
------------- ------------- ------------- ------------- -------------
Net Investment Income (1) 0.21 0.18 0.15 0.11 0.10
Net Realized and Unrealized
Gain on Investments 1.92 3.92 1.04 0.60 0.45
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 2.13 4.10 1.19 0.71 0.55
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income (0.18) (0.17) (0.15) (0.11) (0.11)
Distributions from Net
Realized Gain on
Investments Sold (0.19) (0.92) (1.50) (1.55) (2.81)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.37) (1.09) (1.65) (1.66) (2.92)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $11.91 $14.92 $14.46 $13.51 $11.14
============= ============= ============= ============= =============
Total Investment Return
(2,3) 21.26% 35.55% 7.97% 4.17% 2.94%
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $8,668 $20,884 $17,743 $14,863 $6,202
Ratio of Expenses to Average
Net Assets 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of Adjusted Expenses
to Average Net Assets (4,5) 1.89% 1.02% 0.95% 1.05% 1.08%
Ratio of Net Investment
Income to Average Net
Assets 1.94% 1.31% 0.95% 0.71% 0.73%
Portfolio Turnover Rate 37% 77% 64% 46% 58%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) 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.
(5) Adjusted expenses as a percentage of average net assets are expected
to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Medium Capitalization Growth Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout
each period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- -----------------------------------------------------------------------------------------------------------------------
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 $10.69 $12.67 $13.51 $10.99 $21.10
------------- ------------- ------------- ------------- -------------
Net Investment Income (Loss)
(1) 0.01 -- (2) (0.02) (0.05) (0.07)
Net Realized and Unrealized
Gain (Loss) on Investments
and Foreign Currency
Transactions 2.02 2.06 (0.68) 10.71 (7.44)
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 2.03 2.06 (0.70) 10.66 (7.51)
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income -- -- (2) -- -- --
Distributions from Net
Realized Gain on
Investments Sold (0.05) (1.22) (1.72) (0.55) (3.33)
Distributions in Excess of
Net Realized Gain on
Investments Sold -- -- (0.10) -- --
------------- ------------- ------------- ------------- -------------
Total Distributions (0.05) (1.22) (1.82) (0.55) (3.33)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $12.67 $13.51 $10.99 $21.10 $10.26
============= ============= ============= ============= =============
Total Investment Return
(3,4) 19.00% 17.39% (5.34%) 98.13% (38.23%)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $29,085 $40,302 $16,687 $36,893 $11,499
Ratio of Expenses to Average
Net Assets 0.90% 0.90% 0.90% 0.90%(7) 0.90%
Ratio of Adjusted Expenses
to Average Net Assets (5,6) 1.42% 1.10% 1.11% 1.28% 1.15%
Ratio of Net Investment
Income (Loss) to Average
Net Assets 0.06% 0.03% (0.13%) (0.37%) (0.40%)
Portfolio Turnover Rate 281% 341% 116% 153% 181%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Total investment return assumes dividend reinvestment.
(4) Total returns would have been lower had certain expenses not been
reduced during the periods shown.
(5) Does not take into consideration expense reductions during the
periods shown.
(6) Adjusted expenses as a percentage of average net assets are expected
to decrease as the net assets of the Fund grow.
(7) Expense ratio does not include interest expense due to bank loans,
which amounted to 0.01% for the year ended February 29, 2000.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Capitalization Growth Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout
each period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- -------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED
FEBRUARY 28, ------------------------------- FEBRUARY 29, FEBRUARY 28,
1997(1) 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
Per Share Operating Performance
Net Asset Value, Beginning
of Period $8.50 $9.24 $11.74 $11.65 $24.43
------------- ------------- ------------- ------------- -------------
Net Investment Income (Loss)
(2) 0.03 (0.03) (0.07) (0.09) (0.10)
Net Realized and Unrealized
Gain (Loss) on Investments
and Foreign Currency
Transactions 0.73 2.53 0.61 15.13 (11.92)
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 0.76 2.50 0.54 15.04 (12.02)
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income (0.02) -- (3) -- -- --
Distributions from Net
Realized Gain on
Investments Sold -- -- (0.63) (2.26) (1.92)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.02) -- (3) (0.63) (2.26) (1.92)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $9.24 $11.74 $11.65 $24.43 $10.49
============= ============= ============= ============= =============
Total Investment Return
(4,5) 8.89%(6) 27.07% 4.67% 136.18% (50.27%)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $999 $3,102 $2,453 $8,908 $5,458
Ratio of Expenses to Average
Net Assets 0.90%(7) 0.90% 0.90% 0.90% 0.90%
Ratio of Adjusted Expenses
to Average Net Assets (8,9) 16.24%(7) 4.05% 4.12% 3.19% 2.04%
Ratio of Net Investment
Income (Loss) to Average
Net Assets 0.35%(7) (0.25%) (0.60%) (0.57%) (0.56%)
Portfolio Turnover Rate 92% 117% 125% 238% 242%
(1) The Fund commenced operations on May 2, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Total investment return assumes dividend reinvestment.
(5) Total returns would have been lower had certain expenses not been
reduced during the periods shown.
(6) Not annualized.
(7) Annualized.
(8) Does not take into consideration expense reductions during the
periods shown.
(9) Adjusted expenses as a percentage of average net assets are expected
to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Capitalization Value Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout
each period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- -----------------------------------------------------------------------------------------------------------------------
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 $9.09 $9.38 $11.74 $9.16 $18.09
------------- ------------- ------------- ------------- -------------
Net Investment Income (1) 0.14 0.07 0.05 0.05 (0.04)
Net Realized and Unrealized
Gain (Loss) on Investments 1.08 3.65 (1.23) 10.96 (2.18)
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 1.22 3.72 (1.18) 11.01 (2.22)
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income (0.12) (0.10) (0.04) (0.06) (0.03)
Distributions from Net
Realized Gain on
Investments Sold (0.81) (1.26) (1.20) (2.02) (3.71)
Distributions in Excess of
Net Realized Gain on
Investments Sold -- -- (0.16) -- --
------------- ------------- ------------- ------------- -------------
Total Distributions (0.93) (1.36) (1.40) (2.08) (3.74)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $9.38 $11.74 $9.16 $18.09 $12.13
============= ============= ============= ============= =============
Total Investment Return
(2,3) 13.78% 41.81% (9.46%) 124.33% (10.14%)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $6,011 $9,549 $7,418 $24,259 $30,183
Ratio of Expenses to Average
Net Assets 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of Adjusted Expenses
to Average Net Assets (4,5) 1.83% 1.42% 1.46% 1.48% 1.04%
Ratio of Net Investment
Income to Average Net
Assets 1.46% 0.62% 0.45% 0.37% (0.25%)
Portfolio Turnover Rate 96% 216% 126% 104% 109%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) 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.
(5) Adjusted expenses as a percentage of average net assets are expected
to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- International Equity Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout
each period indicated, investment returns, key ratios and supplemental
data are listed as follows:
- -----------------------------------------------------------------------------------------------------------------------
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 $9.24 $9.35 $9.63 $10.18 $13.33
------------- ------------- ------------- ------------- -------------
Net Investment Income (1) 0.12 0.06 0.07 0.07 0.04
Net Realized and Unrealized
Gain (Loss) on Investments
and Foreign Currency
Transactions 0.14 0.23 0.59 3.83 (4.63)
------------- ------------- ------------- ------------- -------------
Total from Investment
Operations 0.26 0.29 0.66 3.90 (4.59)
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends from Net
Investment Income (0.10) (0.01) (0.07) (0.07) (0.04)
Distributions in Excess of
Net Investment Income -- -- (0.04) (0.04) --
Distributions from Net
Realized Gain on
Investments Sold (0.05) -- -- (0.64) (0.47)
------------- ------------- ------------- ------------- -------------
Total Distributions (0.15) (0.01) (0.11) (0.75) (0.51)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of
Period $9.35 $9.63 $10.18 $13.33 $8.23
============= ============= ============= ============= =============
Total Investment Return
(2,3) 2.79% 3.07% 6.88% 38.84% (34.85%)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $4,204 $7,983 $7,805 $12,848 $5,859
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 (4,5) 3.32% 2.02% 2.73% 2.86% 3.46%
Ratio of Net Investment
Income to Average Net
Assets 1.26% 0.60% 0.69% 0.59% 0.43%
Portfolio Turnover Rate 68% 125% 83% 139% 238%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return assumes dividend reinvestment.
(3) 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.
(5) Adjusted expenses as a percentage of average net assets are expected
to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Active Bond Fund
Schedule of Investments
February 28, 2001
- ----------------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Active Bond Fund on February 28, 2001. It's divided into three
main categories: bonds, warrants and short-term investments. The bonds
are further broken down by industry groups. Short-term investments,
which represent the Fund's "cash" position, are listed last.
PAR VALUE
INTEREST CREDIT (000s
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------ ------- -------------
BONDS
Aerospace (0.69%)
Northrop Grumman Corp.,
Deb 02-15-31 (R) 7.750% BBB- $20 $20,416
Raytheon Co.,
Note 03-01-03 7.900 BBB- 15 15,584
Note 03-01-10 8.300 BBB- 10 11,175
-------------
47,175
-------------
Automobile/Trucks (2.32%)
ERAC USA Finance Co.,
Note 02-15-05 (R) 6.625 BBB+ 6 5,889
Note 12-15-09 (R) 7.950 BBB+ 10 10,426
Ford Credit Auto Owner Trust,
Pass Thru Ctf Ser 2000-F Class A-3 11-15-04 6.580 AAA 30 30,945
Ford Motor Co.,
Note 07-16-31 7.450 A 15 14,546
Honda Auto Receivables Owner Trust,
Pass Thru Ctf Ser 2001-1 Class A-4 06-19-06 5.560 AAA 70 70,413
Toyota Auto Receivables Owner Trust,
Asset Backed Note Ser 2000-B Class A-4 04-15-07 6.800 AAA 25 25,898
-------------
158,117
-------------
Banks -- Foreign (1.21%)
Abbey National First Capital, B.V.,
Sub Note (United Kingdom) 10-15-04 8.200 AA- 20 21,563
Royal Bank of Scotland Group Plc,
Bond (United Kingdom) 03-31-49 8.817 A- 10 10,754
Scotland International Finance No. 2, B.V.,
Gtd Sub Note (United Kingdom) 11-01-06 (R) 8.850 A 35 38,961
UBS Preferred Funding Trust I,
Perpetual Bond (8.622 to 10-01-10 then variable)
10-01-49 8.622 AA- 10 10,846
-------------
82,124
-------------
Banks -- United States (2.61%)
Bank of New York,
Cap Security 12-01-26 (R) 7.780 A- 25 24,898
Bank One Corp.,
Sub Note 08-01-10 7.875 A- 15 16,198
Barclays North American Capital Corp.,
Gtd Cap Note 05-15-21 9.750 AA- 25 26,371
BNP Paribas Capital Trust,
Perpetual Bond (9.003 to 10-27-10 then variable)
12-27-49 (R) 9.003 A 20 21,683
Capital One Bank,
Sr Note 02-01-06 6.875 BBB- 15 14,946
National Westminster Bank Plc -- New York Branch,
Sub Note 05-01-01 9.450 A+ 15 15,079
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 10.125 A 30 33,410
Security Pacific Corp.,
Sub Note 03-01-01 11.000 A 25 25,000
-------------
177,585
-------------
Beverages (0.22%)
Canandaigua Brands, Inc.,
Sr Sub Note Ser C 12-15-03 8.750 B+ 15 15,038
-------------
Broker Services (0.15%)
Goldman Sachs Group, Inc.,
Bond 01-15-11 6.875 A+ 10 10,199
-------------
Building (0.15%)
Vulcan Materials Co.,
Note 02-01-06 6.400 A+ 10 10,075
-------------
Chemicals (0.22%)
Akzo Nobel, Inc.,
Bond 11-15-03 (R) 6.000 A- 15 14,903
-------------
Containers (0.08%)
Stone Container Corp.,
Sr Note 02-01-11 (R) 9.750 B 5 5,138
-------------
Energy (0.85%)
CalEnergy Co., Inc.,
Sr Bond 09-15-28 8.480 BBB- 15 16,248
Enron Corp.,
Note 08-15-05 (R) 8.000 BBB+ 15 15,722
P&L Coal Holdings Corp.,
Sr Sub Note Ser B 05-15-08 9.625 B 15 15,750
Progress Energy, Inc.,
Sr Note 03-01-11 7.100 BBB 10 10,290
-------------
58,010
-------------
Finance (5.24%)
Boeing Capital Corp.,
Note 09-27-10 7.375 AA- 15 16,525
Bombardier Capital, Inc.,
Note 01-15-02 (R) 6.000 A- 20 20,072
CIT Group, Inc.,
Note 02-07-06 6.500 A+ 25 25,075
Citigroup, Inc.,
Note 01-18-11 6.500 AA- 10 10,010
Sub Note 10-01-10 7.250 A+ 10 10,522
Ford Capital B.V.,
Gtd Deb (Netherlands) 05-15-02 9.875 A 35 36,557
Ford Motor Credit Co.,
Bond 02-01-11 7.375 A 15 15,314
Note 04-28-03 6.125 A 20 20,050
General Electric Capital Corp.,
Global Medium Term Note Ser A 11-15-10 6.875 AAA 15 16,031
General Motors Acceptance Corp.,
Note 07-15-05 7.500 A 15 15,599
Heller Financial, Inc.,
Note 01-15-03 6.400 A- 15 14,970
Household Finance Corp.,
Note 11-01-02 5.875 A 25 25,067
Note 01-24-06 6.500 A 10 10,085
HSBC Capital Funding LP,
Perpetual Note (9.547 to 06-30-10 then variable)
(Channel Islands) 12-31-49 (R) 9.547 A- 15 17,169
ING Capital Funding Trust III,
Perpetual Bond (8.439 to 12-31-10 then variable)
12-31-49 8.439 A 10 10,607
Marlin Water Trust/Marlin Water Capital Corp.,
Sr Sec Note 12-15-01 (R) 7.090 BBB 15 15,020
MBNA Master Credit Card Trust,
Pass Thru Ctf Ser 1999-G Class A 12-15-06 6.350 AAA 30 30,919
MMCA Auto Owner Trust,
Pass Thru Ctf Ser 2000-2 Class A-4 06-15-05 6.860 AAA 25 26,075
Qwest Capital Funding, Inc.,
Bond 02-15-31 (R) 7.750 BBB+ 20 20,518
-------------
356,185
-------------
Food (0.23%)
Earthgrains Co. (The),
Note 08-01-03 8.375 BBB 15 15,389
-------------
Government -- Foreign (0.77%)
Brazil, Federative Republic of,
Bond (Brazil) 01-11-06 10.250 BB- 10 9,900
Nova Scotia, Province of,
Deb (Canada) 11-15-19 8.250 A- 15 17,879
Quebec, Government of,
Deb (Canada) 01-22-11 6.125 A+ 25 24,899
-------------
52,678
-------------
Government -- U.S. (21.56%)
United States Treasury,
Bond 08-15-17 8.875 AAA 137 187,775
Bond 02-15-23 7.125 AAA 199 238,987
Bond 08-15-29 6.125 AAA 180 196,144
Note 08-15-03 5.750 AAA 342 351,405
Note 02-15-05 7.500 AAA 69 75,954
Note 07-15-06 7.000 AAA 174 191,917
Note 05-15-08 5.625 AAA 120 124,950
Note 08-15-10 5.750 AAA 95 100,121
-------------
1,467,253
-------------
Government -- U.S. Agencies (21.01%)
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 06-01-14 6.000 AAA 20 19,794
15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 140 137,820
15 Yr Pass Thru Ctf 07-01-15 7.000 AAA 19 19,347
30 Yr Pass Thru Ctf 06-01-29 6.000 AAA 19 18,209
Note 12-15-05 6.000 AAA 65 66,990
Note 09-15-09 6.625 AAA 270 287,466
Note 01-15-30 7.125 AAA 35 39,676
Sub Note 02-01-11 6.250 AA- 15 15,412
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 04-15-28 to 06-15-29 6.500 AAA 506 507,154
30 Yr Pass Thru Ctf 04-15-29 to 01-15-31 7.000 AAA 272 275,530
30 Yr Pass Thru Ctf 11-15-24 to 07-15-30 8.000 AAA 41 42,412
-------------
1,429,810
-------------
Insurance (1.57%)
AXA SA,
Sub Note (France) 12-15-30 8.600 A- 10 10,925
Equitable Life Assurance Society USA,
Surplus Note 12-01-05 (R) 6.950 A+ 10 10,249
Hartford Life, Inc.,
Sr Note 03-01-31 7.375 A 15 15,270
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) 7.625 AA 15 15,291
MONY Group, Inc. (The),
Sr Note 12-15-05 7.450 A- 10 10,272
New York Life Insurance Co.,
Surplus Note 12-15-23 (R) 7.500 AA- 15 14,138
Sun Canada Financial Co.,
Sub Note 12-15-07 (R) 6.625 AA- 20 19,900
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 A- 10 10,800
-------------
106,845
-------------
Leisure (0.59%)
Harrah's Operating Co., Inc.,
Sr Sub Note 12-15-05 7.875 BB+ 10 9,950
HMH Properties, Inc.,
Sr Note Ser A 08-01-05 7.875 BB 10 9,900
MGM Mirage, Inc.,
Sr Note 09-15-10 8.500 BBB- 10 10,498
Station Casinos, Inc.,
Sr Note 02-15-08 (R) 8.375 BB- 5 5,025
Waterford Gaming LLC,
Sr Note 03-15-10 (R) 9.500 B+ 5 4,950
-------------
40,323
-------------
Media (3.52%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 9.250 B+ 15 15,075
Sr Note Ser B 07-15-03 8.125 B+ 8 7,840
British Sky Broadcasting Group Plc,
Sr Note (United Kingdom) 07-15-09 8.200 BB+ 10 10,103
Clear Channel Communications, Inc.,
Note 06-15-05 7.875 BBB- 10 10,581
Continental Cablevision, Inc.,
Sr Note 05-15-06 8.300 A 15 16,212
Cox Radio, Inc.,
Sr Note 02-15-06 6.625 BBB 10 10,020
CSC Holdings, Inc.,
Sr Note Ser B 07-15-09 8.125 BB+ 20 20,738
Sr Sub Deb 05-15-16 10.500 BB- 10 11,250
EchoStar DBS Corp.,
Sr Note 02-01-09 9.375 B+ 10 10,125
Garden State Newspapers, Inc.,
Sr Sub Note 07-01-11 8.625 B+ 10 9,500
Jones Intercable, Inc.,
Sr Note 04-15-08 7.625 BBB 20 21,072
Lenfest Communications, Inc.,
Sr Note 11-01-05 8.375 BBB 10 10,898
Mediacom LLC/Mediacom Capital Corp.,
Sr Note Ser B 04-15-08 8.500 B+ 10 9,600
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 8.250 BBB- 15 15,126
TCI Communications, Inc.,
Sr Deb 02-15-26 7.875 A 10 9,964
Time Warner, Inc.,
Deb 01-15-13 9.125 BBB+ 21 25,153
Viacom, Inc.,
Deb 07-30-30 (R) 7.875 A- 15 16,254
Note 01-30-06 (R) 6.400 A- 10 10,136
-------------
239,647
-------------
Medical (1.11%)
Athena Neuro Finance LLC,
Sr Note 02-21-08 7.250 BBB 15 15,190
Dynacare, Inc.,
Sr Note (Canada) 01-15-06 10.750 B+ 13 13,000
Fresenius Medical Care Capital Trust II,
Gtd Trust Preferred Security 02-01-08 7.875 B+ 15 14,588
HCA -- The Healthcare Co.,
Note 09-01-10 8.750 BB+ 10 10,512
Healthsouth Corp.,
Note 02-01-08, (R) 8.500 BBB- 5 4,988
Quest Diagnostics, Inc.,
Sr Sub Note 12-15-06 10.750 B+ 11 12,155
Tenet Healthcare Corp.,
Sr Note 01-15-05 8.000 BB+ 5 5,100
-------------
75,533
-------------
Metal (1.13%)
Noranda, Inc.,
Note (Canada) 02-15-11 8.375 BBB 15 15,068
WMC Finance (USA) Ltd.,
Gtd Note (Australia) 11-15-03 6.500 A 55 55,804
Yanacocha Receivables Master Trust,
Pass Thru Ctf Ser 1997-A 06-15-04 (R) 8.400 BBB- 6 6,006
-------------
76,878
-------------
Mortgage Banking (7.75%)
Commercial Mortgage Acceptance Corp.,
Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-08 6.790 Aaa 27 27,966
EQCC Home Equity Loan Trust,
Pass Thru Ctf Ser 1997-3 Class A-9 02-15-29 6.570 AAA 40 40,649
GMAC Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 1998-C1 Class A-1 11-15-07 6.411 Aaa 58 58,956
Pass Thru Ctf Ser 1997-C1 Class A-2 09-15-06 6.853 Aaa 20 20,638
Pass Thru Ctf Ser 1997-C2 Class A-3 11-15-07 6.566 Aaa 60 60,654
IMC Home Equity Loan Trust,
Pass Thru Ctf Ser 1998-1 Class A-4 03-20-25 6.600 AAA 20 20,106
LB Commercial Mortgage Trust,
Pass Thru Ctf Ser 1999-C1 Class A-1 08-15-07 6.410 Aaa 14 14,261
Money Store Home Equity Trust (The),
Pass Thru Ctf Ser 1997-D Class AF-7 12-15-38 6.485 AAA 24 23,714
Morgan Stanley Capital I, Inc.,
Pass Thru Ctf Ser 1997-WF1 Class A-1 10-15-06 (R) 6.830 AAA 109 112,212
Pass Thru Ctf Ser 1999-CAM1 Class A-3 11-15-08 6.920 AAA 50 51,779
Salomon Brothers Mortgage Securities VII, Inc.,
Pass Thru Ctf Ser 1997-HUD2 Class A-2 07-25-24 6.750 Aaa 11 11,085
Saxon Asset Securities Trust,
Pass Thru Ctf Ser 2000-2 Class AF-2 06-25-15 7.965 AAA 30 30,745
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1997-A1 Class A-8 06-15-28 7.220 AAA 26 26,811
Pass Thru Ctf Ser 1997-B Class A-6 10-15-28 6.900 AAA 27 27,730
-------------
527,306
-------------
Oil & Gas (2.09%)
Alberta Energy Co., Ltd.,
Note (Canada) 09-15-30 8.125 BBB+ 10 11,128
Amerada Hess Corp.,
Bond 10-01-29 7.875 BBB+ 20 21,681
Apache Finance Canada Corp.,
Note (Canada) 12-15-29 7.750 A- 20 21,902
El Paso Energy Corp.,
Medium Term Note 10-15-30 8.050 BBB 20 21,837
Louis Dreyfus Natural Gas Corp.,
Sr Note 12-01-07 6.875 BBB 10 10,075
Occidental Petroleum Corp.,
Sr Deb 09-15-09 10.125 BBB- 5 6,075
Ocean Energy, Inc.,
Sr Sub Note Ser B 07-15-07 8.875 BB+ 5 5,250
Petroleum Geo-Services ASA,
Sr Note (Norway) 03-30-28 7.125 BBB- 15 11,313
Snyder Oil Corp.,
Sr Sub Note 06-15-07 8.750 BBB+ 10 10,561
Tosco Corp.,
Note 02-15-30 8.125 BBB 20 22,527
-------------
142,349
-------------
Paper & Paper Products (0.23%)
International Paper Co.,
Note 07-08-05 8.125 BBB+ 15 15,600
-------------
Real Estate Operations (0.07%)
EOP Operating L.P.,
Note 02-15-05 6.625 BBB+ 5 5,041
-------------
Real Estate Investment Trust (1.11%)
American Health Properties, Inc.,
Note 01-15-07 7.500 BBB- 10 9,750
Cabot Industrial Properties, L.P.,
Note 05-01-04 7.125 BBB- 15 15,125
Camden Property Trust,
Note 04-15-04 7.000 BBB 10 10,105
Liberty Property L.P.,
Medium Term Note 06-05-02 6.600 BBB- 10 10,259
Mack-Cali Realty, L.P.,
Note 02-15-11 7.750 BBB 10 10,239
ProLogis Trust,
Note 04-15-04 6.700 BBB+ 10 10,095
TriNet Corporate Realty Trust, Inc.,
Note 05-15-01 7.300 BB 10 9,915
-------------
75,488
-------------
Retail (0.37%)
Archer-Daniels-Midland Co.,
Deb 02-01-31 7.000 A+ 10 9,904
Sears Roebuck Acceptance Corp.,
Note 02-01-11 7.000 A- 15 15,045
-------------
24,949
-------------
Telecommunications (4.27%)
BellSouth Capital Funding Corp.,
Deb 02-15-30 7.875 AA- 20 21,645
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon (10.125 , 05-01-04)
(Canada) 05-01-09, (A) Zero B3 10 8,400
Cox Communications, Inc.,
Note 11-01-10 7.750 BBB 10 10,630
Crown Castle International Corp.,
Sr Note 05-15-11 9.000 B 5 5,075
Deutsche Telekom International Finance B.V.,
Bond (Netherlands) 06-15-05 7.750 A- 25 25,800
Bond (Netherlands) 06-15-30 8.250 A- 15 15,167
Dominion Resources, Inc.,
Sr Note Ser A 06-15-10 8.125 BBB+ 15 16,350
Global Crossing Ltd.,
Sr Note (Bermuda) 11-15-09 9.500 BB 10 9,875
LCI International, Inc.,
Sr Note 06-15-07 7.250 BBB+ 15 15,163
Level 3 Communications, Inc.,
Sr Note 03-15-08 11.000 B 10 9,125
McLeodUSA, Inc.,
Sr Note 11-01-08 9.500 B+ 10 9,425
MetroNet Communications Corp.,
Sr Note (Canada) 08-15-07 12.000 BBB 10 11,100
Nextel Communications, Inc.,
Sr Note 11-15-09 9.375 B 10 9,350
Nortel Networks Ltd.,
Note (Canada) 02-15-06 6.125 A 15 14,477
NTL Communications Corp.,
Sr Note Ser B 10-01-08 11.500 B 10 9,700
TeleCorp PCS, Inc.,
Sr Sub Disc Note, Step Coupon (11.625 , 04-15-04)
04-15-09 (A) Zero B3 10 7,150
Telefonos de Mexico S.A. de C.V.,
Sr Note (Mexico) 01-26-06, (R) 8.250 BB+ 15 14,925
Tritel PCS, Inc.,
Sr Sub Note 01-15-11 (R) 10.375 B3 5 5,000
Triton PCS, Inc.,
Sr Sub Note 02-01-11 (R) 9.375 CCC+ 10 10,000
Verizon Global Funding Corp.,
Deb 12-01-30 (R) 7.750 A+ 25 26,971
VoiceStream Wireless Corp.,
Sr Note 09-15-09 11.500 B- 5 5,450
Sr Note 11-15-09 10.375 B- 5 5,600
WorldCom, Inc.,
Note 05-15-06 8.000 BBB+ 15 15,458
Note 08-15-28 6.950 BBB+ 10 8,655
-------------
290,491
-------------
Transport (3.06%)
America West Airlines,
Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 A- 3 3,312
Burlington Northern Santa Fe Corp.,
Deb 08-15-30 7.950 BBB+ 20 21,290
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1997-2C 06-30-04 7.206 BBB 19 19,127
Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA+ 19 18,713
Delta Air Lines, Inc.,
Pass Thru Ctf Ser 2000-1 Class A-2 11-18-10 7.570 AAA 10 10,708
Norfolk Southern Corp.,
Sr Note 02-15-31 7.250 BBB 15 15,152
Northwest Airlines 1996-1 Pass Through Trusts,
Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BBB- 4 4,628
Northwest Airlines, Inc.,
Note 03-15-04 8.375 BB 10 9,907
NWA Trust,
Sr Note Ser A 12-21-12 9.250 AA 32 35,681
U.S. Airways, Inc.,
Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 BB- 17 17,886
United Air Lines, Inc.,
Pass Thru Ctf Ser 2000-1 Class A-1 01-01-14 7.783 AAA 28 29,689
Pass Thru Ctf Ser 2000-2 Class A-1 10-01-10 7.032 AAA 15 15,122
Wisconsin Central Transportation Corp.,
Note 04-15-08 6.625 BBB- 7 6,755
-------------
207,970
-------------
Utilities (9.63%)
AES Corp.,
Sr Note 06-01-09 9.500 BB 10 10,550
Sr Note 09-15-10 9.375 BB 5 5,200
Sr Sub Note 07-15-06 10.250 B+ 12 12,420
AES Eastern Energy L.P.,
Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 15 15,694
Avon Energy Partners Holdings,
Sr Note (United Kingdom) 12-11-02 (R) 6.730 BBB+ 10 10,032
Beaver Valley Funding Corp.,
Sec Lease Oblig Bond 06-01-17 9.000 BB- 9 9,765
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 8.890 BB- 7 7,709
Calpine Corp.,
Sr Note 08-15-05 8.250 BB+ 15 15,356
Sr Note 04-01-08 7.875 BB+ 5 4,875
Sr Note 02-15-11 8.250 BB+ 5 5,056
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 9.500 BB+ 35 36,444
Sec Note Ser D 11-01-17 7.880 BB+ 20 20,418
CMS Energy Corp.,
Sr Note 05-15-02 8.125 BB 15 15,163
Sr Note 10-15-07 9.875 BB 5 5,312
Sr Note Ser B 01-15-04 6.750 BB 15 14,400
Connecticut Light & Power Co.,
1st Ref Mtg Ser C 06-01-02 7.750 BBB+ 15 15,314
East Coast Power LLC,
Sec Note 03-31-12 7.066 BBB- 10 9,712
EIP Funding-PNM,
Sec Fac Bond 10-01-12 10.250 BBB- 23 25,472
GG1B Funding Corp.,
Deb 01-15-11 7.430 BBB- 11 11,517
Hydro-Quebec,
Gtd Bond (Canada) 02-01-21 9.400 A+ 15 19,418
Gtd Bond Ser HY (Canada) 01-15-22 8.400 A+ 10 11,932
Gtd Deb Ser IF (Canada) 02-01-03 7.375 A+ 25 26,013
Iberdrola International B.V.,
Note (Spain) 10-01-02 7.500 AA- 25 25,827
Note (Spain) 06-01-03 (R) 7.125 AA- 25 25,914
KeySpan Corp.,
Note 11-15-10 7.625 A 10 10,851
Long Island Lighting Co.,
Deb 03-15-23 8.200 A- 20 20,400
Midland Funding Corp. II,
Deb Ser A 07-23-05 11.750 BB+ 35 40,425
Niagara Mohawk Power Corp.,
Sec Fac Bond 01-01-18 8.770 BBB 25 27,343
Nisource Finance Corp.,
Bond 11-15-10 (R) 7.875 BBB 15 16,149
North Atlantic Energy Corp.,
1st Mtg Ser A 06-01-02 9.050 BB+ 6 6,105
Northeast Utilities,
Note Ser A 12-01-06 8.580 BBB 3 3,235
PECO Energy Transition Trust,
Pass Thru Ctf Ser 1999-A Class A-6 03-01-09 6.050 AAA 15 15,183
Pass Thru Ctf Ser 2000-A Class A-3 03-01-10 7.625 AAA 40 44,083
Pinnacle Partners,
Sr Note 08-15-04 (R) 8.830 BBB- 10 10,332
PNPP II Funding Corp.,
Deb 05-30-16 9.120 BB- 15 16,308
PSEG Energy Holdings Inc.,
Sr Note 02-15-08 (R) 8.625 BBB- 15 14,978
Sierra Pacific Resources,
Note 05-15-05 8.750 BBB 15 15,301
System Energy Resources, Inc.,
1st Mtg 08-01-01 7.710 BBB- 5 4,963
TXU Electric Capital V.,
Capital Sec 01-30-37 8.175 BBB- 10 9,415
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 01-02-17 8.090 BBB- 25 25,850
Xcel Energy, Inc.,
Sr Note 12-01-10 7.000 BBB+ 15 15,201
-------------
655,635
-------------
Waste Disposal Service & Equip. (0.07%)
Waste Management, Inc.,
Sr Note 08-01-10 7.375 BBB 5 5,036
-------------
TOTAL BONDS
(Cost $6,219,298) (93.88%) 6,388,770
-------- -------------
NUMBER OF
WARRANTS
--------
WARRANTS
MetroNet Communications Corp. (Canada) (R)** 10 970
-------- -------------
TOTAL WARRANTS
(Cost $103) (0.01%) 970
-------- -------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.69%)
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% $387 $387,000
------------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company
Daily Interest Savings Account Current
Rate 4.20% 705
------------
TOTAL SHORT-TERM INVESTMENTS (5.70%) 387,705
--------- ------------
TOTAL INVESTMENTS (99.59%) 6,777,445
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (0.41%) 27,768
--------- ------------
TOTAL NET ASSETS (100.00%) $6,805,213
========= ============
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investor Services or John Hancock Advisers, Inc.
where Standard & Poor's ratings are not available.
** Non-income producing security.
(A) Cash interest will be paid on this obligation at the stated rate
beginning on the stated date.
(R) These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $596,035 or 8.76% of net
assets as of February 28, 2001.
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 -- Dividend Performers Fund
Schedule of Investments
February 28, 2001
- ------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Dividend Performers Fund on February 28, 2001. It's divided into
two main categories: common stocks and short-term investments. The
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 STOCKS
Advertising (2.61%)
Interpublic Group of Cos., Inc. (The) 4,300 $161,680
------------
Banks -- United States (3.87%)
State Street Corp. 930 93,419
Wells Fargo & Co. 2,950 146,438
------------
239,857
------------
Beverages (4.14%)
Anheuser-Busch Cos., Inc. 2,720 118,864
PepsiCo, Inc. 3,000 138,240
------------
257,104
------------
Broker Services (1.66%)
Merrill Lynch & Co., Inc. 1,720 103,028
------------
Building (1.58%)
Black & Decker Corp. (The) 2,360 97,964
------------
Computers (11.44%)
Cisco Systems, Inc.* 2,580 61,114
Compaq Computer Corp. 5,740 115,948
EMC Corp.* 1,960 77,930
International Business Machines Corp. 1,040 103,896
KPMG Consulting, Inc.* 4,000 92,250
McDATA Corp. (Class A)* 72 1,287
Microsoft Corp.* 2,150 126,850
Oracle Corp.* 3,800 72,200
Sun Microsystems, Inc.* 2,925 58,134
------------
709,609
------------
Containers (1.32%)
Bemis Co., Inc. 2,400 81,648
------------
Diversified Operations (2.74%)
Minnesota Mining & Manufacturing Co. 600 67,650
Tyco International Ltd. 1,870 102,196
------------
169,846
------------
Electronics (7.62%)
Emerson Electric Co. 800 53,520
General Electric Co. 4,350 202,275
Intel Corp. 3,400 97,113
Motorola, Inc. 3,260 49,454
Texas Instruments, Inc. 2,380 70,329
------------
472,691
------------
Finance (6.77%)
Citigroup, Inc. 3,266 160,622
Household International, Inc. 1,900 110,048
J.P. Morgan Chase & Co. 2,000 93,320
Morgan Stanley Dean Witter & Co. 860 56,012
------------
420,002
------------
Insurance (4.43%)
AFLAC, Inc. 1,225 73,696
American General Corp. 1,540 117,410
American International Group, Inc. 1,020 83,436
------------
274,542
------------
Media (2.82%)
AOL Time Warner, Inc.* 2,100 92,463
McGraw-Hill Cos., Inc. (The) 1,400 82,544
------------
175,007
------------
Medical (12.08%)
Abbott Laboratories 1,500 73,485
American Home Products Corp. 2,240 138,365
Baxter International, Inc. 1,950 179,576
Johnson & Johnson 1,500 145,995
Merck & Co., Inc. 1,790 143,558
Schering-Plough Corp. 1,700 68,425
------------
749,404
------------
Mortgage Banking (4.63%)
Fannie Mae 1,700 135,490
Freddie Mac 2,300 151,455
------------
286,945
------------
Office (1.07%)
Avery Dennison Corp. 1,250 66,250
------------
Oil & Gas (8.81%)
Anadarko Petroleum Corp. 1,100 68,750
Chevron Corp. 1,140 97,652
Conoco Inc. (Class A) 3,440 97,180
Exxon Mobil Corp. 1,696 137,457
Halliburton Co. 1,900 75,658
Royal Dutch Petroleum Co., American Depositary
Receipts (ADR) (Netherlands) 1,200 69,996
------------
546,693
------------
Paper & Paper Products (2.43%)
Kimberly-Clark Corp. 2,110 150,865
------------
Retail (5.95%)
CVS Corp. 1,900 115,900
Home Depot, Inc. (The) 2,150 91,375
Lowe's Cos., Inc. 2,900 162,052
------------
369,327
------------
Telecommunications (4.12%)
ADC Telecommunications, Inc.* 5,100 56,738
Nokia Corp., (ADR) (Finland) 2,360 51,920
Nortel Networks Corp. (Canada) 2,040 37,720
Verizon Communications 2,200 108,900
------------
255,278
------------
Tobacco (2.80%)
Philip Morris Cos., Inc. 3,600 173,448
------------
Utilities (5.82%)
ALLTEL Corp. 1,500 80,550
Duke Energy Corp. 3,800 154,850
SBC Communications, Inc. 2,630 125,451
------------
360,851
------------
TOTAL COMMON STOCKS
(Cost $5,098,709) (98.71%) 6,122,039
--------- ------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.76%)
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% $109 $109,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company Daily
Interest Savings Account
Current Rate 4.20% 331
------------
TOTAL SHORT-TERM INVESTMENTS (1.76%) 109,331
--------- ------------
TOTAL INVESTMENTS (100.47%) 6,231,370
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (0.47%) (29,063)
--------- ------------
TOTAL NET ASSETS (100.00%) $6,202,307
========= ============
* 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 -- Medium Capitalization Growth Fund
Schedule of Investments
February 28, 2001
- ------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Medium Capitalization Growth Fund on February 28, 2001. It's
divided into two main categories: common stocks and short-term
investments. The 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 STOCKS
Advertising (0.32%)
TMP Worldwide, Inc.* 700 $36,619
------------
Banks -- United States (3.04%)
Mellon Financial Corp. 3,948 182,832
Northern Trust Corp. 2,350 167,144
------------
349,976
------------
Beverages (0.99%)
Pepsi Bottling Group, Inc. 2,833 114,312
------------
Broker Services (1.52%)
Bear Stearns Cos., Inc. 955 49,832
Lehman Brothers Holdings, Inc. 1,817 124,737
------------
174,569
------------
Computers (15.63%)
Brocade Communications Systems, Inc.* 3,035 117,796
DST Systems, Inc.* 830 50,630
EMC Corp.* 994 39,521
Emulex Corp.* 2,100 64,706
Exodus Communications, Inc.* 5,370 78,536
Fiserv, Inc.* 1,600 79,200
Handspring, Inc.* 2,600 65,163
i2 Technologies, Inc.* 3,050 81,969
Interwoven, Inc.* 3,200 53,000
Intuit, Inc.* 3,300 135,712
Manugistics Group, Inc.* 950 29,450
McDATA Corp. (Class A)* 36 644
McDATA Corp. (Class B)* 1,500 29,906
Mercury Interactive Corp.* 1,400 88,113
Micromuse, Inc.* 1,600 65,700
Palm, Inc.* 5,550 96,431
Parametric Technology Corp.* 16,600 220,988
Rational Software Corp.* 2,450 85,597
Research in Motion, Ltd.* (Canada) 1,200 46,425
SunGard Data Systems, Inc.* 3,407 189,770
TIBCO Software, Inc.* 2,700 36,450
VeriSign, Inc.* 2,950 141,508
------------
1,797,215
------------
Electronics (12.89%)
Aeroflex, Inc.* 10,574 141,427
Analog Devices, Inc.* 1,162 43,343
Applied Micro Circuits Corp.* 1,420 37,985
Atmel Corp.* 2,700 28,350
Flextronics International, Ltd.* (Singapore) 3,850 102,025
Jabil Circuit, Inc.* 4,874 109,568
KLA-Tencor Corp.* 2,650 94,737
Lam Research Corp.* 4,800 103,200
Molex, Inc. 1,410 51,201
Novellus Systems, Inc.* 2,600 100,425
PMC-Sierra, Inc.* (Canada) 1,050 35,175
QLogic Corp.* 1,650 61,669
Sanmina Corp.* 2,080 62,010
Tektronix, Inc.* 5,374 132,684
Vitesse Semiconductor Corp.* 2,300 90,706
Waters Corp.* 4,362 287,281
------------
1,481,786
------------
Energy (2.32%)
Calpine Corp.* 4,662 207,412
Dynegy, Inc. (Class A) 1,261 59,267
------------
266,679
------------
Fiber Optics (0.71%)
Sycamore Networks, Inc.* 4,500 81,562
------------
Finance (5.71%)
Affiliated Managers Group, Inc.* 2,103 108,304
Capital One Financial Corp. 1,120 61,880
Concord EFS, Inc.* 2,972 137,455
Golden West Financial Corp. 2,696 147,876
Providian Financial Corp. 4,014 200,740
------------
656,255
------------
Instruments -- Scientific (1.68%)
Applera Corp. -- Applied Biosystems Group 2,799 193,411
------------
Insurance (6.30%)
ACE, Ltd. (Bermuda) 3,360 122,976
AFLAC, Inc. 2,324 139,812
Ambac Financial Group, Inc. 4,139 233,440
American General Corp. 893 68,082
Everest Re Group, Ltd. (Bermuda) 2,535 160,339
------------
724,649
------------
Media (2.62%)
Charter Communications, Inc. (Class A)* 4,750 101,531
Clear Channel Communications, Inc.* 2,103 120,186
Reader's Digest Association, Inc. (Class A) 2,491 79,936
------------
301,653
------------
Medical (12.31%)
Alkermes, Inc.* 1,950 60,450
Allergan, Inc. 1,411 122,686
ALZA Corp.* 4,398 173,941
HEALTHSOUTH Corp.* 9,675 154,026
Human Genome Sciences, Inc.* 1,700 93,394
IDEC Pharmaceuticals Corp.* 1,780 100,347
Immunex Corp.* 4,400 143,275
Inhale Therapeutic Systems, Inc.* 2,250 62,719
MedImmune, Inc.* 2,300 100,481
Millennium Pharmaceuticals, Inc.* 4,100 138,375
Oxford Health Plans, Inc.* 3,700 122,331
Trigon Healthcare, Inc.* 967 58,204
Wellpoint Health Networks, Inc.* 868 85,802
------------
1,416,031
------------
Oil & Gas (8.24%)
Baker Hughes, Inc. 2,169 85,025
BJ Services Co.* 1,405 106,780
Cooper Cameron Corp.* 1,804 107,843
El Paso Corp. 2,414 169,704
Santa Fe International Corp. 3,903 146,167
Transocean Sedco Forex, Inc. 3,714 178,755
Weatherford International, Inc.* 2,938 152,864
------------
947,138
------------
Pollution Control (1.56%)
Waste Management, Inc. 7,095 180,000
------------
Retail (7.03%)
Abercrombie & Fitch Co. (Class A)* 4,082 115,766
Bed Bath & Beyond, Inc.* 6,000 147,750
BJ's Wholesale Club, Inc.* 2,723 123,924
Ethan Allen Interiors, Inc. 2,781 94,443
RadioShack Corp. 2,041 87,355
Talbots, Inc. 2,337 118,766
TJX Cos., Inc. 3,919 119,843
------------
807,847
------------
Telecommunications (14.05%)
Allegiance Telecom, Inc.* 6,650 134,662
American Tower Corp. (Class A)* 5,236 151,530
Comverse Technology, Inc.* 1,420 106,411
Crown Castle International Corp.* 4,850 121,856
Dobson Communications Corp. (Class A)* 13,050 242,241
Global Crossing, Ltd.* (Bermuda) 7,041 114,275
McLeodUSA, Inc. (Class A)* 16,615 218,072
Scientific-Atlanta, Inc. 4,645 217,850
Western Wireless Corp. (Class A)* 4,350 183,516
XO Communications, Inc. (Class A)* 8,400 124,950
------------
1,615,363
------------
Textile (1.04%)
Jones Apparel Group, Inc.* 3,119 119,770
------------
Utilities (0.05%)
NewPower Holdings, Inc.* 885 5,531
------------
TOTAL COMMON STOCKS
(Cost $11,013,857) (98.01%) 11,270,366
--------- ------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.72%)
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% $428 $428,000
------------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company Daily
Interest Savings Account
Current Rate 4.20% 590
------------
TOTAL SHORT-TERM INVESTMENTS (3.73%) 428,590
--------- ------------
TOTAL INVESTMENTS (101.74%) 11,698,956
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (1.74%) (200,103)
--------- ------------
TOTAL NET ASSETS (100.00%) $11,498,853
========= ============
* 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.
Portfolio Concentration (Unaudited)
- ----------------------------------------------------------------------
The Medium Capitalization Growth Fund invests primarily in common stocks
of U.S. and foreign issuers. The performance of the Fund is closely tied
to the economic and financial conditions within the countries in which
it invests. The concentration of investments by industry category for
individual securities held by the Fund is shown in the schedule of
investments. In addition, concentration of investments can be aggregated
by various countries. The table below shows the percentages of the
Fund's investments at February 28, 2001, assigned to country categories.
VALUE AS A
PERCENTAGE OF
COUNTRY DIVERSIFICATION FUND'S NET ASSETS
- ----------------------- -----------------
Bermuda 3.46%
Canada 0.71
Singapore 0.89
United States 96.68
-------
TOTAL INVESTMENTS 101.74%
=======
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Capitalization Growth Fund
Schedule of Investments
February 28, 2001
- ------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Small Capitalization Growth Fund 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 groups.
Short-term investments, which represent the Fund's "cash" position, are
listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ---------- ------------
COMMON STOCKS
Advertising (1.76%)
Getty Images, Inc.* 3,820 $95,978
------------
Banks -- United States (1.41%)
Southwest Bancorp. of Texas, Inc.* 2,000 77,000
------------
Business Services -- Misc (6.61%)
Corporate Executive Board Co. (The)* 3,000 107,250
Forrester Research, Inc.* 1,550 60,547
Heidrick & Struggles International, Inc.* 2,500 82,656
Management Network Group, Inc. (The)* 7,350 83,606
Pivotal Corp.* (Canada) 2,000 26,625
------------
360,684
------------
Computers (10.59%)
Advent Software, Inc.* 2,990 115,115
Cerner Corp.* 3,400 174,037
Embarcadero Technologies, Inc.* 2,300 67,850
IDX Systems Corp.* 3,400 66,300
Manugistics Group, Inc.* 2,000 62,000
M-Systems Flash Disk Pioneers Ltd.* (Israel) 7,000 57,532
Novatel Wireless, Inc.* 7,050 35,250
------------
578,084
------------
Electronics (8.37%)
Aeroflex, Inc.* 5,000 66,875
Alpha Industries, Inc.* 2,100 33,862
DuPont Photomasks, Inc.* 1,050 69,234
Exar Corp.* 3,920 74,480
Micrel, Inc.* 2,740 77,063
PRI Automation, Inc.* 2,590 50,667
Semtech Corp.* 3,380 84,711
------------
456,892
------------
Finance (5.19%)
Actrade Financial Technologies, Ltd.* 2,428 60,396
Affiliated Managers Group, Inc.* 2,000 103,000
AmeriCredit Corp.* 3,500 119,630
------------
283,026
------------
Insurance (3.25%)
RenaissanceRe Holdings Ltd. (Bermuda) 1,200 89,220
Triad Hospitals, Inc.* 2,700 88,256
------------
177,476
------------
Media (4.04%)
Entercom Communications Corp.* 3,200 130,400
Radio One, Inc. (Class A)* 6,000 90,000
------------
220,400
------------
Medical (22.08%)
Accredo Health, Inc.* 4,500 130,781
Alkermes, Inc.* 750 23,250
AmeriSource Health Corp. (Class A)* 2,200 118,184
Cytyc Corp.* 1,500 94,313
DaVita, Inc.* 4,600 80,868
Lincare Holdings, Inc.* 2,650 156,184
NPS Pharmaceuticals, Inc.* 2,600 83,850
Pharmaceutical Product Development, Inc.* 1,900 105,806
Renal Care Group, Inc.* 4,850 128,222
Rightchoice Managed Care * 4,700 189,880
Wilson Greatbatch Technologies, Inc.* 3,960 94,050
------------
1,205,388
------------
Oil & Gas (7.69%)
Marine Drilling Cos., Inc.* 5,000 145,750
Newfield Exploration Co.* 3,050 106,811
Stone Energy Corp.* 1,800 97,200
Universal Compression Holdings, Inc.* 2,000 70,000
------------
419,761
------------
Retail (3.98%)
Columbia Sportswear Co.* 2,000 110,750
Krispy Kreme Doughnuts, Inc.* 400 28,725
Whole Foods Market, Inc.* 1,800 77,625
------------
217,100
------------
Shoes & Related Apparel (1.40%)
Wolverine World Wide, Inc. 5,200 76,492
------------
Steel (2.16%)
Lone Star Technologies, Inc.* 2,650 117,899
------------
Telecommunications (14.31%)
AirGate PCS, Inc.* 3,950 174,294
Alamosa Holdings, Inc.* 11,000 115,500
CTC Communications Group, Inc.* 10,950 90,337
Dobson Communications Corp. (Class A)* 5,600 103,950
SBA Communications Corp.* 4,930 162,690
Sierra Wireless, Inc.* (Canada) 1,500 39,563
WinStar Communications, Inc.* 7,500 94,688
------------
781,022
------------
Textile (1.89%)
Tommy Hilfiger Corp.* 6,800 103,360
------------
TOTAL COMMON STOCKS
(Cost $5,545,155) (94.73%) 5,170,562
--------- ------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.44%)
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% $297 $297,000
------------
Corporate Savings Account (0.01%)
Investors Bank & Trust Company Daily
Interest Savings Account
Current Rate 4.20% 829
------------
TOTAL SHORT-TERM INVESTMENTS (5.45%) 297,829
--------- ------------
TOTAL INVESTMENTS (100.18%) 5,468,391
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (0.18%) (9,985)
--------- ------------
TOTAL NET ASSETS (100.00%) $5,458,406
========= ============
* 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 -- Small Capitalization Value Fund
Schedule of Investments
February 28, 2001
- ------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Small Capitalization Value Fund 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 groups.
Short-term investments, which represent the Fund's "cash" position, are
listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ---------- ------------
COMMON STOCK
Advertising (1.95%)
Penton Media, Inc. 16,000 $361,440
Ventiv Health, Inc.* 14,000 226,625
------------
588,065
------------
Aerospace (0.77%)
Innovative Solutions & Support, Inc.* 15,950 232,272
------------
Broker Services (1.20%)
Jefferies Group, Inc. 12,100 361,790
------------
Business Services -- Misc (4.04%)
Iron Mountain, Inc.* 16,600 647,566
Sensormatic Electronics Corp 25,550 559,545
Xpedior, Inc.* 17,750 12,203
------------
1,219,314
------------
Computers (18.41%)
Aspen Technology, Inc.* 29,000 755,812
Bell & Howell Co.* 45,000 1,032,750
Electronics for Imaging, Inc.* 56,250 1,374,609
Hyperion Solutions Corp.* 23,250 398,156
NetRatings, Inc.* 4,650 56,381
Parametric Technology Corp.* 23,200 308,850
Portal Software, Inc.* 30,850 220,772
Student Advantage, Inc.* 54,950 164,850
UNOVA, Inc. * 141,250 627,150
Viant Corp.* 124,900 382,506
Wind River Systems, Inc.* 10,000 235,000
------------
5,556,836
------------
Containers (0.80%)
Pactiv Corp.* 18,000 242,100
------------
Diversified Operations (1.45%)
ESCO Electronics Corp. 20,250 436,995
------------
Electronics (8.71%)
Alpha Industries, Inc.* 34,550 557,119
Axcelis Technologies, Inc.* 29,000 267,345
MKS Instruments, Inc.* 35,652 623,910
SBS Technologies, Inc.* 14,000 308,000
Vicor Corp.* 40,650 873,975
------------
2,630,349
------------
Finance (5.10%)
NOVA Corp. 50,500 960,005
Sovereign Bancorp, Inc. 65,000 578,910
------------
1,538,915
------------
Food (5.89%)
Galaxy Nutritional Foods, Inc.* 75,000 408,000
Hain Celestial Group, Inc.* 44,250 1,371,750
------------
1,779,750
------------
Insurance (0.65%)
StanCorp Financial Group, Inc.* 5,000 195,500
------------
Leisure (2.44%)
Six Flags, Inc.* 34,100 736,219
------------
Machinery (0.77%)
Zebra Technologies Corp. (Class A)* 5,150 232,072
------------
Media (7.18%)
Pegasus Communications Corp.* 57,000 1,592,438
Regent Communications, Inc.* 60,500 484,000
Sinclair Broadcast Group, Inc. (Class A)* 10,000 90,625
------------
2,167,063
------------
Medical (10.01%)
Alpharma, Inc. (Class A) 28,000 931,000
Covance, Inc.* 92,600 1,389,000
Cyberonics, Inc.* 25,000 514,687
DENTSPLY International, Inc. 5,000 188,125
------------
3,022,812
------------
Oil & Gas (1.98%)
Marine Drilling Cos., Inc.* 5,000 145,750
Petroleum Geo-Services ASA, American Depositary
Receipts (ADR) (Norway)* 15,000 131,250
Precision Drilling Corp. (Canada)* 4,000 169,600
Seitel, Inc. 4,000 74,800
Veritas DGC, Inc.* 2,500 75,375
------------
596,775
------------
Protection -- Safety Equip & Svc (4.17%)
Pittston Brink's Group 63,400 1,258,490
------------
Retail (3.38%)
Pathmark Stores, Inc.* 53,000 901,000
Ruddick Corp. 9,100 119,210
------------
1,020,210
------------
Schools/Education (2.40%)
Career Education Corp.* 15,900 725,438
------------
Telecommunications (18.44%)
AirGate PCS, Inc.* 16,500 728,063
Alaska Communications Systems Holdings, Inc.* 41,700 284,081
ANTEC Corp.* 60,750 544,855
Commonwealth Telephone Enterprises, Inc.* 7,500 255,000
CT Communications, Inc. 17,000 267,750
CTC Communications Group, Inc.* 112,150 925,237
Intermedia Communications, Inc.* 11,850 187,378
Lightbridge, Inc.* 40,000 475,000
Motient Corp. 95,000 350,313
NTELOS, Inc. 60,000 963,750
TeleCorp PCS, Inc.* 12,000 256,500
XM Satellite Radio Holdings, Inc. (Class A)* 32,000 328,000
------------
5,565,927
------------
Waste Disposal Service & Equip. (1.98%)
Casella Waste Systems, Inc. (Class A)* 97,450 596,881
------------
TOTAL COMMON STOCKS
(Cost $32,424,457) (101.72%) 30,703,773
--------- ------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.09%)
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% $26 $26,000
------------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company Daily
Interest Savings Account
Current Rate 4.20% 448
------------
TOTAL SHORT-TERM INVESTMENTS (0.09%) 26,448
--------- ------------
TOTAL INVESTMENTS (101.81%) 30,730,221
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (1.81%) (546,799)
--------- ------------
TOTAL NET ASSETS (100.00%) $30,183,422
========= ============
* 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 -- International Equity Fund
Schedule of Investments
February 28, 2001
- ------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the International Equity Fund on February 28, 2001. It's divided
into four main categories: common stocks, warrants, preferred stocks
and short-term investments. Common stocks, warrants and preferred stocks
are further broken down by country. Short-term investments, which
represent the Fund's "cash" position, are listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ---------- ------------
COMMON STOCKS
Brazil (0.99%)
Embratel Participacoes SA, American Depositary
Receipts (ADR) (Telecommunications) 1,200 $14,520
Tele Norte Leste Participacoes SA (ADR)
(Telecommunications) 2,000 43,400
------------
57,920
------------
Canada (7.82%)
Alberta Energy Co. Ltd. (Oil & Gas) 1,900 84,960
Anderson Exploration Ltd.* (Oil & Gas) 3,100 65,970
Bombardier, Inc. (Diversified Operations) 4,100 58,721
Celestica, Inc.* (Electronics) 300 14,700
Manulife Financial Corp. (Insurance) 2,100 57,603
Precision Drilling Corp.* (Oil & Gas) 1,300 55,120
Research in Motion Ltd.* (Computers) 600 23,212
Sun Life Financial Services (Insurance) 3,000 67,074
Suncor Energy, Inc. (Oil & Gas) 1,200 30,879
------------
458,239
------------
Denmark (2.01%)
Novo Nordisk AS (Medical) 400 78,732
Vestas Wind Systems AS (Utilities) 800 39,193
------------
117,925
------------
France (10.59%)
Accor SA (Leisure) 700 27,506
Assurances Generales de France SA (Insurance) 1,100 68,597
Aventis SA (Medical) 1,000 80,816
Cap Gemini SA (Computers) 200 35,051
Lafarge SA (Building) 400 39,027
PSA Peugeot Citroen SA (Automobile/Trucks) 200 54,251
Schneider Electric SA (Machinery) 720 47,053
Suez Lyonnaise des Eaux SA (Diversified
Operations) 300 49,704
Total Fina Elf SA (Oil & Gas) 889 125,606
Vivendi Environnement* (Utilities) 1,300 55,031
Vivendi Universal SA (Diversified Operations) 600 37,886
------------
620,528
------------
Germany (5.79%)
Bayerische Motoren Werke AG (Automobile/Trucks) 800 27,724
Deutsche Bank AG (Banks -- Foreign) 600 49,544
Dresdner Bank AG (Banks -- Foreign) 1,200 49,760
E.On AG (Utilities) 1,000 51,425
Ergo Versicherungs Gruppe AG (Insurance) 500 76,858
Muenchener Rueckversicherungs- Gesellschaft AG
(Insurance) 258 83,722
------------
339,033
------------
Hong Kong (2.96%)
Cheung Kong Holdings Ltd. (Real Estate
Operations) 5,000 60,578
Citic Pacific Ltd. (Diversified Operations) 10,000 35,641
Hutchison Whampoa Ltd. (Diversified Operations) 4,000 47,437
Johnson Electric Holdings Ltd. (Electronics) 18,000 30,116
------------
173,772
------------
Ireland (1.86%)
Allied Irish Banks Plc (Banks -- Foreign) 6,600 71,381
CRH Plc (Building) 2,000 37,646
------------
109,027
------------
Israel (1.53%)
Check Point Software Technologies Ltd.*
(Computers) 500 32,062
Teva Pharmaceutical Industries Ltd. (ADR)
(Medical) 900 57,375
------------
89,437
------------
Italy (4.91%)
Alleanza Assicurazioni SpA (Insurance) 4,600 69,100
Banca Nazionale del Lavoro SpA (Banks --
Foreign) 18,200 60,810
Edison SpA (Utilities) 6,200 58,209
Finmeccanica SpA* (Aerospace) 33,600 32,814
Riunione Adriatica di Sicurta SpA (Insurance) 4,916 66,924
------------
287,857
------------
Japan (5.79%)
Daikin Industries, Ltd. (Building) 2,000 37,084
Furukawa Electric Co., Ltd. (The) (Wire & Cable
Products) 1,000 13,214
Itochu Techno-Science Corp. (Computers) 200 28,048
Japan Airlines Co., Ltd. (Transport) 7,000 29,957
Mitsui Fudosan Co., Ltd. (Real Estate
Operations) 3,000 28,977
NEC Corp. (Electronics) 1,000 16,275
Nikon Corp. (Computers) 2,000 23,717
Nippon Steel Corp. (Steel) 25,000 45,610
Pioneer Corp. (Electronics) 1,000 25,916
Sony Corp. (Electronics) 600 43,222
Takeda Chemical Industries, Ltd. (Medical) 1,000 47,315
------------
339,335
------------
Mexico (0.93%)
Grupo Financiero BBVA Bancomer, SA de CV*
(Finance) 4,000 2,683
Grupo Televisa SA* (ADR) (Media) 300 11,970
Telefonos de Mexico SA de CV (ADR)
(Telecommunications) 1,230 39,680
------------
54,333
------------
Netherlands (4.48%)
Akzo Nobel NV (Chemicals) 1,280 62,090
ASM Lithography Holding NV* (Electronics) 2,200 46,612
ING Groep NV (Banks -- Foreign) 727 50,221
Koninklijke Ahold NV (Retail) 1,431 46,153
Qiagen NV* (Medical) 1,500 41,834
STMicroelectronics NV (Electronics) 500 15,690
------------
262,600
------------
Norway (0.64%)
Tomra Systems ASA (Pollution Control) 2,050 37,778
------------
Portugal (1.89%)
Electricidade de Portugal SA (Utilities) 16,100 47,866
Portugal Telecom SGPS SA (Telecommunications) 6,500 62,701
------------
110,567
------------
Singapore (0.50%)
Flextronics International Ltd.* (Electronics) 1,100 29,150
------------
Spain (1.87%)
Banco Bilbao Vizcaya Argentaria SA (Banks --
Foreign) 4,000 59,572
Corporacion Mapfre SA (Insurance) 1,200 27,613
Telefonica SA* (Telecommunications) 1,300 22,197
------------
109,382
------------
Sweden (2.64%)
Electrolux AB (Household) 2,400 39,572
Nordea AB (Bank-Foreign) 4,000 29,313
Svenska Handelsbanken AB (Banks -- Foreign) 5,100 85,649
------------
154,534
------------
Switzerland (4.57%)
ABB Ltd. (Engineering/R&D Services) 600 50,726
Nestle SA (Food) 20 43,795
Serona SA* (ADR) (Medical) 3,400 69,088
Syngenta AG* (Chemicals) 700 40,611
UBS AG (Banks -- Foreign) 400 63,572
------------
267,792
------------
Taiwan (0.46%)
United Microelectronics Corp.* (ADR)
(Electronics) 2,800 26,908
------------
United Kingdom (20.51%)
Amdocs Ltd.* (Telecommunications) 800 52,008
Anglo American Plc (Metal) 900 58,602
AstraZeneca PLC (Medical) 1,400 63,649
Barclays Plc (Banks -- Foreign) 1,800 54,652
Billiton Plc (Metal) 14,000 64,377
BP Amoco Plc (Oil & Gas) 6,671 55,187
British Telecommunications Plc
(Telecommunications) 7,700 63,366
Centrica Plc (Utilities) 24,410 82,819
CMG Plc (Computers) 4,600 50,075
COLT Telecom Group Plc* (Telecommunications) 1,900 34,097
Diageo Plc (Beverages) 3,600 36,512
Dixons Group Plc (Electronics) 14,600 54,488
Energis Plc* (Telecommunications) 8,050 52,823
GlaxoSmithKline Plc* (Medical) 1,500 41,255
National Grid Group Plc (Utilities) 9,700 82,066
Reckitt Benckiser Plc (Soap & Cleaning
Preparations) 6,800 93,266
Royal Bank of Scotland Group Plc (Banks --
Foreign) 4,000 87,780
Shell Transport & Trading Co. Plc (Oil & Gas) 8,700 72,224
Vodafone Group Plc (Telecommunications) 37,840 102,571
------------
1,201,817
------------
United States (3.60%)
Santa Fe International Corp. (Oil & Gas) 2,000 74,900
Schlumberger Ltd. (Oil & Gas) 1,000 63,750
Transocean Sedco Forex, Inc. (Oil & Gas) 1,500 72,195
------------
210,845
------------
TOTAL COMMON STOCKS
(Cost $5,222,030) (86.34%) 5,058,779
--------- ------------
WARRANTS
Germany (0.00%)
Muenchener Rueckversicherungs- Gesellschaft AG*
(Insurance) 2 177
------------
TOTAL WARRANTS
(Cost $90) (0.00%) 177
--------- ------------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $5,222,120) (86.34%) 5,058,956
--------- ------------
PREFERRED STOCKS
Germany (1.07%)
SAP AG (Computers) 400 62,959
------------
TOTAL PREFERRED STOCKS
(Cost $70,749) (1.07%) 62,959
--------- ------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (11.47%)
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, 6.00% and 8.75% due 05-15-17
and 02-15-26) -- Note A 5.38% $672 $672,000
NUMBER OF
SHARES
------
Cash Equivalents (14.41%)
Navigator Securities Lending Prime
Portfolio ** 844 844,471
------------
TOTAL SHORT-TERM INVESTMENTS (25.88%) 1,516,471
--------- ------------
TOTAL INVESTMENTS (113.29%) 6,638,386
--------- ------------
OTHER ASSETS AND LIABILITIES, NET (13.29%) (778,994)
--------- ------------
TOTAL NET ASSETS (100.00%) $5,859,392
========= ============
* Non-income producing security.
** Represents investment of security lending collateral -- Note A.
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.
Portfolio Concentration (Unaudited)
- ----------------------------------------------------------------------
The Fund primarily invests in securities issued by companies of other
countries. The performance of the Fund is closely tied to the economic
conditions within the countries in which it invests. The concentration
of investments by country for individual securities held by the Fund is
shown in the schedule of investments. In addition, the concentration of
investments can be aggregated by various industry groups. The table
below shows the percentages of the Fund's investments at February 28,
2001, assigned to the various investment categories.
VALUE OF SECURITIES
INVESTMENT CATEGORIES AS A % OF NET ASSETS
- --------------------- --------------------
Aerospace 0.56%
Automobile/Trucks 1.40
Banks -- Foreign 11.30
Beverages 0.62
Building 1.94
Chemicals 1.75
Computers 4.35
Diversified Operations 3.91
Electronics 5.17
Engineering/R&D Services 0.87
Finance 0.05
Food 0.75
Household 0.68
Insurance 8.84
Leisure 0.47
Machinery 0.80
Media 0.20
Medical 8.19
Metal 2.10
Oil & Gas 11.96
Pollution Control 0.64
Real Estate Operations 1.53
Retail 0.79
Soap & Cleaning Preparations 1.59
Steel 0.78
Telecommunications 8.32
Transport 0.51
Utilities 7.11
Wire & Cable Products 0.23
Short-Term Investments 25.88
-------
TOTAL INVESTMENTS 113.29%
=======
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust
NOTES TO FINANCIAL STATEMENTS
NOTE A --
ACCOUNTING POLICIES
John Hancock Active Bond Fund ("Active Bond Fund"), John Hancock
Dividend Performers Fund ("Dividend Performers Fund"), John Hancock
Medium Capitalization Growth Fund ("Medium Capitalization Growth Fund"),
John Hancock Small Capitalization Growth Fund ("Small Capitalization
Growth Fund"), John Hancock Small Capitalization Value Fund ("Small
Capitalization Value Fund") and John Hancock International Equity Fund
("International Equity Fund") (each, a "Fund," and collectively, the
"Funds") are separate portfolios of John Hancock Institutional Series
Trust (the "Trust") an open-end management investment company registered
under the Investment Company Act of 1940, organized as a Massachusetts
business trust in 1994. Each Fund's class of shares has equal rights as
to voting, redemption, dividends and liquidation within their respective
Fund. Effective November 15, 2000, the Board of Trustees designated the
existing shares of Small Capitalization Growth Fund as Class I shares
and authorized the issuance of Class A, Class B and Class C shares of
the Fund, which will become available for sale to individual investors
at a later time. The Trustees may authorize the creation of additional
portfolios from time to time to satisfy various investment objectives.
The investment objective of the Active Bond Fund is a high rate of total
return, consistent with prudent investment risk. The investment
objective of the Dividend Performers Fund is long-term growth of
capital, with income as a secondary objective. The investment objective
of the Medium Capitalization Growth Fund is long-term capital
appreciation. The investment objective of the Small Capitalization
Growth Fund is long-term growth of capital. The investment objective of
the Small Capitalization Value Fund is capital appreciation. The
investment objective of the International Equity Fund is long-term
growth of capital.
Significant accounting policies of the Funds are as follows:
VALUATION OF INVESTMENTS Securities in the Funds' portfolios 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. All portfolio transactions initially
expressed in terms of foreign currencies have been translated into U.S.
dollars as described in "Foreign Currency Translation" below.
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 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.
FOREIGN CURRENCY TRANSLATION All assets or liabilities initially
expressed in terms of foreign currencies are translated into U.S.
dollars based on London currency exchange quotations as of 5:00 p.m.,
London time, on the date of any determination of the net asset value of
the Funds. Transactions affecting statement of operations accounts and
net realized gain (loss) on investments are translated at the rates
prevailing at the dates of the transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized
gains or losses from investments.
Reported net realized foreign exchange gains or losses arise from sales
of foreign currency, currency gains or losses realized between the trade
and settlement dates on securities transactions and the difference
between the amounts of dividends, interest and foreign withholding taxes
recorded on the Funds' books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains
and losses arise from changes in the value of assets and liabilities
other than investments in securities, resulting from changes in the
exchange rate.
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.
DISCOUNT ON SECURITIES The Funds accrete 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 are 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.
ORGANIZATION EXPENSE Expenses incurred in connection with the
organization of the Funds have been capitalized and are being charged to
the Funds' operations ratably over a five-year year that began with the
commencement of investment operations 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 following funds had borrowings under the line of credit during the
year ended February 28, 2001:
AVERAGE DAILY LOAN BALANCE INTEREST EXPENSE
DURING THE PERIOD FOR WHICH WEIGHTED AVERAGE PAID UNDER THE
FUND LOANS WERE OUTSTANDING INTEREST RATE LINE OF CREDIT
- ---- --------------------------- ---------------- --------------
Dividend Performers Fund $2,764,125 6.33% $3,830
Medium Capitalization
Growth Fund 7,011,000 7.125 1,365
International Equity
Fund 1,256,429 6.05 1,457
The Funds had no outstanding borrowing under the line of credit at
February 28, 2001.
SECURITIES LENDING The Funds may lend their 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, Medium
Capitalization Growth Fund loaned securities having a market value of
$52,725 collateralized by securities in the amount of $53,780 and
International Equity Fund loaned securities having a market value of
$803,545 collateralized by cash in the amount of $844,471. The cash
collateral was invested in a short-term instrument.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds (except for
Dividend Performers Fund) may enter into forward foreign currency
exchange contracts as a hedge against the effect of fluctuations in
currency exchange rates. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a
future date at a set price. The aggregate principal amounts of the
contracts are marked to market daily at the applicable foreign currency
exchange rates. Any resulting unrealized gains and losses are included
in the determination of the Funds' daily net assets. The Funds record
realized gains and losses at the time the forward foreign currency
contracts are closed out or offset by matching contracts. Risks may
arise upon entering these contracts from the potential inability of
counterparties to meet the terms of the contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S.
dollar.
These contracts involve market or credit risk in excess of the
unrealized gain or loss reflected in the Funds' Statement of Assets and
Liabilities. The Funds may also purchase and sell forward contracts to
facilitate the settlement of foreign currency-denominated portfolio
transactions, under which they intend to take delivery of the foreign
currency. Such contracts normally involve no market risk if they are
offset by the currency amounts of the underlying transactions.
The Funds had the following open forward foreign currency exchange
contracts at February 28, 2001:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ---------- ------------
INTERNATIONAL EQUITY FUND
Buys
Canadian Dollar 5,006 March 01 ($2)
Pound Sterling 41,357 March 01 107
-----------
$105
===========
Sells
Euro 14,121 March 01 $6
Pound Sterling 103,240 March 01 (269)
-----------
($263)
===========
FINANCIAL FUTURES CONTRACTS The Funds may buy and sell financial
futures. Buying futures tends to increase the Funds' exposure to the
underlying instrument. Selling futures tends to decrease the Funds'
exposure to the underlying instrument or hedge other Fund instruments.
At the time the Funds enter into a financial futures contract, they are
required to deposit with their custodian a specified amount of cash or
U.S. government securities, known as "initial margin," equal to a
certain percentage of the value of the financial futures contract being
traded. Each day, the futures contract is valued at the official
settlement price of the board of trade or U.S. commodities exchange on
which it trades. Subsequent payments to and from the broker, known as
"variation margin," are made on a daily basis as the market price of the
financial futures contract fluctuates. Daily variation margin
adjustments, arising from this "mark to market," are recorded by the
Funds as unrealized gains or losses.
When the contracts are closed, the Funds recognize a gain or loss. Risks
of entering into futures contracts include the possibility that there
may be an illiquid market and/or that a change in the value of the
contracts may not correlate with changes in the value of the underlying
securities. In addition, the Funds could be prevented from opening or
realizing the benefits of closing out futures positions because of
position limits or limits on daily price fluctuation imposed by an
exchange.
For federal income tax purposes, the amount, character and timing of the
Funds' gains and/or losses can be affected as a result of futures
contracts.
The Funds had no open financial futures contracts at February 28, 2001.
FEDERAL INCOME TAXES The Funds' policy is to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies and to distribute all of their taxable
income, including net realized gain on investments, to their
shareholders. Therefore, no federal income tax provisions are required.
The following Funds had capital loss carryforwards available, to the
extent provided by regulations, to offset future net realized gains. To
the extent such carryforwards are used by each Fund, no capital gain
distribution will be made. Additionally, net capital losses attributed
to security transactions occurring after October 31, 2000 are treated as
arising on the first day of the Funds' next taxable year (March 1,
2001).
POST- POST-OCTOBER
CAPITAL LOSS CAPITAL LOSS OCTOBER 31, 2000 CURRENCY
CARRYFORWARD CARRYFORWARD LOSS TREATED LOSS TREATED
EXPIRING EXPIRING AS ARISING AS ARISING
FUND 2/29/08 2/28/09 3/1/01 3/1/01
- ---- ------------ ------------ ---------------- -------------
Active Bond $49,819 $79,391 -- --
Small Capitalization
Growth -- 332,423 $924,258 --
Small Capitalization
Value -- -- 99,819 $303
International Equity -- 636,448 531,279 --
Expired capital loss carryforwards are reclassified to capital paid-in,
in the year of expiration. Additionally, net capital losses attributable
to security transactions occuring after October 31, 2000 are treated as
arising on the first day of the Funds' next taxable year (March 1,
2001).
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, capital gains and repatriation taxes imposed by
certain countries in which it invests, which are accrued as applicable.
The Funds record 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 investment management contract, the Funds pay a monthly management
fee to the Adviser equivalent, on an annual basis, as follows:
FUND RATE
- ---- ----
Active
Bond Fund 0.50% of average daily net assets up to $1.5 billion
0.45% of such assets in excess of $1.5 billion
Dividend
Performers
Fund 0.60% of average daily net assets up to $500 million
0.55% of such assets in excess of $500 million
Medium
Capitalization
Growth Fund 0.80% of average daily net assets up to $500 million
0.75% of such assets in excess of $500 million
Small
Capitalization
Growth Fund 0.80% of average daily net assets
Small
Capitalization
Value Fund 0.70% of average daily net assets up to $500 million
0.65% of such assets in excess of $500 million
International
Equity Fund 0.90% of average daily net assets up to $500 million
0.65% of such assets in excess of $500 million
International Equity Fund and the Adviser had a subadvisory contract
with and Indocam International Investments Services ("IIIS"). The
Adviser terminated the contract with IIIS on December 14, 2000.
Effective December 14, 2000, the Fund and the Adviser entered into a
subadvisory contract with Nicholas-Applegate Capital Management LP, who
is the Funds' sole subadviser as of February 28, 2001. The Fund is not
responsible for payment of these subadvisory fees.
The Adviser has voluntarily agreed to limit each Funds' expenses to the
following: 0.60% of Active Bond Fund's average daily net assets, 0.70%
of Dividend Performers Fund's average daily net assets, 0.90% of Medium
Capitalization Growth Fund's average daily net assets, 0.90% of Small
Capitalization Growth Fund's average daily net assets, 0.80% of Small
Capitalization Value Fund's average daily net assets and 1.00% of
International Equity Fund's average daily net assets, at least until
June 30, 2001. Accordingly, for the year ended February 28, 2001, the
reduction in the Funds' expenses amounted to as follows: $78,188 for the
Active Bond Fund, $48,786 for the Dividend Performers Fund, $70,047 for
the Medium Capitalization Growth Fund, $89,398 for the Small
Capitalization Growth Fund, $66,011 for the Small Capitalization Value
Fund and $248,764 for the International Equity 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 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 John
Hancock Life Insurance Company. Each Fund pays transfer agent fees at an
annual fee accrued daily of 0.05% of its average daily net assets.
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 each Fund.
Mr. Stephen L. Brown and Ms. Maureen R. Ford 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
Fund. The unaffiliated Trustees may elect to defer, for tax purposes,
their receipt of this compensation under the John Hancock Group of Fund
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 Fund' deferred compensation
liability are recorded on the Funds' books as an other assets. The
deferred compensation liability and the related other assets are always
equal and are marked to market on a quarterly basis to reflect any
income earned by the investments 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 securities and obligations of the U.S. Government,
during the year ended February 28, 2001, were as follows:
FUND PURCHASES SALES
- ---- ----------- -----------
Active Bond Fund $18,912,119 $16,825,288
Dividend Performers Fund 7,062,302 15,472,435
Medium Capitalization Growth Fund 46,891,025 56,434,459
Small Capitalization Growth Fund 20,136,084 18,467,653
Small Capitalization Value Fund 42,102,790 28,902,221
International Equity Fund 22,663,380 25,238,745
The cost of investments on February 28, 2001, and gross unrealized
appreciation and depreciation in value of investments owned by the
Funds, for federal income tax purposes, were as follows:
NET UNREALIZED
GROSS UNREALIZED GROSS UNREALIZED APPRECIATION
FUND COST APPRECIATION DEPRECIATION (DEPRECIATION)
- ---- ---- ------------ ------------ ------------
Active Bond
Fund $6,643,270 $189,638 $56,168 $133,470
Dividend
Performers
Fund 5,218,322 1,427,610 414,893 1,012,717
Medium
Capitalization
Growth Fund 11,642,925 2,127,107 2,071,666 55,441
Small
Capitalization
Growth Fund 5,850,051 532,878 915,367 (382,489)
Small
Capitalization
Value Fund 32,450,457 4,452,002 6,172,686 (1,720,684)
International
Equity
Fund 6,853,689 246,839 462,142 (215,303)
NOTE D --
RECLASSIFICATION OF ACCOUNTS
During the year ended February 28, 2001, reclassifications have been
made in each Fund's capital balances to report these balances on a tax
basis, excluding certain temporary difference, 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 certain differences in the
treatment of net operating losses, foreign currency gains and losses and
return of capital 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.
UNDISTRIBUTED ACCUMULATED
CAPITAL NET INVESTMENT NET REALIZED
FUND PAID-IN INCOME (LOSS) GAIN (LOSS)
- ---- ------- ------------- -----------
Active Bond Fund ($51) $326 ($275)
Dividend Performers
Fund (155) (10) 165
Medium Capitalization
Growth Fund (111,891) 111,736 155
Small Capitalization
Growth Fund (43,524) 43,491 33
Small Capitalization
Value Fund (713) 68,461 (67,748)
International Equity
Fund (6) 26,492 (26,486)
NOTE E --
CHANGE IN ACCOUNTING PRINCIPLE
The Funds have 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 began
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 Active Bond Fund,
John Hancock Dividend Performers Fund, John Hancock Medium
Capitalization Growth Fund, John Hancock Small Capitalization Growth
Fund, John Hancock Small Capitalization Value Fund and John Hancock
International Equity 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 as
of 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 each
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 31, 2001
TAX INFORMATION (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 GAINS RECEIVED
DESIGNATED DEDUCTION
---------------- ----------
Dividend Performers Fund $2,011,405 100%
Medium Capitalization Growth Fund 1,987,361 --
Small Capitalization Growth Fund 240,520 --
Small Capitalization Value Fund 2,145,322 1.50
International Equity Fund 218,244 --
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."]
KB00A 2/01
4/01
The latest report from your
Fund's management team
SEMIANNUAL REPORT
Institutional
Series Trust
Active Bond Fund
Dividend Performers Fund
Medium Capitalization Growth Fund
Focused Small Cap Growth Fund
(formerly Small Capitalization Growth Fund)
Small Cap Equity Fund
(formerly Small Capitalization Value Fund)
International Equity 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 conditions warrant.
John Hancock Active Bond Fund 4
John Hancock Dividend Performers Fund 7
John Hancock Medium Capitalization Growth Fund 10
John Hancock Focused Small Cap Growth Fund 13
John Hancock Small Cap Equity Fund 16
John Hancock International Equity Fund 19
3) Financial Statements 22
4) Notes to Financial Statements 61
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
SUB-INVESTMENT ADVISER
International Equity Fund
Nicholas-Applegate Capital Management
600 West Broadway
San Diego, CA 92101
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 JAMES K. HO, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND
BENJAMIN A. MATTHEWS, PORTFOLIO MANAGER
John Hancock
Active Bond Fund
Slowing economy was a positive influence
on fixed-income market
While stocks suffered from the lethargic economy and corporate earnings
retrenchment during the past six months, the broad fixed-income market
performed in historic fashion. The worse the economic news became and the
more aggressive the Federal Reserve Board was in cutting short-term
interest rates, the more yields fell and bond prices rose. All domestic
fixed-income sectors posted gains, with investment-grade and high-yield
corporate debt leading the pack.
"All domestic
fixed-income
sectors
posted
gains ..."
Corporate bonds enjoyed strong demand from domestic and foreign investors,
as the difference in their yields relative to U.S. government securities
with comparable maturities remained attractive. However, the generally
hospitable environment thinly veiled the corporate sector's minefields. A
number of issuers in the areas of telecommunications equipment and
wireless services, such as competitive local exchange carriers,
experienced quite a bit of distress. In-depth credit research and constant
monitoring of holdings enabled us to move out of problem issuers early on
or avoid them entirely.
[A 2" x 2 1/2" photo at bottom middle of page of John Hancock Active
Bond Fund. Caption below reads "Fund management team leader Jim Ho."]
Performance review
For the six months ended August 31, 2001, John Hancock Active Bond Fund
produced a total return of 4.56%. This compares with the 4.20% return of
the average corporate debt A-rated fund, according to Lipper, Inc.
Historical performance information can be found on page six.
Increased weighting in
corporate bonds
Since midyear, we continued our strategy of bolstering the Fund's stake in
corporate bonds when prices dipped, as they did in early June. We focused
primarily on investment-grade issues but also targeted high-yield bonds on
a selective basis. This strategy proved beneficial to the Fund as
investors began to take note of the corporate sector's attractive risk
premium and the Fed's ongoing commitment to cut interest rates as much as
is needed to stimulate economic growth. When risk premiums are attractive,
it means that the higher relative yields and total return potential
currently offered by a particular fixed-income sector tend to outweigh the
possible risks.
[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 0% at the bottom
and 5% at the top. The first bar represents the 4.56% total return for
John Hancock Active Bond Fund. The second bar represents the 4.20% total
return for Average corporate debt A-rated fund. The third bar represents
the 4.60% total return for Lehman Brothers Government/Corporate Bond
Index. A note below the chart reads "The total return for John Hancock
Active Bond Fund is at net asset value with all distributions
reinvested. The average corporate debt A-rated fund is tracked by
Lipper, Inc. See the following page for historical performance
information."]
In both the investment-grade and high-yield areas, we chose holdings on a
bond-by-bond basis, letting intensive research be our guide. Although a
few high-profile telecommunications companies such as Lucent, Motorola,
and Nortel Networks experienced financial deterioration (and whose bonds
we moved out of earlier in the period), we were not deterred from
investment-grade opportunities in the telecommunications sector. In fact,
we owned a number of domestic and foreign telecom issues that performed
well. These included Verizon, BellSouth, VoiceStream Wireless, Deutsche
Telekom and France Telecom. We did, however, exit a number of high-yield
telecom names that have since become problem credits, such as Nextel,
Level 3, Global Crossing and NEXTLINK.
We also avoided an esoteric fixed-income subsector called collateralized
debt obligations, believing they exhibit much greater risk than their
potential reward. These types of securities represent an underlying pool
of debt from a variety of issuers with varying credit quality and offer
high relative yields. Over the period, they proved quite volatile, and
many investors suffered losses.
"As the
period
progressed,
we emphasized
more
cyclically
oriented
issuers..."
Cyclically oriented issues gain exposure
As the period progressed, we emphasized more cyclically oriented issuers
or "old economy" names, particularly higher-yielding, lower-quality issues
that stand to perform well once the economy gathers steam. We increased
the Fund's exposure to automotive, retail, paper, defense and railroad
holdings, purchasing or adding to such issues as Ford Motor, Delphi
Automotive Systems, Sears Roebuck, Georgia-Pacific, Lockheed Martin and
Burlington Northern.
Outlook
As we went to publication with this report, the tragic terrorist attacks
on the World Trade Center and Pentagon had just rocked the nation. Please
be assured that we will closely monitor the impact of these events on the
financial markets and will act to adjust our investment posture where we
see fit, continuing, of course, to focus on fundamentals and to apply
in-depth analysis. We are also fully confident that despite any short-term
impact, the resilience of the U.S. people and the economy will outlast the
shock of these events.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (3/30/95)
------- ------- ------- -------
Cumulative Total Returns 4.56% 12.09% 50.49% 63.31%
Average Annual Total Returns -- 12.09% 8.52% 7.94%
YIELD
As of August 31, 2001
SEC 30-DAY
YIELD
-------
John Hancock Active Bond Fund 5.33%
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
Active Bond 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 Lehman Brothers Government/Credit Bond
Index -- an unmanaged index that measures the performance of U.S.
government bonds, U.S. corporate bonds and Yankee bonds. It is not
possible to invest in an index. Past performance is no guarantee of
future results.
[Line chart with the heading John Hancock Active Bond 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
Lehman Brothers Government/Corporate Bond Index and is equal to $16,516
as of August 31, 2001. The second line represents the value of the
hypothetical $10,000 investment made in the John Hancock Active Bond
Fund on March 30, 1995 and is equal to $16,333 as of August 31, 2001.]
BY JOHN F. SNYDER, III, PORTFOLIO MANAGEMENT TEAM LEADER, AND
PETER M. SCHOFIELD, CFA, PORTFOLIO MANAGER
John Hancock
Dividend Performers Fund
Slowing economy and corporate earnings
disappointments send market down
The stock market's malaise extended into 2001. Under the pressure of
disappointing corporate earnings and gloomy economic news, stocks
continued their treacherous decline. Several short-lived market rallies
sparked investors' hopes that stock prices might have bottomed out. Those
hopes, however, were repeatedly dashed as the dismal corporate results and
a continued soft economy sent the market spiraling downward again after
each rally. The period ended with doubt pervading the market and gun-shy
investors taking a cautious wait-and-see attitude. The result was negative
market returns, with the Standard & Poor's 500 Index returning -7.97% in
the six months ended August 30, 2001.
[A 2" x 2 1/2" photo at bottom middle of page of John Hancock Dividend
Performers Fund. Caption below reads "Fund management team leader John
Snyder."]
Performance scorecard
In the same period, John Hancock Dividend Performers Fund posted a total
return of -6.65% at net asset value. By comparison, the average large-cap
core fund returned -9.18% for the same period, according to Lipper Inc.
Historical performance can be found on page nine.
In this difficult environment, we were reminded of the importance of stock
selectivity. For example, thanks to its strong product cycle and
accelerating earnings, Baxter International turned in a strong
performance, despite the declining health-care sector. In the
communications sector, Verizon held up well, while long-distance carriers
AT&T and MCI/WorldCom suffered from intense price competition.
"In this
difficult
environment,
we were
reminded
of the
importance
of stock
selectivity."
Not all of our investments performed so strongly. With technology stocks
coming under pressure during the period, several of our tech holdings --
such as EMC and Compaq -- turned in disappointing returns. Drugstore chain
CVS was also a disappointment, dropping on the news of weakening
fundamentals.
[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 -6.65% total
return for John Hancock Dividend Performers Fund. 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 Dividend
Performers Fund 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."]
"...a change
that
incorporates
a broader
definition of
'dividend
performers'..."
Enhancing investment flexibility
The Board of Trustees recently approved a change that we believe will
enhance the Fund's investment flexibility. Prior to July 2, 2001, Dividend
Performers Fund invested 65% of its stocks in "dividend performers,"
defined as companies that have increased their dividends for at least ten
consecutive years. The Board has approved a change that incorporates a
broader definition of "dividend performers" and increases the minimum
percentage of the Fund's stock investments in such companies by 15%. As of
July 2, 2001, the Fund will keep at least 80% of its common stock
investments in "dividend performers" -- companies that have typically
increased their dividend payments over time, or which the managers believe
demonstrate the potential for above-average stability of earnings or
dividends growth.
The reason for the change is simple. Today, many companies are putting
their cash flow back into their business rather than paying dividends.
Fewer than 25% of companies in the S&P 500 Index meet the 10-year rising
dividend test. This restriction has limited our flexibility to compete
effectively. What's more, regulatory changes have increased the portion of
the portfolio that has to meet the dividend performer test. Without a
change in the definition of "dividend performer," this new mandate would
have further limited the Fund's investment potential.
New opportunities
Our focus on stock selectivity has led us to make several additions to the
portfolio. We've beefed up our position in basic materials stocks, such as
Rohm & Haas and Dow Chemical, believing they will perform strongly when
the economy recovers. We've also purchased cosmetic giant Avon. With a new
CEO at the helm, Avon is expanding beyond its traditional catalogue
business into new retail channels.
A look ahead
As we were going to publication with this report, the tragic terrorist
attack on the World Trade Center and Pentagon had just rocked the nation.
While it's too early to understand the true impact this event will have on
the world financial markets, in the near term we are certain to see market
volatility. We will keep a close eye on the situation and adjust our
investment strategy accordingly. As always, we will maintain our steadfast
focus on high-quality stocks with strong growth potential and reasonable
valuations.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (3/30/95)
------- ------- ------- -------
Cumulative Total Returns (6.65%) (16.99%) 70.71% 118.11%
Average Annual Total Returns -- (16.99%) 11.29% 12.91%
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
Dividend Performers 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 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. Past performance is no guarantee of future results.
[Line chart with the heading John Hancock Dividend Performers 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 500 Index and is equal to $25,181 as of
August 31, 2001. The second line represents the value of the
hypothetical $10,000 investment made in the John Hancock Dividend
Performers Fund on March 30, 1995 and is equal to $21,811 as of August
31, 2001.]
BY PAUL J. BERLINGUET AND TIMOTHY N. MANNING
FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock Medium
Capitalization Growth Fund
Mid-cap growth stocks tumble
Recently, Paul Berlinguet assumed the role of portfolio management team
leader for John Hancock Medium Capitalization Growth Fund. Prior to
joining John Hancock Funds, Mr. Berlinguet spent more than 11 years as a
senior vice president for Baring Asset Management. He has been in the
investment business since 1986.
"...the
economy
remained
weak and
many
companies
missed
earnings..."
The stock market continued to decline in 2001, despite a brief relief
rally in the second quarter. Stock prices fell early in the year, led by
technology and telecommunications names, which looked overly expensive
relative to deteriorating business fundamentals. In April, the market
recovered, but as the economy remained weak and many companies missed
earnings, the market soon resumed its slide, with the Standard & Poor's
500 Index returning -7.97% for the six months ended August 31, 2001. Over
the same period, the Russell Midcap Growth Index returned -13.89% due to
its heavier concentrations in technology, telecom and biotechnology names.
Disappointing performance
John Hancock Medium Capitalization Growth Fund maintained its long-term
focus on mid-cap companies with strong earnings growth prospects. The Fund
had an average stake in technology -- about one-third of assets -- but was
dogged by weak stock performance. Our higher-than-average investment in
telecom also hurt, leaving the Fund with a -21.64% return at net asset
value for the six months ended August 31, 2001. By comparison, the average
multi-cap growth fund returned -16.91%, according to Lipper, Inc.
Historical performance information can be found on page 12.
[A 2" x 2 1/2" photo at bottom middle of page of John Hancock Medium
Capitalization Growth Fund. Caption below reads "Fund management team
leader Paul Berlinguet."]
Declines in technology
Among the biggest drags on performance were McLeodUSA and XO
Communications, new telecom entrants that fell sharply as the sector moved
out of favor with investors. Several biotech-related stocks also cost the
Fund dearly, including Applera Corp.-Applied Biosystems Group, which
supplies analytical equipment to biotech companies, and Immunex, a
biopharmaceutical company that specializes in autoimmune disorders. In the
technology area, Mercury Interactive, a software testing company, and
Comverse Technology, a company that develops software for telecom
companies, suffered as tech spending slowed. We cut our losses and sold
all these names.
[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 5% with -25% at the
bottom and 0% at the top. The first bar represents the -21.64% total
return for John Hancock Medium Capitalization Growth Fund. The second
bar represents the -16.91% total return for Average mid-cap growth fund.
The third bar represents the -13.89% total return for Russell Midcap
Growth Index. A note below the chart reads "The total return for John
Hancock Medium Capitalization Growth Fund is at net asset value with all
distributions reinvested. The average mid-cap growth fund is tracked by
Lipper, Inc. See the following page for historical performance
information."]
Gains in finance and health care
By contrast, finance investments such as USA Education, a student loan
company; Concord EFS, a transaction processor; and Affiliated Managers, an
asset management company, all posted strong returns thanks to their steady
earnings growth. In the health-care area, Teva Pharmaceutical Industries,
which has a strong product pipeline, and King Pharmaceuticals, which has a
new cardiovascular drug, also did quite well. We took profits in the
latter. Retailers like Abercrombie & Fitch and BJ's Wholesale Club (which
we sold) also rallied nicely as consumer spending held steady.
Focus on predictability
In the spring, we stepped up the Fund's emphasis on companies that have
predictable or visible earnings growth and currently enjoy favorable
pricing trends. We reduced our total number of investments, selling more
volatile names in the telecom, biotech and software areas. Our disciplined
investment approach kept us focused on stocks like Dobson Communications,
a wireless company with long-term contracts and little direct competition,
as well as health-care companies like Wellpoint Health Networks, Universal
Health Services and Express Scripts that have predictable earnings growth.
"...we
stepped up
the Fund's
emphasis on
companies
that have
predictable
or visible
earnings
growth..."
Buying opportunities
We added to our media investments, buying names like USA Networks that
should benefit from having a highly diversified portfolio. We also
increased our stake in semiconductor and semiconductor capital equipment
names, anticipating that corporations will soon be in the midst of a
personal computer upgrade cycle and chip makers will be upgrading to the
newest manufacturing technology.
A look ahead
Near term, our main concern for the market is whether the terrorist acts
that occurred shortly after the period ended could further delay a
recovery by derailing consumer and business confidence. We believe,
however, that the market outlook will improve over time, as the Federal
Reserve's interest-rate cuts and additional government economic stimulus
will lead eventually to economic recovery.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (4/11/95)
------- ------- ------- -------
Cumulative Total Returns (21.64%) (49.98%) 15.98% 59.77%
Average Annual Total Returns -- (49.98%) 3.01% 7.61%
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 Medium
Capitalization Growth 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 Russell Midcap Growth Index -- an unmanaged
index that contains those Russell Midcap securities with a
greater-than-average growth orientation. It is not possible to invest in
an index. Past performance is no guarantee of future results.
[Line chart with the heading John Hancock Medium Capitalization Growth
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 Russell Midcap Growth Index and is equal to $20,620 as of
August 31, 2001. The second line represents the value of the
hypothetical $10,000 investment made in the John Hancock Medium
Capitalization Growth Fund on April 11, 1995 and is equal to $15,977 as
of August 31, 2001.]
BY BERNICE S. BEHAR, CFA, PORTFOLIO MANAGEMENT TEAM LEADER,
AND ANURAG PANDIT, CFA, PORTFOLIO MANAGER
John Hancock
Focused Small Cap
Growth Fund
Slowing economy and waning profits sink the stock market
See the prospectus for the the risks of investing in small-cap stocks.
On July 1, 2001, the John Hancock Small Capitalization Growth Fund was
renamed John Hancock Focused Small Cap Growth Fund to more accurately
reflect its concentrated management style.
Over the last six months, the stock market was hit by a continuing stream
of bad economic and corporate earnings news. With the exception of a rally
in growth stocks in April on the hopes that seven interest-rate cuts by
the Federal Reserve would reboot the economy by fall, stocks have mostly
headed south. Investors became increasingly discouraged about the sharp
drop in business spending -- particularly on technology -- as well as by
signs that the world's major economies may be shrinking at once, and a
growing number of layoffs that could eventually undermine consumer
confidence. Less expensive value stocks continued to hold up better than
growth stocks, and small stocks outperformed large. Overall, the major
market indexes ended the period in negative territory, and investor
sentiment remained decidedly wary.
"The recent
decline in
commodities
prices
caused a
sharp selloff
in
energy
stocks..."
[A 2" x 2 1/2" photo at bottom middle of page of John Hancock Focused
Small Cap Growth Fund. Caption below reads "Fund management team leader
Bernice Behar."]
Fund performance
For the six months ended August 31, 2001, John Hancock Focused Small Cap
Growth Fund posted a total return of -11.73% at net asset value. That
compared with the -5.10% return of the average small-cap growth fund,
according to Lipper, Inc., and the -8.03% of the Fund's benchmark index,
the Russell 2000 Growth Index. Historical performance information can be
found on page 15.
Energy, IT consultants, telecom hurt fund
Our relative underperformance stemmed from our overweightings in energy
and information technology (IT) consulting companies. The recent decline
in commodities prices caused a sharp sell-off in energy stocks, as
earnings estimates for next year got revised downward. As a result, we
have pared our energy stake in this less favorable environment, although
we continue to believe the longer-term outlook for the energy industry is
good, given the tight supply picture. Our stake in IT companies hurt us as
demand for IT services slowed dramatically, even for companies with strong
franchises and niche markets like Forrester Research and Management
Network Group.
[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 -12% at the
bottom and 0% at the top. The first bar represents the -11.73% total
return for John Hancock Focused Small Cap Growth Fund. The second bar
represents the -5.10% total return for Average small-cap growth fund.
The third bar represents the -8.03% total return for Russell 2000 Growth
Index. A note below the chart reads "The total return for John Hancock
Focused Small Cap Growth Fund is at net asset value with all
distributions reinvested. The average small-cap growth fund is tracked
by Lipper, Inc. See the following page for historical performance
information."]
"More
recently, we
have begun
to bring
our tech
weight back
up to a
market
average..."
Our telecommunications services companies also fell hard as the demand for
all kinds of products and services ground to a halt. The telecom meltdown
hurt Fund holdings SBA Communications, Winstar Communications, CTC
Communications Group and Dobson Communications. We cut our losses and sold
all but SBA, which provides communications towers to wireless providers.
Defensive names help, tech boosted
Our investments in more defensive companies with relative earnings
stability served us well, although their gains were not enough to overcome
other losses. In particular, health-care service companies were boosted by
their perception as steady growers and by rising drug prices. Accredo
Health, a specialty pharmaceutical distributor, was one of our better
performers. We also did well with our defensive position in some
consumer-oriented companies such as Whole Foods Market, which owns the
chain of Bread & Circus gourmet stores.
At the beginning of the period, we had scaled back our technology
weighting to below the market average, given the lack of earnings
visibility or growth prospects. More recently, we have begun to bring our
tech weight back up to a market average, because we believe we need to be
positioned to take advantage of a potential rebound in fundamentals next
year.
Outlook
As we went to publication with this report, the tragic terrorist attacks
on the World Trade Center and Pentagon had just rocked the nation. Please
be assured that we will closely monitor the impact of these events on the
financial markets and will act to adjust our investment posture where we
see fit, continuing, of course, to focus on fundamentals and to apply
in-depth security analysis. We are also fully confident that despite any
short-term impact, the resilience of the U.S. people and the economy will
outlast the shock of these events.
See the prospectus for a discussion of the risks of investing in
small-cap stocks.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (5/2/96)
------- ------- ------- -------
Cumulative Total Returns (11.73%) (50.87%) 36.65% 50.15%
Average Annual Total Returns -- (50.87%) 6.44% 7.92%
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
Focused Small Cap Growth 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 Russell 2000 Index and the Russell 2000
Growth Index. The Russell 2000 Index is an unmanaged small-cap index
composed of 2,000 U.S. stocks. The Russell 2000 Growth Index is an
unmanaged index containing Russell 2000 Index stocks with a
greater-than-average growth orientation. It is not possible to invest in
an index. Past performance is no guarantee of future results.
[Line chart with the heading John Hancock Focused Small Cap Growth Fund,
representing the growth of a hypothetical $10,000 investment over the
life of the fund. Within the chart are three lines. The first line
represents the value of the hypothetical $10,000 investment made in the
John Hancock Focused Small Cap Growth Fund on May 2, 1996 and is equal to
$15,015 as of August 31, 2001. The second line represents the Russell
2000 Index and is equal to $14,430 as of August 31, 2001. The third line
represents the Russell 2000 Growth Index and is equal to $10,639 as of
August 31, 2001.]
BY TIMOTHY E. QUINLISK, CFA, PORTFOLIO MANAGEMENT TEAM LEADER, AND
R. SCOTT MAYO, CFA, AND JAMES S. YU, CFA, PORTFOLIO MANAGERS
John Hancock
Small Cap Equity Fund
Small-cap stocks shine in market decline
On September 30, 2001, John Hancock Small Capitalization Value Fund was
renamed John Hancock Small Cap Equity Fund to better reflect the Fund's
investment strategy.
Small-cap stocks held up well amid the stock market's continued
volatility. The market rallied in the spring on the belief that both the
Federal Reserve's numerous interest-rate cuts and strong consumer spending
would help the economy stabilize and then turn around. But further signs
of deterioration, followed by second-quarter earnings disappointments,
soon triggered sell-offs in the market. Small-cap stocks, however, fared
better than most other sectors, benefiting from access to cheaper capital
and a lack of overseas exposure. The Russell 2000 Index returned -0.51%
for the six months ended August 31, 2001, compared with the -7.87% return
for the broader Standard & Poor's 500 Index.
"We
maintained
above-
average
stakes in
technology
and
telecom..."
Performance review
John Hancock Small Cap Equity Fund returned 2.31% at net asset value for
the six months ended August 31, 2001. Our results were slightly behind the
average small-cap core fund, which returned 3.71% over the same period,
according to Lipper, Inc. The Fund benefited from its strategy of buying
great businesses when their stocks are selling at cheap prices. Strong
stock selection and an above-average stake in technology, solid gains in
health care and a below-average investment in the weak energy sector also
helped performance. The Fund lost some ground from its underweighting in
the financial sector, as well as poor performance among selected media and
food stocks.
[A 2" x 2 1/2" photo at bottom middle of page of John Hancock Small Cap
Equity Fund. Caption below reads "Fund management team leader Tim
Quinlisk."]
Strong stock selection
Our technology related investments did quite well, especially Alpha
Industries, a wireless semiconductor company; MKS Instruments, a
semiconductor capital equipment company; and Three-Five Systems, a company
that makes liquid crystal displays for wireless phones. All moved up in
anticipation of improved business prospects related to the holiday selling
season and economic recovery. Several other stocks posted strong gains
from turnarounds, including Casella Waste Systems, a waste management
company; Covance, a pharmaceutical contract research organization;
ProQuest (formerly Bell & Howell), an information services firm; and
Pathmark Stores, a supermarket chain emerging from bankruptcy. Other
standouts included NOVA, a transactions processing company whose value was
realized through an acquisition by U.S. Bancorp, and XM Satellite Radio
Holdings, a satellite radio company that began rolling out its new
service.
[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 -1% at the
bottom and 4% at the top. The first bar represents the 2.31% total
return for John Hancock Small Cap Equity Fund. The second bar represents
the 3.71% total return for Average small-cap core fund. The third bar
represents the -0.51% total return for Russell 2000 Index. A note below
the chart reads "The total return for John Hancock Small Cap Equity Fund
is at net asset value with all distributions reinvested. The average
small-cap core fund is tracked by Lipper, Inc. See the following page
for historical performance information."]
Near-term weakness
Unfortunately, some of our worst performers were also large investments.
Pegasus Communications, a direct television company, suffered near term
from changing its business model to focus on cash flow and profitability
over subscriber growth. Hain Celestial Group struggled with integration
issues surrounding its recent merger. Vicor, a power supply company, and
Alpharma, a generic drug company, saw more modest stock price declines
related to the difficult market environment. In the leisure area,
disappointments included Six Flags, an amusement park chain hurt by rainy
weather this past summer, and Penton Media, a trade publication company
whose stock we sold. Selected software stocks like Aspen Technology and
Parametric Technology also suffered sharp drops as technology spending
slowed.
Opportunities ahead
We maintained above-average stakes in technology and telecom, which are
not traditional value sectors, because that was where we found companies
with great businesses whose stock prices were selling at a discount. We
also boosted our media stake, adding stocks like Cumulus Media, a radio
company that should benefit as the economy improves and companies increase
their spending on advertising. We began rebuilding our investment in
energy with companies like Chesapeake Energy whose stock price had fallen
as commodity prices weakened.
"Near term
we expect
further
market
volatility..."
Looking forward
Near term we expect further market volatility, as the terrorist acts that
occurred shortly after the end of the period could slow consumer spending
and delay a recovery. Further out, we expect small-cap stocks to benefit
from lower interest rates, which should provide them with access to
cheaper capital and eventually trigger an economic recovery. As always, we
plan to stick with our disciplined strategy, taking advantage of market
volatility to buy great companies at bargain prices.
See the prospectus for a discussion of the risks of investing in small-cap
stocks.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (4/19/95)
------- ------- ------- -------
Cumulative Total Returns 2.31% (11.49%) 189.87% 227.21%
Average Annual Total Returns -- (11.49%) 23.72% 20.46%
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
Small Cap Equity 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 Russell 2000 Index -- an unmanaged,
small-cap index composed of 2,000 U.S stocks. It is not possible to
invest in an index. Past performance is no guarantee of future results.
[Line chart with the heading John Hancock Small Cap Equity 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 value of the hypothetical $10,000 investment made in the
John Hancock Small Cap Equity Fund on April 19, 1995 and is equal to
$32,721 as of August 31, 2001. The second line represents the Russell
2000 Index and is equal to $19,617 as of August 31, 2001.]
BY LORETTA MORRIS AND RANDY KAHN
FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
International Equity Fund
International stocks decline amid slowing global growth
During the six months ended August 31, 2001, international stock markets
continued to reflect weakness in economies worldwide. Slowing growth in
non-U.S. developed nations, coupled with the ongoing unwillingness of the
European Central Bank (ECB) to reduce interest rates and ongoing
uncertainty in Japan, sent international stocks lower. For the reporting
period, non-U.S. stocks -- as represented by the MSCI All-Country World
Free ex-U.S. Index -- shed 11.51% of their value.
The central theme for most of 2001 has been the fall from grace of growth
stocks, as cautious investors have instead turned to value-oriented stocks
or alternative asset classes. Throughout most of the Eurozone nations,
consumer spending declined, exports fell and confidence waned. Despite
such a bleak outlook, the ECB remained focused on its mission to fight
higher-than-mandated levels of inflation. While central bankers were
aggressively cutting rates in other parts of the world -- including seven
rate cuts totaling 3.0% in the U.S. -- the ECB held firm, lowering rates
only twice during the period.
Meanwhile, lingering structural problems with the Japanese economy weighed
heavily on investor sentiment. Investors were initially optimistic
following the election of popular Prime Minister Junichiro Koizumi.
However, as the magnitude of Japan's problems -- growing unemployment, an
aging populace that will require rising social spending, the overhang of
bad debts and a weakening manufacturing sector -- became clear, its
benchmark Nikkei 225 Index sank sharply in June, July and August to touch
lows not seen since the early 1980s. Investors were further dismayed as
Koizumi began to backpedal on some of his key campaign promises as the
economic and political costs of their implementation began to emerge.
"The central
theme for
most of 2001
has been the
fall from
grace of
growth
stocks..."
Fund performance
Amid such challenging market conditions, John Hancock International Equity
Fund lost ground, returning -15.19% at net asset value. By comparison, the
average international fund returned -12.69%, according to Lipper, Inc.
See page 21 for historical performance information.
The Fund's underperformance for the period stemmed in large part from poor
stock selection in Japan and the United Kingdom. Despite a fundamentally
sound economic picture and stimulus from the Bank of England's surprise
rate cut in early August, U.K. stocks declined during the period. As for
Japan, the Fund had significantly decreased its exposure to that country
in light of its economic woes, but the Fund's holdings declined more than
the stocks in the benchmark as the growth segment continued to come under
tremendous pressure. During the reporting period, only holdings in
Singapore, Ireland and South Africa registered positive gains.
"...underperformance
...stemmed
in large
part from
poor stock
selection in
Japan and
the United
Kingdom."
[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 5% with -20% at the
bottom and 0% at the top. The first bar represents the -15.19% total
return for John Hancock International Equity Fund. The second bar
represents the -12.69% total return for Average international fund. The
third bar represents the -11.51% total return for MSCI All Country World
Free Ex-U.S. Index. A note below the chart reads "The total return for
John Hancock International Equity Fund is at net asset value with all
distributions reinvested. The average international fund is tracked by
Lipper, Inc. See the following page for historical performance
information."]
From a sector standpoint, commercial/industrial services, energy and
financial services stocks were especially hard hit. For the six months
ended August 31, 2001, every sector in the benchmark save energy was down
- -- in most cases by a significant margin. Holdings in the consumer
durables group were the lone bright spot for the period, while stock
selection in the health-care sector and an underweight position in the
technology area helped limit the Fund's overall decline.
Looking ahead
Days after the period ended, the world was stunned by the devastating
terrorist attack on the United States. Beyond any short-term volatility
that may be understandably triggered by such a catastrophe, we believe
that broader economic factors and events will influence stock markets
worldwide over the long term. We remain confident that the actions of
global central bankers will be positive for the financial markets.
In these difficult times, as always, we at Nicholas-Applegate continue to
adhere to our proven investment philosophy and process. We continue to
seek out and invest in companies with solid fundamentals that we believe
are poised to capitalize on positive, sustainable change in the
short-to-intermediate term. We believe this approach will reward investors
with significant capital appreciation over time.
International investing involves special risks such as political, economic
and currency risks, and differences in accounting standards and financial
reporting.
A LOOK AT PERFORMANCE
For the period ended August 31, 2001
SINCE
SIX ONE FIVE INCEPTION
MONTHS YEAR YEARS (3/30/95)
------- ------- ------- -------
Cumulative Total Returns (15.19%) (35.50%) (12.37%) (4.61%)
Average Annual Total Returns -- (35.50%) (2.61%) (0.73%)
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
International Equity 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 Morgan Stanley Capital International (MSCI) All
Country World Free Ex-U.S. Index -- an unmanaged index that measures the
performance of both developed and emerging foreign stock markets. The
index represents freely traded stocks. It is not possible to invest in an
index. Past performance is no guarantee of future results.
[Line chart with the heading John Hancock International Equity 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 MSCI All Country World Free Ex-U.S. Index and is equal to
$12,554 as of August 31, 2001. The second line represents the value of
the hypothetical $10,000 investment made in the John Hancock
International Equity Fund on March 30, 1995 and is equal to $9,539 as of
August 31, 2001.]
FINANCIAL STATEMENTS
John Hancock Funds -- Institutional Series Trust
Statement of Assets and Liabilities
August 31, 2001 (Unaudited)
- ----------------------------------------------------------------------------------------------------------
ACTIVE DIVIDEND MEDIUM
BOND PERFORMERS CAPITALIZATION
FUND FUND GROWTH FUND
----------------- ----------------- -----------------
Assets:
Investments at value (cost -
$8,479,023, $4,930,595 and
$6,288,327, respectively) $8,712,699 $5,399,683 $6,245,007
Cash 578 332 --
Receivable for investments sold 66,782 -- 190,350
Dividends and interest receivable 106,548 7,856 1,179
Receivable from affiliates 3,074 2,538 4,054
Other assets 580 1,717 3,515
----------- ----------- -----------
Total assets 8,890,261 5,412,126 6,444,105
- ----------------------------------------------------------------------------------------------------------
Liabilities:
Due to custodian -- -- 380,717
Payable for investments purchased 143,519 -- 44,367
Accounts payable and accrued
expenses 22,683 15,133 23,935
----------- ----------- -----------
Total liabilities 166,202 15,133 449,019
- ----------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 8,597,498 3,713,238 7,231,316
Accumulated net realized gain
(loss) on investments and foreign
currency transactions (82,771) 1,207,529 (1,163,835)
Net unrealized appreciation
(depreciation) of investments and
translation of assets and
liabilities in foreign currencies 233,507 469,088 (43,320)
Undistributed net investment income
(accumulated net investment loss) (24,175) 7,138 (29,075)
----------- ----------- -----------
Net assets $8,724,059 $5,396,993 $5,995,086
==========================================================================================================
Net Asset Value Per Share:
(Based on 999,237, 521,466 and
745,937 shares, respectively, of
beneficial interest outstanding -
unlimited number of shares
authorized with no par value) $8.73 $10.35 $8.04
==========================================================================================================
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 Assets and Liabilities (continued)
August 31, 2001 (Unaudited)
- ----------------------------------------------------------------------------------------------------------
FOCUSED SMALL CAP INTERNATIONAL
SMALL CAP EQUITY EQUITY
GROWTH FUND FUND FUND
----------------- ----------------- -----------------
Assets:
Investments at value (cost -
$4,778,687, $35,596,383 and
$5,116,029, respectively) $4,852,652 $32,491,151 $4,903,090
Cash 144 -- 492
Foreign currency, at value (cost -
none, none and $73,505,
respectively) -- -- 73,500
Receivable for investments sold -- 1,005,064 --
Receivable for shares sold -- 11,171 157,239
Dividends and interest receivable 129 3,071 11,806
Receivable from affiliates 2,395 -- 7,047
Other assets 550 1,618 1,187
----------- ----------- -----------
Total assets 4,855,870 33,512,075 5,154,361
- ----------------------------------------------------------------------------------------------------------
Liabilities:
Due to custodian -- 351,280 --
Payable for investments purchased 11,576 12,443 125,955
Payable for shares repurchased 2,750 16,880 --
Payable for securities on loan -- -- 585,960
Payable for forward foreign
currency exchange contracts -- -- 9,418
Payable to affiliates -- 15,526 --
Accounts payable and accrued
expenses 17,426 28,638 34,739
----------- ----------- -----------
Total liabilities 31,752 424,767 756,072
- ----------------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 7,102,710 33,435,585 6,713,718
Accumulated net realized gain
(loss) on investments and foreign
currency transactions (2,338,368) 2,816,393 (2,085,800)
Net unrealized appreciation
(depreciation) of investments and
translation of assets and
liabilities in foreign currencies 73,965 (3,105,232) (222,801)
Accumulated net investment loss,
distributions in excess of net
investment income (14,189) (59,438) (6,828)
----------- ----------- -----------
Net assets $4,824,118 $33,087,308 $4,398,289
==========================================================================================================
Net Asset Value Per Share:
(Based on 520,896, 2,666,082 and
630,122 shares, respectively, of
beneficial interest outstanding -
unlimited number of shares
authorized with no par value) $9.26 $12.41 $6.98
==========================================================================================================
See notes to financial statements.
Statement of Operations
Six months ended August 31, 2001 (Unaudited)
- ----------------------------------------------------------------------------------------------------------
ACTIVE DIVIDEND MEDIUM
BOND PERFORMERS CAPITALIZATION
FUND FUND GROWTH FUND
----------------- ----------------- -----------------
Investment Income:
Dividends (net of foreign
withholding tax of none, $113 and
$45, respectively) -- $39,144 $7,000
Interest $263,115 4,535 5,874
Securities lending -- -- 1,531
----------- ----------- -----------
Total investment income 263,115 43,679 14,405
- ----------------------------------------------------------------------------------------------------------
Expenses:
Investment management fee 20,149 17,512 36,825
Custodian fee 19,925 4,615 13,042
Registration and filing fee 10,500 13,742 10,646
Auditing fee 9,187 7,814 8,280
Printing 3,323 2,814 3,185
Transfer agent fee 2,015 1,459 2,301
Accounting and legal services fee 811 586 921
Miscellaneous 336 601 463
Trustees' fee 166 55 576
Legal fee 47 57 62
----------- ----------- -----------
Total expenses 66,459 49,255 76,301
Less expense reductions (42,280) (28,825) (34,873)
- ----------------------------------------------------------------------------------------------------------
Net expenses 24,179 20,430 41,428
- ----------------------------------------------------------------------------------------------------------
Net investment income (loss) 238,936 23,249 (27,023)
- ----------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments 83,309 147,006 (1,763,818)
Foreign currency transactions (2) -- (3)
Change in net unrealized
appreciation (depreciation) on:
Investments 46,818 (554,242) (299,829)
Translation of assets and
liabilities in foreign currencies (169) -- --
----------- ----------- -----------
Net realized and unrealized gain
(loss) 129,956 (407,236) (2,063,650)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations $368,892 ($383,987) ($2,090,673)
==========================================================================================================
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 (losses) for the period stated.
See notes to financial statements.
Statement of Operations (continued)
Six months ended August 31, 2001 (Unaudited)
- ----------------------------------------------------------------------------------------------------------
FOCUSED SMALL CAP INTERNATIONAL
SMALL CAP EQUITY EQUITY
GROWTH FUND FUND FUND
----------------- ----------------- -----------------
Investment Income:
Dividends (net of foreign
withholding tax of none, none and
$6,985, respectively) $626 $14,860 $48,480
Interest 2,851 3,618 8,748
Securities lending 5,853 54,089 5,444
----------- ----------- -----------
Total investment income 9,330 72,567 62,672
- ----------------------------------------------------------------------------------------------------------
Expenses:
Investment management fee 20,646 114,571 25,289
Registration and filing fee 13,443 12,615 10,565
Custodian fee 8,487 13,826 59,122
Auditing fee 7,574 8,835 9,036
Printing 3,322 4,140 5,653
Transfer agent fee 1,290 8,184 1,405
Organization expense 714 -- --
Accounting and legal services fee 519 3,300 564
Miscellaneous 243 398 463
Trustees' fee 209 725 158
Legal fee 36 203 255
Interest expense -- 3,162 --
----------- ----------- -----------
Total expenses 56,483 169,959 112,510
Less expense reductions (33,256) (39,020) (84,411)
- ----------------------------------------------------------------------------------------------------------
Net expenses 23,227 130,939 28,099
- ----------------------------------------------------------------------------------------------------------
Net investment income (loss) (13,897) (58,372) 34,573
- ----------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments (1,073,792) 1,941,406 (719,804)
Foreign currency transactions -- -- (151,741)
Change in net unrealized
appreciation (depreciation) on:
Investments 448,558 (1,384,548) (41,985)
Translation of assets and
liabilities in foreign currencies -- -- (9,210)
----------- ----------- -----------
Net realized and unrealized gain
(loss) (625,234) 556,858 (922,740)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations ($639,131) $498,486 ($888,167)
==========================================================================================================
See notes to financial statements.
Statements of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
ACTIVE BOND DIVIDEND PERFORMERS
FUND FUND
--------------------------------------- ---------------------------------------
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 $368,916 $238,936 $95,088 $23,249
Net realized gain 18,772 83,307 2,380,858 147,006
Change in net unrealized
appreciation (depreciation) 304,795 46,649 (1,356,247) (554,242)
----------- ----------- ----------- -----------
Net increase (decrease) in net
assets resulting from operations 692,483 368,892 1,119,699 (383,987)
----------- ----------- ----------- -----------
Distributions to Shareholders:
From net investment income (370,991) (243,630) (100,614) (27,059)
From net realized gain -- -- (2,068,903) --
----------- ----------- ----------- -----------
Total distributions to shareholders (370,991) (243,630) (2,169,517) (27,059)
----------- ----------- ----------- -----------
From Portfolio Share Transactions: *
Shares sold 4,430,138 2,630,388 4,639,407 710,852
Shares issued to shareholders in
reinvestment of distributions 366,504 226,404 2,169,758 27,227
Less shares repurchased (2,535,098) (1,063,208) (14,419,671) (1,132,347)
----------- ----------- ----------- -----------
Net increase (decrease) 2,261,544 1,793,584 (7,610,506) (394,268)
----------- ----------- ----------- -----------
Net Assets:
Beginning of period 4,222,177 6,805,213 14,862,631 6,202,307
----------- ----------- ----------- -----------
End of period (including
undistributed (distributions in
excess of) net investment income
of ($2,962), ($24,175), $10,948
and $7,138, respectively) $6,805,213 $8,724,059 $6,202,307 $5,396,993
=========== =========== =========== ===========
*Analysis of Portfolio Share
Transactions:
Shares sold 535,238 306,342 320,516 64,522
Shares issued to shareholders in
reinvestment of distributions 44,172 26,376 183,485 2,521
Less shares repurchased (307,954) (123,625) (1,047,503) (102,181)
----------- ----------- ----------- -----------
Net increase (decrease) 271,456 209,093 (543,502) (35,138)
=========== =========== =========== ===========
The Statement of Changes in Net Assets shows how the value of each Fund's
net assets has changed since the previous period. The difference reflects
net investment income, any investment and foreign currency 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)
- ---------------------------------------------------------------------------------------------------------------------------
MEDIUM CAPITALIZATION FOCUSED SMALL CAP
GROWTH FUND GROWTH FUND
--------------------------------------- ---------------------------------------
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 loss ($112,124) ($27,023) ($43,724) ($13,897)
Net realized gain (loss) 2,260,504 (1,763,821) (1,172,422) (1,073,792)
Change in net unrealized
appreciation (depreciation) (12,919,604) (299,829) (3,958,158) 448,558
----------- ----------- ----------- -----------
Net increase (decrease) in net
assets resulting from operations (10,771,224) (2,090,673) (5,174,304) (639,131)
----------- ----------- ----------- -----------
Distributions to Shareholders:
From net investment income -- -- -- --
From net realized gain (4,552,005) -- (853,819) --
----------- ----------- ----------- -----------
Total distributions to shareholders (4,552,005) -- (853,819) --
----------- ----------- ----------- -----------
From Portfolio Share Transactions: *
Shares sold 23,310,057 1,791,537 8,114,648 1,049,251
Shares issued to shareholders in
reinvestment of distributions 4,512,270 -- 856,091 --
Less shares repurchased (37,893,065) (5,204,631) (6,392,389) (1,044,408)
----------- ----------- ----------- -----------
Net Increase (Decrease) (10,070,738) (3,413,094) 2,578,350 4,843
----------- ----------- ----------- -----------
Net Assets:
Beginning of period 36,892,820 11,498,853 8,908,179 5,458,406
----------- ----------- ----------- -----------
End of period (including
accumulated net investment loss,
distributions in excess of net
investment income, of ($2,052),
($29,075), ($292) and ($14,189),
respectively) $11,498,853 $5,995,086 $5,458,406 $4,824,118
=========== =========== =========== ===========
*Analysis of Portfolio Share
Transactions:
Shares sold 1,245,050 189,860 432,156 104,854
Shares issued to shareholders in
reinvestment of distributions 366,810 -- 70,365 --
Less shares repurchased (2,239,222) (564,896) (346,807) (104,346)
----------- ----------- ----------- -----------
Net increase (decrease) (627,362) (375,036) 155,714 508
=========== =========== =========== ===========
See notes to financial statements.
Statements of Changes in Net Assets (continued)
- ---------------------------------------------------------------------------------------------------------------------------
SMALL CAP INTERNATIONAL
EQUITY FUND EQUITY FUND
--------------------------------------- ---------------------------------------
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 (loss) ($69,025) ($58,372) $43,466 $34,573
Net realized gain (loss) 6,078,320 1,941,406 (1,169,908) (871,545)
Change in net unrealized
appreciation (depreciation) (8,772,416) (1,384,548) (3,005,103) (51,195)
----------- ----------- ----------- -----------
Net increase (decrease) in net
assets resulting from operations (2,763,121) 498,486 (4,131,545) (888,167)
----------- ----------- ----------- -----------
Distributions to Shareholders:
From net investment income (49,153) -- (32,472) --
From net realized gain (6,670,587) -- (387,846) --
----------- ----------- ----------- -----------
Total distributions to shareholders (6,719,740) -- (420,318) --
----------- ----------- ----------- -----------
From Portfolio Share Transactions: *
Shares sold 17,123,240 6,869,840 5,627,681 9,037,017
Shares issued to shareholders in
reinvestment of distributions 6,721,015 -- 420,270 --
Less shares repurchased (8,436,558) (4,464,440) (8,484,719) (9,609,953)
----------- ----------- ----------- -----------
Net increase (decrease) 15,407,697 2,405,400 (2,436,768) (572,936)
----------- ----------- ----------- -----------
Net Assets:
Beginning of period 24,258,586 30,183,422 12,848,023 5,859,392
----------- ----------- ----------- -----------
End of period (including
accumulated net investment loss,
distributions in excess of net
investment income, of ($1,066),
($59,438), ($41,401) and
($6,828), respectively) $30,183,422 $33,087,308 $5,859,392 $4,398,289
=========== =========== =========== ===========
*Analysis of Portfolio Share
Transactions:
Shares sold 1,077,952 532,620 469,845 1,181,823
Shares issued to shareholders in
reinvestment of distributions 611,557 -- 45,781 --
Less shares repurchased (541,612) (355,648) (766,906) (1,263,904)
----------- ----------- ----------- -----------
Net increase (decrease) 1,147,897 176,972 (251,280) (82,081)
=========== =========== =========== ===========
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Active Bond Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns,
key ratios and supplemental data are listed as follows:
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED
---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001
1997 1998 1999 2000 2001 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $8.64 $8.54 $8.83 $8.59 $8.14 $8.61
-------- -------- -------- -------- -------- --------
Net Investment Income (1) 0.60 0.59 0.56 0.58 0.56 0.25
Net Realized and Unrealized
Gain (Loss) on Investments (0.09) 0.34 (0.02) (0.43) 0.47 0.13
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 0.51 0.93 0.54 0.15 1.03 0.38
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.60) (0.59) (0.56) (0.58) (0.56) (0.26)
In Excess of Net Investment
Income -- --(2) --(2) --(2) -- --
From Net Realized Gain (0.01) (0.05) (0.22) (0.02) -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.61) (0.64) (0.78) (0.60) (0.56) (0.26)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $8.54 $8.83 $8.59 $8.14 $8.61 $8.73
======== ======== ======== ======== ======== ========
Total Investment Return (3,4) 6.17% 11.25% 6.24% 1.83% 13.11% 4.56%(5)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $2,191 $5,158 $5,686 $4,222 $6,805 $8,724
Ratio of Expenses to Average
Net Assets 0.60% 0.60% 0.60% 0.60% 0.60% 0.60%(6)
Ratio of Adjusted Expenses to
Average Net Assets (7,8) 4.05% 2.64% 2.33% 2.93% 2.03% 1.65%(6)
Ratio of Net Investment
Income to Average Net Assets 7.10% 6.78% 6.36% 6.88% 6.74% 5.93%(6,9)
Portfolio Turnover Rate 136% 230% 356% 301% 327% 133%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Total investment return assumes dividend reinvestment.
(4) Total returns would have been lower had certain expenses not been reduced during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Does not take into consideration expense reductions during the periods shown.
(8) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow.
(9) Had the Fund not amortized premiums on debt securities, the annualized ratio of net investment income to average net assets
would have been 6.13%.
The Financial Highlights summarizes the impact of the following factors on
a single share for each period indicated: net investment income, gains
(losses), dividends and total investment return of the Fund. It shows how
the Fund's net asset value for a share has changed since the end of the
previous period. 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 -- Dividend Performers Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns,
key ratios and supplemental data are listed as follows:
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED
---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001
1997 1998 1999 2000 2001 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $10.15 $11.91 $14.92 $14.46 $13.51 $11.14
-------- -------- -------- -------- -------- --------
Net Investment Income (1) 0.21 0.18 0.15 0.11 0.10 0.04
Net Realized and Unrealized
Gain (Loss) on Investments 1.92 3.92 1.04 0.60 0.45 (0.78)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 2.13 4.10 1.19 0.71 0.55 (0.74)
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.18) (0.17) (0.15) (0.11) (0.11) (0.05)
From Net Realized Gain (0.19) (0.92) (1.50) (1.55) (2.81) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.37) (1.09) (1.65) (1.66) (2.92) (0.05)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $11.91 $14.92 $14.46 $13.51 $11.14 $10.35
======== ======== ======== ======== ======== ========
Total Investment Return (2,3) 21.26% 35.55% 7.97% 4.17% 2.94% (6.65%)(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $8,668 $20,884 $17,743 $14,863 $6,202 $5,397
Ratio of Expenses to Average
Net Assets 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%(5)
Ratio of Adjusted Expenses to
Average Net Assets (6,7) 1.89% 1.02% 0.95% 1.05% 1.08% 1.69%(5)
Ratio of Net Investment
Income to Average Net Assets 1.94% 1.31% 0.95% 0.71% 0.73% 0.80%(5)
Portfolio Turnover Rate 37% 77% 64% 46% 58% 19%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return 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) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Medium Capitalization Growth Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns,
key ratios and supplemental data are listed as follows:
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED
---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001
1997 1998 1999 2000 2001 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $10.69 $12.67 $13.51 $10.99 $21.10 $10.26
-------- -------- -------- -------- -------- --------
Net Investment Income
(Loss)(1) 0.01 --(2) (0.02) (0.05) (0.07) (0.03)
Net Realized and Unrealized
Gain (Loss) on Investments 2.02 2.06 (0.68) 10.71 (7.44) (2.19)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 2.03 2.06 (0.70) 10.66 (7.51) (2.22)
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income -- --(2) -- -- -- --
From Net Realized Gain (0.05) (1.22) (1.72) (0.55) (3.33) --
In Excess of Net Realized
Gain -- -- (0.10) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.05) (1.22) (1.82) (0.55) (3.33) --
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $12.67 $13.51 $10.99 $21.10 $10.26 $8.04
======== ======== ======== ======== ======== ========
Total Investment Return (3,4) 19.00% 17.39% (5.34%) 98.13% (38.23%) (21.64%)(5)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $29,085 $40,302 $16,687 $36,893 $11,499 $5,995
Ratio of Expenses to Average
Net Assets 0.90% 0.90% 0.90% 0.90% 0.90% 0.90%(6)
Ratio of Adjusted Expenses to
Average Net Assets (7,8) 1.42% 1.10% 1.11% 1.28% 1.15% 1.66%(6)
Ratio of Net Investment
Income (Loss) to Average Net
Assets 0.06% 0.03% (0.13%) (0.37%) (0.40%) (0.59%)(6)
Portfolio Turnover Rate 281% 341% 116% 153% 181% 118%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Less than $0.01 per share.
(3) Total investment return assumes dividend reinvestment.
(4) Total returns would have been lower had certain expenses not been reduced during the periods shown.
(5) Not annualized.
(6) Annualized.
(7) Does not take into consideration expense reductions during the periods shown.
(8) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Focused Small Cap Growth Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns,
key ratios and supplemental data are listed as follows:
- ----------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED
FEBRUARY 28, ------------------------ FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001
1997(1) 1998 1999 2000 2001 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $8.50 $9.24 $11.74 $11.65 $24.43 $10.49
-------- -------- -------- -------- -------- --------
Net Investment Income
(Loss)(2) 0.03 (0.03) (0.07) (0.09) (0.10) (0.03)
Net Realized and Unrealized
Gain (Loss) on Investments 0.73 2.53 0.61 15.13 (11.92) (1.20)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 0.76 2.50 0.54 15.04 (12.02) (1.23)
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.02) --(3) -- -- -- --
From Net Realized Gain -- -- (0.63) (2.26) (1.92) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.02) --(3) (0.63) (2.26) (1.92) --
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $9.24 $11.74 $11.65 $24.43 $10.49 $9.26
======== ======== ======== ======== ======== ========
Total Investment Return (4,5) 8.89%(6) 27.07% 4.67% 136.18% (50.27%) (11.73%)(6)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $999 $3,102 $2,453 $8,908 $5,458 $4,824
Ratio of Expenses to Average
Net Assets 0.90%(7) 0.90% 0.90% 0.90% 0.90% 0.90%(7)
Ratio of Adjusted Expenses to
Average Net Assets (8,9) 16.24%(7) 4.05% 4.12% 3.19% 2.04% 2.19%(7)
Ratio of Net Investment
Income (Loss) to Average Net
Assets 0.35%(7) (0.25%) (0.60%) (0.57%) (0.56%) (0.54%)(7)
Portfolio Turnover Rate 92% 117% 125% 238% 242% 73%
(1) The Fund commenced operations on May 2, 1996.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Less than $0.01 per share.
(4) Total investment return assumes dividend reinvestment.
(5) Total returns would have been lower had certain expenses not been reduced during the periods shown.
(6) Not annualized.
(7) Annualized.
(8) Does not take into consideration expense reductions during the periods shown.
(9) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Cap Equity Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns,
key ratios and supplemental data are listed as follows:
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED
---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001
1997 1998 1999 2000 2001 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $9.09 $9.38 $11.74 $9.16 $18.09 $12.13
-------- -------- -------- -------- -------- --------
Net Investment Income
(Loss)(1) 0.14 0.07 0.05 0.05 (0.04) (0.02)
Net Realized and Unrealized
Gain (Loss) on Investments 1.08 3.65 (1.23) 10.96 (2.18) 0.30
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 1.22 3.72 (1.18) 11.01 (2.22) 0.28
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.12) (0.10) (0.04) (0.06) (0.03) --
From Net Realized Gain (0.81) (1.26) (1.20) (2.02) (3.71) --
In Excess of Net Realized
Gain -- -- (0.16) -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions (0.93) (1.36) (1.40) (2.08) (3.74) --
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $9.38 $11.74 $9.16 $18.09 $12.13 $12.41
======== ======== ======== ======== ======== ========
Total Investment Return (2,3) 13.78% 41.81% (9.46%) 124.33% (10.14%) 2.31%(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $6,011 $9,549 $7,418 $24,259 $30,183 $33,087
Ratio of Expenses to Average
Net Assets 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%(5)
Ratio of Adjusted Expenses to
Average Net Assets (6,7) 1.83% 1.42% 1.46% 1.48% 1.04% 1.04%(5)
Ratio of Net Investment
Income (Loss) to Average Net
Assets 1.46% 0.62% 0.45% 0.37% (0.25%) (0.36%)(5)
Portfolio Turnover Rate 96% 216% 126% 104% 109% 34%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return 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) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- International Equity Fund
Financial Highlights (continued)
Selected data for a share of beneficial interest outstanding throughout each period indicated, investment returns,
key ratios and supplemental data are listed as follows:
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, YEAR ENDED YEAR ENDED SIX MONTHS ENDED
---------------------------------------- FEBRUARY 29, FEBRUARY 28, AUGUST 31, 2001
1997 1998 1999 2000 2001 (UNAUDITED)
-------- -------- -------- -------- -------- --------
Per Share Operating Performance
Net Asset Value, Beginning of
Period $9.24 $9.35 $9.63 $10.18 $13.33 $8.23
-------- -------- -------- -------- -------- --------
Net Investment Income (1) 0.12 0.06 0.07 0.07 0.04 0.05
Net Realized and Unrealized
Gain (Loss) on Investments 0.14 0.23 0.59 3.83 (4.63) (1.30)
-------- -------- -------- -------- -------- --------
Total from Investment
Operations 0.26 0.29 0.66 3.90 (4.59) (1.25)
-------- -------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.10) (0.01) (0.07) (0.07) (0.04) --
In Excess of Net Investment
Income -- -- (0.04) (0.04) -- --
From Net Realized Gain (0.05) -- -- (0.64) (0.47) --
-------- -------- -------- -------- -------- --------
Total Distributions (0.15) (0.01) (0.11) (0.75) (0.51) --
-------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $9.35 $9.63 $10.18 $13.33 $8.23 $6.98
======== ======== ======== ======== ======== ========
Total Investment Return (2,3) 2.79% 3.07% 6.88% 38.84% (34.85%) (15.19%)(4)
Ratios and Supplemental Data
Net Assets, End of Period
(000s omitted) $4,204 $7,983 $7,805 $12,848 $5,859 $4,398
Ratio of Expenses to Average
Net Assets 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%(5)
Ratio of Adjusted Expenses to
Average Net Assets (6,7) 3.32% 2.02% 2.73% 2.86% 3.46% 4.00%(5)
Ratio of Net Investment
Income to Average Net Assets 1.26% 0.60% 0.69% 0.59% 0.43% 1.23%(5)
Portfolio Turnover Rate 68% 125% 83% 139% 238% 96%
(1) Based on the average of the shares outstanding at the end of each month.
(2) Total investment return 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) Adjusted expenses as a percentage of average net assets are expected to decrease as the net assets of the Fund grow.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Active Bond Fund
Schedule of Investments
August 31, 2001 (Unaudited)
- ----------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
the Active Bond Fund on August 31, 2001. It's divided into three main
categories: bonds, preferred stocks and warrants and short-term
investments. The bonds are further broken down by industry group.
Short-term investments, which represent the Fund's "cash" position, are
listed last.
PAR VALUE
INTEREST CREDIT (000s
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------ ------- --------------
BONDS
Aerospace (0.69%)
Lockheed Martin Corp.,
Bond 12-01-29 8.500% BBB- $25 $29,219
Systems 2001 Asset Trust LLC,
Pass Thru Ctf Ser 2001 Class B
12-15-11 (R) 7.156 A 30 31,318
--------------
60,537
--------------
Agricultural Operations (0.41%)
Cargill, Inc.,
Note 05-01-06 (R) 6.250 A+ 35 35,860
--------------
Automobile/Trucks (2.22%)
DaimlerChrysler NA Holding Corp.
Note 01-18-31 8.500 A- 20 22,282
Delphi Automotive Systems Corp.,
Note 06-15-06 6.550 BBB 70 71,463
ERAC USA Finance Co.,
Note 02-15-05 (R) 6.625 BBB+ 6 6,063
Note 06-15-08 (R) 7.350 BBB+ 35 36,050
Note 12-15-09 (R) 7.950 BBB+ 45 48,139
Ford Motor Co.,
Note 07-16-31 7.450 A 10 9,905
--------------
193,902
--------------
Banks - Foreign (2.63%)
Abbey National First Capital, B.V.,
Sub Note (United Kingdom) 10-15-04, (Y) 8.200 AA- 80 88,174
Barclays Bank Plc,
Perpetual Bond (7.375% to 12-29-11
then variable) (United Kingdom)
06-29-49 (R), (Y) 7.375 A+ 20 20,800
Royal Bank of Scotland Group Plc,
Bond (United Kingdom) 03-31-49, (Y) 8.817 A- 10 10,917
Bond (United Kingdom) 08-31-49, (Y) 7.648 A- 20 20,185
Scotland International Finance No. 2, B.V.,
Gtd Sub Note (United Kingdom)
11-01-06 (R), (Y) 8.850 A 35 39,798
Skandinaviska Enskilda Banken AB,
Perpetual Bond (6.50% to 6-30-03
then variable) (Sweden) 12-29-49
(R), (Y) 6.500 BBB 20 20,298
UBS Preferred Funding Trust I,
Perpetual Bond (8.622% to 10-01-10
then variable) 10-01-49 8.622 AA- 25 29,150
--------------
229,322
--------------
Banks - United States (3.00%)
Bank of New York,
Cap Security 12-01-26 (R) 7.780 A- 25 26,319
Bank One Corp.,
Sub Note 08-01-10 7.875 A- 15 16,614
BNP Paribas Capital Trust,
Perpetual Bond (9.003% to 10-27-10
then variable) 12-27-49 (R) 9.003 A 20 22,717
Capital One Bank,
Sr Note 02-01-06 6.875 BBB- 15 15,083
Colonial Bank,
Sub Note 06-01-11 9.375 BBB- 30 31,949
RBSG Capital Corp.,
Gtd Cap Note 03-01-04 10.125 A 50 56,248
Wells Fargo Bank NA,
Sub Note 02-01-11 6.450 A+ 40 40,890
Zions Financial Corp.,
Note (6.95% to 5-15-06 then
variable) 05-15-11 (R) 6.950 BBB- 50 51,562
--------------
261,382
--------------
Beverages (0.17%)
Canandaigua Brands, Inc.,
Sr Sub Note Ser C 12-15-03 8.750 B+ 15 15,112
--------------
Broker Services (1.53%)
Citigroup, Inc.,
Note 01-18-11 6.500 AA- 35 36,161
Goldman Sachs Group, Inc.,
Bond 01-15-11 6.875 A+ 45 46,440
Morgan Stanley Dean Witter & Co.,
Bond 04-15-06 6.100 AA- 35 35,802
Salomon Smith Barney Holdings, Inc.,
Note 03-15-06 5.875 A 15 15,254
--------------
133,657
--------------
Building (0.46%)
Horton (D.R.), Inc.,
Sr Note 08-15-11 7.875 BB 10 9,700
Vulcan Materials Co.,
Note 02-01-06 6.400 A+ 30 30,863
--------------
40,563
--------------
Business Services - Misc. (0.40%)
Cendant Corp.,
Note 08-15-06 (R) 6.875 BBB 35 35,119
--------------
Chemicals (0.65%)
Akzo Nobel, Inc.,
Bond 11-15-03 (R) 6.000 A- 15 15,422
Equistar Chemicals L.P./Equistar Funding Corp.,
Note 02-15-04 8.500 BBB- 15 14,578
Potash Corp. of Saskatchewan, Inc.
Note (Canada) 05-31-11, (Y) 7.750 BBB+ 25 26,799
--------------
56,799
--------------
Computers (0.30%)
AOL Time Warner, Inc.,
Bond 04-15-31 7.625 BBB+ 25 26,174
--------------
Containers (0.18%)
Stone Container Corp.,
Sr Note 02-01-11 9.750 B 15 15,675
--------------
Cosmetics & Personal Care (0.59%)
International Flavors & Fragrances, Inc.,
Note 05-15-06 (R) 6.450 BBB+ 50 51,047
--------------
Energy (0.52%)
CalEnergy Co., Inc.,
Sr Bond 09-15-28 8.480 BBB- 15 16,562
Enron Corp.,
Note 08-15-05 (R) 8.000 BBB+ 15 15,676
P&L Coal Holdings Corp.,
Sr Sub Note Ser B 05-15-08 9.625 B+ 12 12,780
--------------
45,018
--------------
Finance (4.06%)
Bombardier Capital, Inc.,
Note 01-15-02 (R) 6.000 A- 20 20,144
Ford Capital B.V.,
Gtd Deb (Netherlands) 05-15-02, (Y) 9.875 A 35 36,223
Ford Motor Credit Co.,
Note 01-15-03 7.250 A 25 25,926
Note 02-01-06 6.875 A 30 30,969
General Motors Acceptance Corp.,
Note 07-15-05 7.500 A 35 37,242
Note 03-02-11 7.250 A 25 26,129
Heller Financial, Inc.,
Note 03-15-06 6.375 A- 15 15,765
Household Finance Corp.,
Note 05-09-05 8.000 A 25 27,209
Note 07-15-10 8.000 A 15 16,815
HSBC Holding Plc,
Sub Note (United Kingdom) 07-15-09, (Y) 7.500 A 15 16,247
ING Capital Funding Trust III,
Perpetual Bond (8.439% to 12-31-10
then variable) 12-31-49 8.439 A 10 11,015
Standard Chartered Bank,
Sub Note (United Kingdom) 05-30-31
(R), (Y) 8.000 A- 25 26,321
Standard Credit Card Master Trust,
Ser 1995-1 Class A 01-07-07 8.250 AAA 40 43,950
U.S. Bank NA,
Note 08-01-11 6.375 A 20 20,405
--------------
354,360
--------------
Food (0.78%)
Conagra, Inc.,
Sub Note 09-15-04 7.400 BBB 20 21,124
Earthgrains Co. (The),
Note 08-01-03 8.375 A+ 45 46,971
--------------
68,095
--------------
Government - Foreign (2.02%)
Colombia, Republic of,
Bond (Colombia) 04-09-11, (Y) 9.750 BBB 25 26,437
Nova Scotia, Province of,
Deb (Canada) 11-15-19, (Y) 8.250 A- 25 29,856
Quebec, Government of,
Deb (Canada) 01-22-11, (Y) 6.125 A+ 85 86,184
Quebec, Province of,
Deb (Canada) 09-15-29, (Y) 7.500 A+ 30 33,598
--------------
176,075
--------------
Government - U.S. (15.47%)
United States Treasury,
Bond 08-15-17 8.875 AAA 127 174,227
Bond 02-15-23 7.125 AAA 199 239,733
Bond 05-15-30 6.250 AAA 155 173,163
Inflation Indexed Note 01-15-07 3.375 AAA 107 108,059
Note 08-15-03 5.750 AAA 92 95,594
Note 02-15-05 7.500 AAA 164 181,399
Note 07-15-06 7.000 AAA 164 181,963
Note 05-15-08 5.625 AAA 30 31,542
Note 08-15-10 5.750 AAA 155 164,275
--------------
1,349,955
--------------
Government - U.S. Agencies (15.12%)
Federal National Mortgage Assn.,
15 Yr Pass Thru Ctf 12-01-14 5.500 AAA 130 129,075
15 Yr Pass Thru Ctf 07-01-15 7.000 AAA 16 16,986
15 Yr Pass Thru Ctf 02-01-16 7.000 AAA 23 23,816
15 Yr Pass Thru Ctf 05-01-16 6.000 AAA 20 19,733
15 Yr Pass Thru Ctf 06-01-16 6.000 AAA 167 167,845
30 Yr Pass Thru Ctf 06-01-30 7.500 AAA 213 219,821
30 Yr Pass Thru Ctf 12-01-30 7.000 AAA 19 19,905
30 Yr Pass Thru Ctf 02-01-31 7.500 AAA 51 52,602
Note 01-15-30 7.125 AAA 95 107,009
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 04-15-28 to
05-15-29 6.500 AAA 109 110,780
30 Yr Pass Thru Ctf 04-15-29 to
12-25-31 7.000 AAA 405 415,314
30 Yr Pass Thru Ctf 11-15-24 to
07-15-30 8.000 AAA 35 36,317
--------------
1,319,203
--------------
Insurance (1.83%)
AXA SA,
Sub Note (France) 12-15-30, (Y) 8.600 A- 20 23,312
Equitable Life Assurance Society USA,
Surplus Note 12-01-05 (R) 6.950 A+ 25 26,227
Massachusetts Mutual Life Insurance Co.,
Surplus Note 11-15-23 (R) 7.625 AA 15 15,818
MONY Group, Inc. (The),
Sr Note 12-15-05 7.450 A- 25 26,205
Sun Canada Financial Co.,
Sub Note 12-15-07 (R) 6.625 AA- 55 56,788
URC Holdings Corp.,
Sr Note 06-30-06 (R) 7.875 AA+ 10 11,046
--------------
159,396
--------------
Leisure (0.94%)
Harrah's Operating Co., Inc.,
Note 06-01-07 (R) 7.125 BBB- 25 25,344
Sr Sub Note 12-15-05 7.875 BB+ 10 10,288
HMH Properties, Inc.,
Sr Note Ser A 08-01-05 7.875 BB 10 10,000
MGM Mirage, Inc.,
Sr Note 09-15-10 8.500 BBB- 10 10,756
Sabre Holdings Corp.,
Note 08-01-11 7.350 BBB+ 15 15,220
Station Casinos, Inc.,
Sr Note 02-15-08 8.375 BB- 5 5,050
Waterford Gaming LLC,,
Sr Note 03-15-10 (R) 9.500 B+ 5 5,012
--------------
81,670
--------------
Media (5.29%)
Adelphia Communications Corp.,
Sr Note 06-15-11 10.250 B+ 5 4,900
Sr Note Ser B 10-01-02 9.250 B+ 15 15,075
Sr Note Ser B 07-15-03 8.125 B+ 13 12,545
British Sky Broadcasting Group Plc,
Sr Note (United Kingdom) 07-15-09, (Y) 8.200 BB+ 35 36,158
Century Communications Corp.,
Sr Note 03-01-05 9.500 B+ 10 9,938
Charter Communications Holdings, LLC/
Charter Communications Holdings Capital Corp.,
Sr Note 01-15-11 11.125 B+ 5 5,388
Sr Note 05-15-11 (R) 10.000 B+ 5 5,050
Clear Channel Communications, Inc.,
Note 06-15-05 7.875 BBB- 50 53,297
Comcast Cable Communications, Inc.,
Sr Note 01-30-11 6.750 BBB 15 15,052
Continental Cablevision, Inc.,
Sr Note 05-15-06 8.300 A 25 27,517
CSC Holdings, Inc.,
Sr Note 04-01-11 (R) 7.625 BB+ 45 44,981
Sr Sub Deb 05-15-16 10.500 BB- 10 11,125
EchoStar DBS Corp.,
Sr Note 02-01-09 9.375 B+ 10 10,300
Garden State Newspapers, Inc.,
Sr Sub Note 07-01-11 8.625 B+ 10 9,400
Jones Intercable, Inc.,
Sr Note 04-15-08 7.625 BBB 20 21,018
Lenfest Communications, Inc.,
Sr Note 11-01-05 8.375 BBB 10 10,938
Mediacom LLC/Mediacom Capital Corp.,
Sr Note 01-15-13 (R) 9.500 B+ 5 5,025
Sr Note Ser B 04-15-08 8.500 B+ 10 9,750
News America, Inc.,
Gtd Sr Note 04-30-28 7.300 BBB- 15 14,005
News America Holdings, Inc.,
Gtd Sr Deb 08-10-18 8.250 BBB- 20 20,838
TCI Communications, Inc.,
Sr Deb 02-15-26 7.875 A 20 20,788
Time Warner, Inc.,
Deb 01-15-13 9.125 BBB+ 16 18,911
Univision Communications, Inc.,
Sr Note 07-15-11 (R) 7.850 BB+ 25 26,175
Viacom, Inc.,
Gtd Note 01-30-06 (R) 6.400 A- 15 15,562
Sr Note 01-30-06 6.400 A- 10 10,368
Sr Deb 07-30-30 7.875 A- 25 27,571
--------------
461,675
--------------
Medical (1.34%)
Dynacare, Inc.,
Sr Note (Canada) 01-15-06, (Y) 10.750 B+ 13 13,325
Fresenius Medical Care Capital Trust II,
Gtd Trust Preferred Security
02-01-08 7.875 B+ 15 14,925
HCA - The Healthcare Co.,
Note 09-01-10 8.750 BB+ 25 27,375
Note 06-01-06 7.125 BB+ 20 20,340
HEALTHSOUTH Corp.,
Sr Note 02-01-08 8.500 BBB- 10 10,450
Quest Diagnostics, Inc.,
Sr Note 07-12-06 6.750 BBB- 15 15,322
Tenet Healthcare Corp.,
Sr Note 01-15-05 8.000 BB+ 5 5,350
Triad Hospitals, Inc.,
Note 05-01-09 (R) 8.750 B- 10 10,425
--------------
117,512
--------------
Metal (1.07%)
Newmont Mining Corp.,
Note 05-15-11 8.625 BBB 30 30,956
WMC Finance (USA) Ltd.,
Gtd Note (Australia) 11-15-03, (Y) 6.500 A 55 56,660
Yanacocha Receivables Master Trust,
Pass Thru Ctf Ser 1997-A 06-15-04
(R) 8.400 BBB- 6 5,566
--------------
93,182
--------------
Mortgage Banking (6.39%)
Asset Securitization Corp.,
Mtg Pass Thru Ctf Ser 1997-D4 Class
A-1B 04-14-27 7.400 AAA 40 42,375
Commercial Mortgage Acceptance Corp.,
Pass Thru Ctf Ser 1999-C1 Class A-1
06-15-31 6.790 Aaa 26 27,216
Credit Suisse First Boston Mortgage Securities Corp.,
Commercial Mtg Pass Thru Ctf Ser
1998-C1 Class A-1A 5-17-40 6.260 AAA 26 26,938
EQCC Home Equity Loan Trust,
Pass Thru Ctf Ser 1997-3 Class A-9
02-15-29 6.570 AAA 40 41,300
GMAC Commercial Mortgage Securities, Inc.,
Pass Thru Ctf Ser 1997-C1 Class A-2
07-15-29 6.853 Aaa 20 20,963
Pass Thru Ctf Ser 1998-C1 Class A-1
05-15-30 6.411 Aaa 52 53,360
IMC Home Equity Loan Trust,
Pass Thru Ctf Ser 1998-1 Class A-4
03-20-25 6.600 AAA 20 20,312
LB Commercial Mortgage Trust,
Pass Thru Ctf Ser 1999-C1 Class A-1
06-15-31 6.410 Aaa 14 14,092
Money Store Home Equity Trust (The),
Pass Thru Ctf Ser 1997-D Class AF-7
12-15-38 6.485 AAA 22 22,255
Morgan (J.P.) Commercial Mortgage Finance Corp.,
Pass Thru Ctf Ser 1997-C5 Class A2
09-15-29 7.069 AAA 35 36,794
Morgan Stanley Capital I, Inc.,
Pass Thru Ctf Ser 1997-WF1 Class
A-1 07-15-29 (R) 6.830 AAA 101 104,996
Pass Thru Ctf Ser 1999-CAM1 Class
A-3 03-15-32 6.920 AAA 50 52,578
Salomon Brothers Mortgage Securities VII, Inc.,
Mtg Pass Thru Ctf Ser 1997-HUD2
Class A-2 07-25-24 6.750 Aaa 10 10,265
Saxon Asset Securities Trust,
Pass Thru Ctf Ser 2000-2 Class AF-2
06-25-15 7.965 AAA 30 30,309
UCFC Home Equity Loan Trust,
Pass Thru Ctf Ser 1997-A1 Class A-8
06-15-28 7.220 AAA 24 25,043
Pass Thru Ctf Ser 1997-B Class A-6
10-15-28 6.900 AAA 28 28,741
--------------
557,537
--------------
Oil & Gas (2.65%)
Alberta Energy Co., Ltd.,
Note (Canada) 09-15-30, (Y) 8.125 BBB+ 10 11,055
Amerada Hess Corp.,
Note 08-15-31 7.300 BBB 25 25,335
Chesapeake Energy Corp.,
Sr Note 04-01-11 8.125 B+ 10 9,700
Forest Oil Corp.,
Sr Note 06-15-08 (R) 8.000 BB 10 9,950
Louis Dreyfus Natural Gas Corp.,
Sr Note 12-01-07 6.875 BBB 10 10,189
Nova Chemicals Corp.,
Note (Canada) 05-15-06, (Y) 7.000 BBB 15 14,981
Occidental Petroleum Corp.,
Sr Deb 09-15-09 10.125 BBB 5 6,127
Ocean Energy, Inc.,
Sr Sub Note Ser B 07-15-07 8.875 BB+ 5 5,285
Pemex Project Funding Master Trust,
Note 10-13-10 (R) 9.125 BB+ 35 37,321
Petrobras International Finance Co.,
Sr Note (Cayman Islands) 07-06-11
(R), (Y) 9.750 Baa1 10 10,025
Petroleum Geo-Services ASA,
Sr Note (Norway) 03-30-28, (Y) 7.125 BBB- 15 12,770
Snyder Oil Corp.,
Sr Sub Note 06-15-07 8.750 BBB+ 10 10,544
Tosco Corp.,
Note 02-15-30 8.125 BBB 15 16,947
Transocean Sedco Forex, Inc.
Note 04-15-31 7.500 A- 20 20,335
Union Pacific Resources Group, Inc.,
Deb 05-15-28 7.150 BBB+ 20 20,038
Valero Energy Corp.,
Note 06-15-05 8.375 BBB- 10 10,847
--------------
231,449
--------------
Paper & Paper Products (1.57%)
International Paper Co.,
Note 07-08-05 8.125 BBB 45 48,375
Georgia-Pacific Corp.,
Note 05-15-06 7.500 BBB- 15 15,423
Note 05-15-31 8.875 BBB- 20 21,142
Stora Enso Oyj,
Sr Note (Finland) 05-15-11, (Y) 7.375 BBB+ 25 26,563
Weyerhaeuser Co.,
Note 08-01-06 6.000 A- 25 25,155
--------------
136,658
--------------
Real Estate Investment Trust (1.24%)
American Health Properties, Inc.,
Note 01-15-07 7.500 BBB+ 10 10,309
Cabot Industrial Properties, L.P.,
Note 05-01-04 7.125 BBB 15 15,437
Camden Property Trust,
Note 04-15-04 7.000 BBB 10 10,375
Healthcare Realty Trust
Sr Note 05-01-11 8.125 BBB- 30 31,200
iStar Financial, Inc.,
Sr Note 08-15-08 8.750 BB+ 5 5,013
Liberty Property L.P.,
Medium Term Note 06-05-02 6.600 BBB 25 25,188
ProLogis Trust,
Note 04-15-04 6.700 BBB+ 10 10,296
--------------
107,818
--------------
Real Estate Operations (0.30%)
EOP Operating L.P.,
Note 02-15-05 6.625 BBB+ 25 25,910
--------------
Retail (1.61%)
Delhaize America, Inc.,
Note 04-15-11 (R) 8.125 BBB- 40 43,750
Kroger Co.,
Sr Note 04-01-11 6.800 BBB- 20 20,624
Sears Roebuck Acceptance Corp.,
Note 08-15-11 6.750 A- 35 34,822
Toys R Us, Inc.,
Note 08-01-11 (R) 7.625 BBB+ 40 40,924
--------------
140,120
--------------
Telecommunications (5.09%)
AT&T Wireless Group,
Sr Note 03-01-31 (R) 8.750 BBB 25 27,775
BellSouth Capital Funding Corp.,
Deb 02-15-30 7.875 A+ 25 28,104
Citizens Communications Co.,
Note 05-15-06 8.500 BBB 35 37,367
Deutsche Telekom International Finance B.V.,
Bond (Coupon Rate Step-up/down on
rating) (Netherlands) 06-15-05, (Y) 7.750 A- 55 58,588
Bond (Coupon Rate Step-up/down on
rating) (Netherlands) 06-15-30, (Y) 8.250 A- 20 21,633
Dominion Resources, Inc.,
Sr Note Ser A 06-15-10 8.125 BBB+ 15 16,753
LCI International, Inc.,
Sr Note 06-15-07 7.250 BBB+ 15 15,445
MetroNet Communications Corp.,
Sr Discount Note, Step Coupon
(10.75%, 11-01-02) (Canada)
11-01-07, (A), (Y) Zero BBB 15 12,603
Sr Note (Canada) 08-15-07, (Y) 12.000 BBB 10 10,900
Qwest Capital Funding, Inc.,
Bond 02-15-31 (R) 7.750 NR 30 29,997
Sprint Capital Corp.,
Note 01-30-06 7.125 BBB+ 15 15,645
Note 11-15-28 6.875 BBB+ 35 31,729
Telefonos de Mexico SA de C.V.,
Sr Note 01-26-06 (R) 8.250 BB+ 30 31,275
Telus Corp.,
Note (Canada) 06-01-11, (Y) 8.000 BBB+ 25 26,200
Triton PCS, Inc.,
Sr Sub Note 02-01-11 9.375 B- 5 5,025
Verizon Global Funding Corp.,
Deb 12-01-30 (R) 7.750 A+ 15 16,490
VoiceStream Wireless Corp.,
Sr Note 09-15-09 11.500 A- 5 5,750
WorldCom, Inc.,
Note 05-15-06 8.000 BBB+ 35 37,557
Note 05-15-31 8.250 BBB+ 15 15,266
--------------
444,102
--------------
Transportation (2.85%)
America West Airlines,
Pass Thru Ctf Ser 1996-1B 01-02-08 6.930 A- 3 3,296
Burlington Northern Santa Fe Corp.,
Deb 08-15-30 7.950 BBB+ 30 33,117
Continental Airlines, Inc.,
Pass Thru Ctf Ser 1997-2C 06-30-04 7.206 BBB 16 16,227
Pass Thru Ctf Ser 1999-1A 02-02-19 6.545 AA+ 19 18,756
Delta Air Lines, Inc.,
Note 12-15-05 7.700 BBB- 15 15,128
Northrop Grumman Systems Corp.,
Note 02-15-11 7.125 BBB- 20 20,620
Northwest Airlines 1996-1 Pass Through Trusts,
Pass Thru Ctf Ser 1996-1D 01-02-15 8.970 BBB- 4 4,710
Northwest Airlines, Inc.,
Note 03-15-04 8.375 BB 10 9,966
Sr Note 06-01-06 8.875 BB 10 9,900
NWA Trust,
Sr Note Ser A 12-21-12 9.250 AA 31 34,854
U.S. Airways, Inc.,
Pass Thru Ctf Ser 1990-A1 03-19-05 11.200 BB- 14 14,379
Union Pacific Corp.,
Deb 02-01-29 6.625 BBB- 25 23,964
United Air Lines, Inc.,
Pass Thru Ctf Ser 2000-1 Class A-1
01-01-14 7.783 AAA 28 29,276
Pass Thru Ctf Ser 2000-2 Class A-1
10-01-10 7.032 AAA 14 14,780
--------------
248,973
--------------
Utilities (10.62%)
AES Corp.,
Sr Note 06-01-09 9.500 BB 10 10,400
Sr Note 09-15-10 9.375 BB 5 5,050
Sr Sub Note 07-15-06 10.250 B+ 12 12,300
AES Eastern Energy L.P.,
Pass Thru Ctf Ser 1999-A 01-02-17 9.000 BBB- 15 15,791
Beaver Valley Funding Corp.,
Sec Lease Oblig Bond 06-01-17 9.000 BB- 9 9,951
BVPS II Funding Corp.,
Collateralized Lease Bond 06-01-17 8.890 BB- 7 7,927
Calpine Canada Energy Finance ULC,
Sr Note (Canada) 05-01-08 (Y) 8.500 BB+ 15 15,201
Calpine Corp.,
Sr Note 08-15-05 8.250 BB+ 15 15,415
Sr Note 04-01-08 7.875 BB+ 5 4,750
Sr Note 02-15-11 8.500 BB+ 35 35,564
Cleveland Electric Illuminating Co.,
1st Mtg Ser B 05-15-05 9.500 BB+ 35 36,050
Sec Note Ser D 11-01-17 7.880 BB+ 20 21,146
CMS Energy Corp.,
Sr Note 05-15-02 8.125 BB 15 15,205
Sr Note 10-15-07 9.875 BB 5 5,350
Sr Note Ser B 01-15-04 6.750 BB 15 14,738
EIP Funding-PNM,
Sec Fac Bond 10-01-12 10.250 BBB- 22 23,980
Exelon Generation Co LLC,
Sr Note 06-15-11 (R) 6.950 A- 60 62,212
GG1B Funding Corp.,
Deb 01-15-11 7.430 BBB- 11 11,632
HQI Transelec Chile SA,
Sr Note (Chile) 04-15-11 (R), (Y) 7.875 A- 55 56,610
Utilities (continued)
Hydro-Quebec,
Gtd Bond Ser HY (Canada) 01-15-22, (Y) 8.400 A+ 10 12,099
Gtd Deb Ser IF (Canada) 02-01-03, (Y) 7.375 A+ 25 26,179
Iberdrola International B.V.,
Note 10-01-02 7.500 AA- 25 25,885
Note (Spain) 06-01-03 (R), (Y) 7.125 AA- 25 26,110
KeySpan Corp.,
Note 11-15-10 7.625 A 25 27,390
Long Island Lighting Co.,
Deb 03-15-23 8.200 A- 20 20,600
Midland Funding Corp. II,,
Deb Ser A 07-23-05 11.750 BB+ 50 55,500
Mirant Americas Generation, Inc.,
Sr Note 05-01-11 (R) 8.300 BBB- 35 37,169
Niagara Mohawk Power Corp.,
Sec Fac Bond 01-01-18 8.770 BBB 25 26,215
Northeast Utilities,
Note Ser A 12-01-06 8.580 BBB 3 3,296
NRG Energy, Inc.,
Sr Note 04-01-11 7.750 BBB- 25 26,205
Pinnacle Partners,
Sr Note 08-15-04 (R) 8.830 BBB- 20 20,260
Pinnacle West Capital Corp.,
Sr Note 04-01-06 6.400 BBB 20 20,293
PNPP II Funding Corp.,
Deb 05-30-16 9.120 BB- 15 16,830
PSEG Energy Holdings, Inc.,
Sr Note 02-15-08 (R) 8.625 BBB- 15 15,804
PSEG Power LLC,
Sr Note 04-15-31 (R) 8.625 BBB 15 17,013
Sierra Pacific Power Co.,
1st Mtg Note 06-01-08 (R) 8.000 BBB+ 45 46,451
Sierra Pacific Resources,
Note 05-15-05 8.750 BBB- 10 10,402
Tiers Fixed Rate Certificates,
Collateral Trust 06-15-04 (R) 7.200 BBB- 30 30,329
TXU Electric Capital V,
Capital Sec 01-30-37 8.175 BBB- 10 10,205
Waterford 3 Funding Corp.,
Sec Lease Obligation Bond 01-02-17 8.090 BBB- 25 25,662
Xcel Energy, Inc.,
Sr Note 12-01-10 7.000 BBB+ 45 46,950
--------------
926,119
--------------
Waste Disposal Service & Equip (0.35%)
Republic Services, Inc.,
Sr Note 08-15-11 6.750 BBB 30 30,305
--------------
TOTAL BONDS
(Cost $7,997,827) (94.34%) 8,230,281
-------------- --------------
NUMBER OF
SHARES OR
WARRANTS
--------------
PREFERRED STOCKS AND WARRANTS
CSC Holdings, Inc., 11.125%, Ser M,
Preferred Stock 125 13,313
CSC Holdings, Inc., 11.750%, Ser H,
Preferred Stock 140 15,155
MetroNet Communications Corp.,
Warrant (Canada) (R)** 10 950
--------------
29,418
--------------
TOTAL PREFERRED STOCKS AND WARRANTS
(Cost $28,196) (0.34%) 29,418
-------------- --------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.19%)
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% $453 $453,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $453,000) (5.19%) 453,000
-------------- --------------
TOTAL INVESTMENTS (99.87%) 8,712,699
-------------- --------------
OTHER ASSETS AND LIABILITIES, NET (0.13%) 11,360
-------------- --------------
TOTAL NET ASSETS (100.00%) $8,724,059
============== ==============
* Credit ratings are unaudited and rated by Standard & Poor's where
available, or Moody's Investor Services or John Hancock Advisers, Inc.
where Standard & Poor's ratings are not available.
** Non-income producing security.
(A) Cash interest will be paid on this obligation at the stated rate
beginning on the stated date.
(R) These securities are exempt from registration under rule 144A of
the Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from
registration. Rule 144A securities amounted to $1,421,083 or 16.29% of
net assets as of August 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.
+ All or a portion of these securities, having an aggregate value of
$87,179 or 1.00% of the Fund's net assets, have been purchased as
forward commitments; that is, the Fund has agreed on trade date to take
delivery of and make payment for such securities on a delayed basis
subsequent to the date of this schedule. The purchase price and interest
rate of such securities are fixed at trade date, although the Fund does
not earn any interest on such 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.
Accordingly, the market values of $42,164 and $47,797 of United States
Treasury Bond 7.125%, 02-15-23 and United States Treasury Note 5.75%,
08-15-03 has been segregated to cover the forward commitments.
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.
Schedule of Investments
August 31, 2001 (Unaudited)
- -------------------------------------------------------------------------------------------------
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ---------- --------------
COMMON STOCKS
Banks - United States (4.04%)
Bank of America Corp. 900 $55,350
PNC Financial Services Group 1,230 81,906
Wells Fargo & Co. 1,750 80,518
--------------
217,774
--------------
Beverages (3.74%)
Anheuser-Busch Cos., Inc. 1,420 61,117
PepsiCo, Inc. 3,000 141,000
--------------
202,117
--------------
Chemicals (3.69%)
Air Products & Chemicals, Inc. 1,600 67,840
Dow Chemical Co. (The) 1,700 59,602
Rohm & Haas Co. 2,000 71,820
--------------
199,262
--------------
Computers (9.56%)
AOL Time Warner, Inc.* 2,100 78,435
Cisco Systems, Inc.* 5,080 82,956
Compaq Computer Corp. 5,740 70,889
EMC Corp.* 1,960 30,302
International Business Machines
Corp. 1,040 104,000
Microsoft Corp.* 1,850 105,543
Oracle Corp.* 3,600 43,956
--------------
516,081
--------------
Cosmetics & Personal Care (1.28%)
Avon Products, Inc. 1,500 69,195
--------------
Diversified Operations (3.18%)
Honeywell International, Inc. 2,000 74,520
Tyco International Ltd. 1,870 97,147
--------------
171,667
--------------
Electronics (9.05%)
Analog Devices, Inc.* 1,400 66,892
Emerson Electric Co. 1,000 53,600
General Electric Co. 3,350 137,283
Intel Corp. 3,400 95,064
Motorola, Inc. 3,260 56,724
Texas Instruments, Inc. 2,380 78,778
--------------
488,341
--------------
Energy (1.12%)
Xcel Energy, Inc. 2,200 60,280
--------------
Finance (6.21%)
Citigroup, Inc. 2,666 121,969
J.P. Morgan Chase & Co. 2,000 78,800
Merrill Lynch & Co., Inc. 1,720 88,752
Morgan Stanley Dean Witter & Co. 860 45,881
--------------
335,402
--------------
Food (0.99%)
Kraft Foods, Inc. (Class A) 1,655 53,374
--------------
Insurance (5.27%)
ACE, Ltd. 1,800 59,706
AFLAC, Inc. 3,250 89,440
American International Group, Inc. 1,020 79,764
Marsh & McLennan Cos., Inc. 600 55,740
--------------
284,650
--------------
Media (3.42%)
McGraw-Hill Cos., Inc. (The) 1,900 112,575
Viacom, Inc. (Class B)* 1,700 72,080
--------------
184,655
--------------
Medical (9.64%)
American Home Products Corp. 2,240 125,440
Baxter International, Inc. 3,400 175,440
Johnson & Johnson 3,000 158,130
Pfizer, Inc. 1,600 61,296
--------------
520,306
--------------
Mortgage Banking (5.08%)
Fannie Mae 1,700 129,557
Freddie Mac 2,300 144,624
--------------
274,181
--------------
Office (1.19%)
Avery Dennison Corp. 1,250 64,262
--------------
Oil & Gas (8.37%)
Anadarko Petroleum Corp. 1,100 56,925
Chevron Corp. 1,140 103,455
Conoco, Inc. (Class A) 3,440 101,996
Exxon Mobil Corp. 3,392 136,189
Halliburton Co. 1,900 52,934
--------------
451,499
--------------
Paper & Paper Products (2.43%)
Kimberly-Clark Corp. 2,110 130,925
--------------
Retail (6.11%)
CVS Corp. 1,900 68,609
Home Depot, Inc. (The) 2,150 98,792
Lowe's Cos., Inc. 2,500 93,000
Target Corp. 2,000 69,300
--------------
329,701
--------------
Telecommunications (3.56%)
ADC Telecommunications, Inc.* 5,100 22,287
Tellabs, Inc.* 4,500 59,940
Verizon Communications, Inc. 2,200 110,000
--------------
192,227
--------------
Tobacco (3.16%)
Philip Morris Cos., Inc. 3,600 170,640
--------------
Utilities (3.52%)
Duke Energy Corp. 2,100 82,551
SBC Communications, Inc. 2,630 107,593
--------------
190,144
--------------
TOTAL COMMON STOCKS
(Cost $4,637,595) (94.62%) 5,106,683
-------------- --------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (5.43%)
Investment in a joint repurchase
agreement transaction with
UBS Warburg, Inc. - Dated
08-31-01, due 09-04-01
(Secured by U.S. Treasury Bonds,
8.75% due 05-15-20 and
U.S. Treasury Note, 4.75%
due 11-15-08) 3.64% $293 $293,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $293,000) (5.43%) 293,000
-------------- --------------
TOTAL INVESTMENTS (100.05%) 5,399,683
-------------- --------------
OTHER ASSETS AND LIABILITIES, NET (0.05%) (2,690)
-------------- --------------
TOTAL NET ASSETS (100.00%) $5,396,993
============== ==============
* 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.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Medium Capitalization Growth Fund
Schedule of Investments
August 31, 2001 (Unaudited)
- -------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
the Medium Capitalization Growth Fund on August 31, 2001. Common stocks
are further broken down by industry group.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ---------- --------------
COMMON STOCKS
Advertising (2.22%)
Lamar Advertising Co.* 1,850 $59,385
TMP Worldwide, Inc.* 1,650 74,003
--------------
133,388
--------------
Banks - United States (1.80%)
Commerce Bancorp, Inc. 495 33,437
Zions BanCorp. 1,300 74,438
--------------
107,875
--------------
Broker Services (3.09%)
Legg Mason, Inc. 3,388 151,477
Lehman Brothers Holdings, Inc. 510 33,481
--------------
184,958
--------------
Business Services - Misc. (2.14%)
Corporate Executive Board Co.
(The)* 1,200 41,700
Robert Half International, Inc. 3,486 86,767
--------------
128,467
--------------
Computers (5.97%)
Brocade Communications Systems,
Inc.* 2,485 59,764
Citrix Systems, Inc.* 2,400 79,080
DST Systems, Inc.* 1,722 82,398
EarthLink, Inc.* 650 8,782
Peregrine Systems, Inc. * 2,850 74,613
SunGard Data Systems, Inc.* 2,259 53,425
--------------
358,062
--------------
Electronics (16.03%)
Cree, Inc.* 3,450 72,346
Garmin Ltd.* 4,000 79,400
International Rectifier Corp.* 2,037 75,328
KLA-Tencor Corp.* 2,100 103,194
Lam Research Corp.* 3,300 93,423
Micrel, Inc.* 3,250 100,295
National Semiconductor Corp.* 4,587 151,600
Novellus Systems, Inc.* 2,500 110,775
Semtech Corp.* 2,550 95,192
TriQuint Semiconductor, Inc.* 3,750 79,500
--------------
961,053
--------------
Energy (1.38%)
Calpine Corp.* 2,500 82,550
--------------
Finance (7.61%)
Affiliated Managers Group, Inc.* 1,443 102,309
Concord EFS, Inc.* 2,672 140,200
SEI Investments Co. 1,500 61,560
USA Education, Inc. 1,920 152,083
--------------
456,152
--------------
Household (0.70%)
Mohawk Industries, Inc.* 939 41,879
--------------
Instruments - Scientific (2.54%)
Waters Corp.* 4,603 152,497
--------------
Insurance (6.66%)
ACE, Ltd. (Bermuda) 3,225 106,973
Ambac Financial Group, Inc. 1,658 98,154
Everest Re Group, Ltd. (Bermuda) 1,505 97,675
MGIC Investment Corp. 1,383 96,672
--------------
399,474
--------------
Manufacturing (2.83%)
Danaher Corp. 3,052 169,600
--------------
Media (8.17%)
Emmis Communications Corp. (Class A)* 3,250 77,935
McGraw-Hill Cos., Inc. (The) 1,860 110,205
Univision Communications, Inc.
(Class A)* 2,190 65,328
USA Networks, Inc.* 5,000 115,800
Westwood One, Inc. 4,225 120,413
--------------
489,681
--------------
Medical (23.98%)
Allergan, Inc. 1,257 90,818
AmerisourceBergen Corp.* 1,915 123,403
Express Scripts, Inc.* 2,550 136,476
Genzyme Corp.* 1,600 90,624
ICOS Corp.* 1,200 69,960
IDEC Pharmaceuticals Corp.* 2,430 144,026
Laboratory Corp. of America
Holdings* 1,157 90,130
MedImmune, Inc.* 2,650 106,398
Smith & Nephew Plc, (United
Kingdom) 150 783
Tenet Healthcare Corp.* 1,283 71,104
Trigon Healthcare, Inc.* 871 56,397
Universal Health Services, Inc.
(Class B) 2,815 133,150
Varian Medical Systems, Inc. 1,400 92,400
Wellpoint Health Networks, Inc.* 1,438 153,118
Zimmer Holdings, Inc.* 2,900 78,880
--------------
1,437,667
--------------
Medical - Drugs (4.25%)
Forest Laboratories, Inc.* 491 35,848
Shire Pharmaceuticals Group Plc,*
American Depositry Receipt (ADR)
(United Kingdom) 1,961 85,147
Teva Pharmaceutical Industries, Ltd.,
(ADR) (Israel) 1,879 133,597
--------------
254,592
--------------
Oil & Gas (1.47%)
Santa Fe International Corp. 1,878 47,513
Weatherford International, Inc.* 1,217 40,490
--------------
88,003
--------------
Real Estate Operations (1.52%)
Lennar Corp. 2,051 91,372
--------------
Retail (8.31%)
Abercrombie & Fitch Co. (Class A)* 1,984 60,195
Darden Restaurants, Inc. 2,912 83,341
Family Dollar Stores, Inc. 2,711 81,330
Intimate Brands, Inc. 4,532 62,360
Talbots, Inc. 2,442 90,647
TJX Cos., Inc. 3,423 120,147
--------------
498,020
--------------
Telecommunications (2.57%)
Dobson Communications Corp. (Class A)* 10,450 154,137
--------------
Waste Disposal Service & Equip (0.93%)
Republic Services, Inc.* 2,800 55,580
--------------
TOTAL COMMON STOCKS
(Cost $6,288,327) (104.17%) 6,245,007
-------------- --------------
TOTAL INVESTMENTS (104.17%) 6,245,007
-------------- --------------
OTHER ASSETS AND LIABILITIES, NET (4.17%) (249,921)
-------------- --------------
TOTAL NET ASSETS (100.00%) $5,995,086
-------------- --------------
* 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.
Portfolio Concentration (Unaudited)
- ------------------------------------------------------------------------
The Medium Capitalization Growth Fund invests primarily in common stocks
of U.S. and foreign issuers. The performance of the Fund is closely tied
to the economic and financial conditions within the countries in which it
invests. The concentration of investments by industry category for
individual securities held by the Fund is shown in the schedule of
investments. In addition, concentration of investments can be aggregated
by various countries. The table below shows the percentages of the Fund's
investments at August 31, 2001, assigned to country categories.
VALUE AS A
PERCENTAGE OF
COUNTRY DIVERSIFICATION FUND'S NET ASSETS
- ----------------------- -----------------
Bermuda 3.41%
Israel 2.23
United Kingdom 1.43
United States 97.10
-----------------
TOTAL INVESTMENTS 104.17%
=================
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Focused Small Cap Growth Fund
Schedule of Investments
August 31, 2001 (Unaudited)
- -------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
the Focused Small Cap Growth 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
Advertising (0.67%)
Getty Images, Inc.* 2,020 $32,360
--------------
Business Services - Misc. (2.88%)
Corporate Executive Board Co.
(The)* 4,000 139,000
--------------
Computers (9.03%)
Advent Software, Inc.* 1,690 89,756
Cerner Corp.* 1,900 92,131
eFUNDS Corp.* 550 9,504
Macromedia, Inc.* 4,000 55,720
Manugistics Group, Inc.* 2,000 23,420
Netegrity, Inc.* 3,950 69,915
Numerical Technologies, Inc.* 1,500 42,675
Stellant, Inc. * 2,400 52,320
--------------
435,441
--------------
Electronics (17.93%)
Alpha Industries, Inc.* 3,100 98,456
Brooks Automation, Inc.* 1,800 78,030
Cree, Inc.* 3,300 69,201
DDi Corp.* 3,300 46,233
DuPont Photomasks, Inc.* 1,050 36,750
LTX Corp.* 3,650 65,372
Micrel, Inc.* 2,490 76,841
Microsemi Corp.* 3,000 85,500
Nanometrics, Inc.* 2,150 60,759
Powerwave Technologies, Inc.* 3,900 56,940
Rudolph Technologies, Inc.* 3,300 118,800
Semtech Corp.* 1,930 72,047
--------------
864,929
--------------
Finance (4.01%)
Affiliated Managers Group, Inc.* 1,750 124,075
AmeriCredit Corp.* 1,500 69,240
--------------
193,315
--------------
Insurance (1.43%)
StanCorp Financial Group, Inc. 1,500 69,000
--------------
Leisure (0.93%)
Expedia, Inc. (Class A)* 1,200 44,832
--------------
Machinery (2.39%)
Hydril Co.* 3,550 69,331
SureBeam Corp. (Class A)* 4,400 45,848
--------------
115,179
--------------
Media (3.76%)
Entercom Communications Corp.* 2,200 92,026
Insight Communications Co., Inc.* 1,900 43,301
Radio One, Inc. (Class A)* 3,000 45,990
--------------
181,317
--------------
Medical (23.40%)
Accredo Health, Inc.* 3,500 128,975
Alkermes, Inc.* 2,900 74,240
AmeriSourceBergen Corp. 1,150 74,106
Charles River Laboratories International,
Inc.* 1,600 57,120
CV Therapeutics, Inc.* 1,100 54,747
Cytyc Corp.* 4,500 109,035
DaVita, Inc.* 3,700 76,405
Gene Logic, Inc.* 500 8,725
Lincare Holdings, Inc.* 4,000 113,640
Regeneron Pharmaceuticals, Inc.* 1,500 45,180
Renal Care Group, Inc.* 3,050 99,918
Rightchoice Managed Care, Inc. * 2,700 124,713
Wilson Greatbatch Technologies,
Inc.* 6,260 162,134
--------------
1,128,938
--------------
Medical - Drugs (8.03%)
CIMA Labs, Inc.* 800 42,824
Inhale Therapeutic Systems, Inc.* 5,200 75,556
Noven Pharmaceuticals, Inc.* 2,100 46,557
NPS Pharmaceuticals, Inc.* 3,400 114,308
Pharmaceutical Product Development,
Inc.* 2,300 69,368
Salix Pharmaceuticals, Ltd.* 2,600 38,480
--------------
387,093
--------------
Oil & Gas (2.37%)
Evergreen Resources, Inc.* 1,600 60,560
Universal Compression Holdings,
Inc.* 2,000 53,600
--------------
114,160
--------------
Retail (12.61%)
Buca, Inc.* 2,450 37,461
Columbia Sportswear Co.* 2,400 78,384
Duane Reade, Inc.* 1,500 53,100
GoTo.com, Inc.* 4,150 81,962
Hot Topic, Inc.* 1,500 49,875
Krispy Kreme Doughnuts, Inc.* 1,600 49,360
O'Reilly Automotive, Inc.* 2,150 67,080
P.F. Chang's China Bistro, Inc.* 1,450 64,525
Whole Foods Market, Inc.* 3,600 126,684
--------------
608,431
--------------
Schools / Education (2.61%)
Strayer Education, Inc. 2,600 126,100
--------------
Shoes & Related Apparel (1.21%)
Skechers U.S.A., Inc. (Class A)* 2,800 58,660
--------------
Telecommunications (4.20%)
AirGate PCS, Inc.* 2,450 144,403
Metro One Telecommunications, Inc.* 725 22,990
SBA Communications Corp.* 2,630 35,032
--------------
202,425
--------------
Waste Disposal Service & Equipment (1.60%)
Waste Connections, Inc.* 2,400 77,472
--------------
TOTAL COMMON STOCKS
(Cost $4,704,687) (99.06%) 4,778,652
------------ --------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (1.53%)
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) 3.64% $74 $74,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $74,000) (1.53%) 74,000
------------ --------------
TOTAL INVESTMENTS (100.59%) 4,852,652
------------ --------------
OTHER ASSETS AND LIABILITIES, NET (0.59%) (28,534)
------------ --------------
TOTAL NET ASSETS (100.00%) $4,824,118
============ ==============
* 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.
See notes to financial statements.
John Hancock Funds -- Institutional Series Trust -- Small Cap Equity Fund
Schedule of Investments
August 31, 2001 (Unaudited)
- ---------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
the Small Cap Equity Fund on August 31, 2001. Common stocks are further
broken down by industry group.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ---------- --------------
COMMON STOCKS
Advertising (0.23%)
Penton Media, Inc. 6,000 $75,600
--------------
Broker Services (1.22%)
Jefferies Group, Inc. 12,100 402,930
--------------
Computers (11.89%)
Aspen Technology, Inc.* 46,000 757,620
Electronics for Imaging, Inc.* 18,000 368,280
Hyperion Solutions Corp.* 23,250 361,538
Parametric Technology Corp.* 23,200 169,128
ProQuest Co.* 10,450 368,885
Student Advantage, Inc.* 54,950 106,054
UNOVA, Inc. * 141,250 889,875
Wind River Systems, Inc.* 60,000 912,000
--------------
3,933,380
--------------
Electronics (13.34%)
Alpha Industries, Inc.* 32,050 1,017,908
Axcelis Technologies, Inc.* 29,000 404,550
MKS Instruments, Inc.* 35,652 796,822
Three-Five Systems, Inc. * 53,730 1,020,870
Vicor Corp.* 57,650 1,173,754
--------------
4,413,904
--------------
Finance (2.18%)
Sovereign Bancorp., Inc. 65,000 720,200
--------------
Food (6.38%)
Galaxy Nutritional Foods, Inc.* 75,000 506,250
Hain Celestial Group, Inc.* 71,500 1,605,890
--------------
2,112,140
--------------
Insurance (0.63%)
StanCorp Financial Group, Inc.* 4,500 207,000
--------------
Leisure (1.71%)
Six Flags, Inc.* 34,100 567,083
--------------
Media (11.48%)
Cumulus Media, Inc. (Class A)* 91,300 1,154,945
Pegasus Communications Corp.* 141,700 1,629,550
Radio One, Inc. (Class D)* 35,300 540,443
Regent Communications, Inc.* 60,500 474,925
--------------
3,799,863
--------------
Medical (10.83%)
Alpharma, Inc. (Class A) 47,500 1,491,500
Covance, Inc.* 55,000 1,057,100
Cyberonics, Inc.* 25,000 437,500
I-STAT Corp.* 85,300 597,100
--------------
3,583,200
--------------
Oil & Gas (3.68%)
Chesapeake Energy Corp.* 40,000 238,400
Marine Drilling Cos., Inc.* 22,500 290,250
Petroleum Geo-Services ASA, American
Depositary Receipts. (ADR)
(Norway)* 15,000 149,400
Precision Drilling Corp. (Canada)* 22,000 539,000
--------------
1,217,050
--------------
Protection - Safety Equip & Svc. (2.56%)
Pittston Brink's Group 38,400 847,104
--------------
Real Estate Investment Trust (0.23%)
Pinnacle Holdings, Inc.* 114,000 75,240
--------------
Retail (6.58%)
Pathmark Stores, Inc.* 53,000 1,285,250
Rite Aid Corp. * 45,000 357,300
Wild Oats Markets, Inc.* 60,000 535,200
--------------
2,177,750
--------------
Telecommunications (18.17%)
AirGate PCS, Inc.* 5,000 294,700
Alaska Communications Systems
Holdings, Inc.* 41,700 353,616
Arris Group, Inc.* 60,750 439,830
Aware, Inc. 38,000 209,380
CT Communications, Inc. 17,000 296,820
CTC Communications Group, Inc.* 112,150 790,658
Lightbridge, Inc.* 47,000 549,900
LCC International, Inc. (Class A)* 40,000 206,400
Motient Corp. 95,000 32,281
NTELOS, Inc.* 61,000 1,013,820
SBA Communications Corp.* 27,400 364,966
XM Satellite Radio Holdings, Inc.
(Class A)* 145,350 1,460,768
--------------
6,013,139
--------------
Transportation (3.66%)
RailAmerica, Inc.* 95,000 1,211,250
--------------
Waste Disposal Service & Equip (3.43%)
Casella Waste Systems, Inc. (Class A)* 97,450 1,134,318
-------------- --------------
TOTAL COMMON STOCKS
(Cost $35,596,383) (98.20%) 32,491,151
-------------- --------------
TOTAL INVESTMENTS (98.20%) 32,491,151
-------------- --------------
OTHER ASSETS AND LIABILITIES, NET (1.80%) 596,157
-------------- --------------
TOTAL NET ASSETS (100.00%) $33,087,308
============== ==============
* 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 -- International Equity Fund
Schedule of Investments
August 31, 2001 (Unaudited)
- ---------------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by
the International Equity Fund on August 31, 2001. It's divided into three
main categories: common stocks, warrants and short-term investments.
Common stocks and warrants are further broken down by country. Short-term
investments, which represent the Fund's "cash" position, are listed last.
NUMBER OF
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ---------- --------------
COMMON STOCKS
Australia (0.27%)
Woolworths Ltd. (Retail) 2,100 $11,877
--------------
Belgium (0.29%)
UCB SA (Medical) 300 12,736
--------------
Bermuda (1.13%)
XL Capital Ltd. (Class A)
(Insurance) 600 49,800
--------------
Canada (6.96%)
Anderson Exploration Ltd.* (Oil &
Gas) 2,500 42,638
Biovail Corp.* (Medical) 500 23,050
Loblaw Cos. Ltd. (Retail) 800 27,082
Magna International, Inc. (Class A)
(Automobile/Trucks) 603 37,028
Manulife Financial Corp.
(Insurance) 1,900 55,765
Precision Drilling Corp.* (Oil &
Gas) 1,500 36,750
Suncor Energy, Inc. (Oil & Gas) 1,500 41,582
Talisman Energy, Inc. (Oil & Gas) 1,100 42,163
--------------
306,058
--------------
Denmark (1.59%)
Novo Nordisk AS (Medical) 1,100 45,928
Vestas Wind Systems AS (Utilities) 800 24,124
--------------
70,052
--------------
Finland (0.61%)
Stora Enso Oyj (Paper & Paper
Products) 2,300 26,868
--------------
France (13.05%)
Alstom SA (Machinery) 1,600 43,550
Assurances Generales de France SA
(Insurance) 700 38,119
Aventis SA (Medical) 600 43,910
BNP Paribas SA (Banks - Foreign) 400 36,728
Castorama Dubois Investissement SA
(Retail) 600 33,546
Lafarge SA (Building) 300 27,232
PSA Peugeot Citroen SA
(Automobile/Trucks) 700 33,378
Sanofi-Synthelabo SA (Medical) 700 45,850
Schneider Electric SA (Machinery) 620 34,382
STMicroelectronics NV (Electronics) 500 15,227
Television Francaise 1 SA (Media) 1,600 46,531
TotalFinaElf SA (Oil & Gas) 489 72,328
Vivendi Environnement SA
(Utilities) 1,400 59,526
Vivendi Universal SA
(Diversified Operations) 800 43,782
--------------
574,089
--------------
Germany (6.21%)
BASF AG (Chemicals) 1,200 49,091
Bayerische Motoren Werke AG
(Automobile/Trucks) 1,300 41,778
Deutsche Bank AG (Banks - Foreign) 400 27,600
E.On AG (Diversified Operations) 1,000 54,591
Fresenius Medical Care AG (Medical) 200 15,891
Infineon Technologies AG
(Electronics) 500 11,700
Muenchener Rueckversicherungs-
Gesellschaft AG (Insurance) 158 45,332
SAP AG (Computers) 200 27,106
--------------
273,089
--------------
Hong Kong (0.92%)
China Mobile Ltd.*
(Telecommunications) 6,500 20,292
Johnson Electric Holdings Ltd.
(Electronics) 17,000 20,270
--------------
40,562
--------------
Ireland (3.41%)
Allied Irish Banks Plc (Banks -
Foreign) 3,300 37,200
Bank of Ireland (Banks - Foreign) 2,700 25,650
Bank of Ireland (Banks - Foreign) 1,800 17,166
CRH Plc (Building) 2,000 33,637
Elan Corp. Plc* American Depositary
Receipts (ADR) (Medical) 700 36,365
--------------
150,018
--------------
Israel (0.97%)
Teva Pharmaceutical Industries Ltd. (ADR)
(Medical) 600 42,660
--------------
Italy (3.81%)
Autostrade SpA (Transport) 8,500 59,501
ENI SpA (Oil & Gas) 2,800 37,164
Riunione Adriatica di Sicurta SpA
(Insurance) 3,816 51,690
Telecom Italia SpA
(Telecommunications) 2,300 19,048
--------------
167,403
--------------
Japan (14.76%)
Ajinomoto Co., Inc. (Food) 3,000 32,493
All Nippon Airways Co., Ltd.*
(Transport) 1,000 3,184
Daikin Industries, Ltd. (Building) 2,000 32,206
Eisai Co., Ltd. (Beverages) 1,000 24,719
Fast Retailing Co., Ltd. (Retail) 200 25,266
Fuji Photo Film Co., Ltd. (Leisure) 1,000 37,226
Fujisawa Pharmaceutical Co., Ltd.
(Medical) 1,000 19,413
Furukawa Electric Co., Ltd.
(Wire & Cable Products) 1,000 7,546
Honda Motor Co., Ltd.
(Automobile/Trucks) 500 18,065
Marui Co., Ltd. (Retail) 2,000 25,098
Nintendo Co., Ltd. (Leisure) 100 15,960
Nippon Telegraph & Telephone Corp.
(Telecommunications) 3 13,644
Nissan Motor Co., Ltd.
(Automobile/Trucks) 11,000 64,294
Nomura Securities Co., Ltd.
(Broker Services) 2,000 34,025
NTT DoCoMo, Inc.
(Telecommunications) 1 12,296
Oriental Land Co., Ltd. (Leisure) 400 28,635
Orix Corp. (Leasing Companies) 200 19,927
Seven-Eleven Japan Co., Ltd.
(Retail) 1,000 33,183
Shionogi & Co., Ltd. (Medical) 1,000 17,939
Sumitomo Mitsui Banking Corp.
(Banks - Foreign) 8,000 65,356
Takeda Chemical Industries, Ltd.
(Medical) 1,000 41,184
Tokyo Electric Power Co., Inc.
(Utilities) 900 23,270
Tokyo Electron Ltd. (Electronics) 500 27,456
Toray Industries, Inc. (Textile) 8,000 26,479
--------------
648,864
--------------
Mexico (0.61%)
America Movil SA de CV (ADR)
(Telecommunications) 1,600 26,944
--------------
Netherlands (6.07%)
Aegon NV (Insurance) 1,100 33,190
Akzo Nobel NV (Chemicals) 880 38,960
Fortis (NL) NV (Insurance) 1,300 36,578
Heineken NV (Beverages) 1,075 45,102
ING Groep NV (Insurance) 1,354 42,787
Koninklijke Ahold NV (Retail) 731 21,837
Unilever Plc (Food) 5,700 48,662
--------------
267,116
--------------
Portugal (0.36%)
Portugal Telecom SGPS SA*
(Telecommunications) 2,500 15,955
--------------
Singapore (1.21%)
Singapore Telecommunications Ltd.
(Telecommunications) 46,000 53,372
--------------
South Africa (0.34%)
South African Breweries Ltd.
(Beverages) 2,000 14,801
--------------
South Korea (0.66%)
Korea Telecom Corp. (ADR)
(Telecommunications) 1,400 29,106
--------------
Spain (2.11%)
Banco Popular Espanol SA
(Banks - Foreign) 900 33,022
Sogecable SA* (Media) 2,000 44,110
Telefonica SA*
(Telecommunications) 1,342 15,592
--------------
92,724
--------------
Sweden (1.59%)
Securitas AB
(Protection - Safety Equip &
Services) 1,600 25,243
Svenska Handelsbanken AB
(Banks - Foreign) 3,100 44,448
--------------
69,691
--------------
Switzerland (3.31%)
Nestle SA (Food) 300 63,287
Novartis AG (Medical) 1,359 49,560
Serona SA (ADR) (Medical) 1,400 32,480
--------------
145,327
--------------
United Kingdom (21.48%)
Abbey National Plc (Banks -
Foreign) 3,200 52,036
AstraZeneca Plc (Medical) 700 33,813
Barclays Plc (Banks - Foreign) 1,800 54,620
BG Group Plc (Oil & Gas) 8,200 34,050
BP Plc (Oil & Gas) 6,500 55,161
British Airways Plc (Transport) 5,200 23,103
British American Tobacco Plc
(Tobacco) 5,700 48,745
British Sky Broadcasting Group Plc*
(Media) 3,700 41,821
Centrica Plc (Utilities) 16,410 53,846
Compass Group Plc (Food) 5,300 40,399
Diageo Plc (Beverages) 5,900 59,535
Friends Provident Plc* (Insurance) 9,400 34,768
GlaxoSmithKline Plc (Medical) 2,000 53,081
Reckitt Benckiser Plc
(Soap & Cleaning Preparations) 3,500 53,256
Royal Bank of Scotland Group Plc
(Banks - Foreign) 2,300 57,437
Scottish Power Plc (Utilities) 6,300 44,820
Shire Pharmaceuticals Group Plc*
(Medical) 2,600 37,787
South African Breweries Plc
(Beverages) 2,700 20,032
Standard Chartered Plc
(Banks - Foreign) 2,300 27,951
Tesco Plc (Retail) 11,600 43,873
Vodafone Group Plc
(Telecommunications) 37,440 74,744
--------------
944,878
--------------
United States (2.59%)
Santa Fe International Corp. (Oil &
Gas) 1,700 43,010
Schlumberger Ltd. (Oil & Gas) 800 39,200
Transocean Sedco Forex, Inc. (Oil &
Gas) 1,100 31,790
--------------
114,000
--------------
TOTAL COMMON STOCKS
(Cost $4,360,979) (94.31%) 4,147,990
-------------- --------------
WARRANTS
Germany (0.00%)
Muenchener Rueckversicherungs-
Gesellschaft AG* (Insurance) 2 140
--------------
TOTAL WARRANTS
(Cost $90) (0.00%) 140
-------------- --------------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $4,361,069) (94.31%) 4,148,130
-------------- --------------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- ------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.85%)
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,
5.25% due 11-15-28 and
U.S. Treasury Note, 4.75%
due 11-15-08) 3.64% $169 $169,000
NUMBER OF SHARES
Cash Equivalents (13.32%) ----------------
Navigator Securities Lending
Prime Portfolio** 585,960 585,960
-------------- --------------
TOTAL SHORT-TERM INVESTMENTS (17.17%) 754,960
-------------- --------------
TOTAL INVESTMENTS (111.48%) 4,903,090
-------------- --------------
OTHER ASSETS AND LIABILITIES, NET (11.48%) (504,801)
-------------- --------------
TOTAL NET ASSETS (100.00%) $4,398,289
============== ==============
* Non-Income producing security.
** Represents investment of security lending collateral.
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.
Portfolio Concentration (Unaudited)
- ----------------------------------------------------------------------
The Fund primarily invests in securities issued by companies of other
countries. The performance of the Fund is closely tied to the economic
conditions within the countries in which it invests. The concentration of
investments by country for individual securities held by the Fund is shown
in the schedule of investments. In addition, the concentration of
investments can be aggregated by various industry groups. The table below
shows the percentages of the Fund's investments at August 31, 2001,
assigned to the various investment categories.
MARKET VALUE OF SECURITIES
INVESTMENT CATEGORIES AS A % OF NET ASSETS
- --------------------- --------------------
Automobile/Trucks 4.42%
Banks - Foreign 10.90
Beverages 3.73
Broker Services 0.77
Building 2.12
Chemicals 2.00
Computers 0.62
Diversified Operations 2.24
Electronics 1.70
Food 4.20
Insurance 8.83
Leasing Companies 0.45
Leisure 1.86
Machinery 1.77
Media 3.01
Medical 12.55
Oil & Gas 10.82
Paper & Paper Products 0.61
Protection - Safety Equipment & Services 0.57
Retail 5.04
Soap & Cleaning Preparations 1.21
Textile 0.60
Tobacco 1.11
Telecommunications 6.39
Transport 1.95
Utilities 4.67
Wire & Cable Products 0.17
Short-Term Investments 17.17
-------
TOTAL INVESTMENTS 111.48%
=======
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Institutional Series Trust
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Active Bond Fund ("Active Bond Fund"), John Hancock Dividend
Performers Fund ("Dividend Performers Fund"), John Hancock Medium
Capitalization Growth Fund ("Medium Capitalization Growth Fund"), John
Hancock Focused Small Cap Growth Fund, (formerly John Hancock Small
Capitalization Growth Fund) ("Focused Small Cap Growth Fund"), John
Hancock Small Cap Equity Fund, (formerly John Hancock Small Capitalization
Value Fund) ("Small Cap Equity Fund") and John Hancock International
Equity Fund ("International Equity Fund") are separate portfolios of John
Hancock Institutional Series Trust the ("Trust"), an open-end investment
management company registered under the Investment Company Act of 1940,
organized as a Massachusetts business trust in 1994. Each Fund's class of
shares has equal rights as to voting, redemption, dividends and
liquidation within their respective Fund. Effective November 15, 2000, the
board of Trustees designated the existing shares of Focused Small Cap
Growth Fund as Class I shares and authorized the issuance of Class A,
Class B and Class C shares of the Fund, which will become available for
sale to individuals at a later time. The Trustees may authorize the
creation of additional portfolios from time to time to satisfy various
investment objectives.
The investment objective of the Active Bond Fund is a high rate of total
return, consistent with prudent investment risk. The investment objective
of the Dividend Performers Fund is long-term growth of capital, with
income as a secondary objective. The investment objective of the Medium
Capitalization Growth Fund is long-term capital appreciation. The
investment objective of the Focused Small Cap Growth Fund is long-term
growth of capital. The investment objective of the Small Cap Equity Fund
is capital appreciation. The investment objective of the International
Equity Fund is long-term growth of capital.
Significant accounting policies of the Funds are as follows:
VALUATION OF INVESTMENTS Securities in the Funds' portfolios are valued on
the basis of market quotations, valuations provided by independent pricing
services or, if quotations are not readily available or the value has been
materially affected by events occurring after the closing of a foreign
market, 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. All portfolio transactions initially expressed in terms of foreign
currencies have been translated into U.S. dollars as described in "Foreign
Currency Translation" below.
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.
FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed
in terms of foreign currencies are translated into U.S. dollars based on
London currency exchange quotations as of 5:00 p.m., London time, on the
date of any determination of the net asset value of the Funds.
Transactions affecting statement of operations accounts and net realized
gain (loss) on investments are translated at the rates prevailing at the
dates of the transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held.
Such fluctuations are included with the net realized and unrealized gain
or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions and the difference between the
amounts of dividends, interest and foreign withholding taxes recorded on
the Funds' books and the U.S. dollar equivalent of the amounts actually
received or paid. Net unrealized foreign exchange gains and losses arise
from changes in the value of assets and liabilities, other than
investments in securities, resulting from changes in the exchange rate.
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, which
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 Funds 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 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.
ORGANIZATION EXPENSES Expenses incurred in connection with the
organization of the Funds have been capitalized and are being charged to
the Funds' operations ratably over a five year period that began with the
commencement of the investment operations 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 outstanding borrowings activity
under the line of credit during the six months ended August 31, 2001.
SECURITIES LENDING The Funds 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 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, Focused Small Cap Growth Fund loaned
securities having a market value of $43,086 collateralized by securities
in the amount of $46,374, Small Cap Equity Fund loaned securities having a
market value of $4,218,150 collateralized by securities in the amount of
$4,220,152 and International Equity Fund loaned securities having a market
value of $555,000 collateralized by cash in the amount of $585,960. The
cash collateral was invested in a short-term instrument.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Funds may enter into
forward foreign currency exchange contracts as a hedge against the effect
of fluctuations in currency exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date at a set price. The aggregate principal amounts
of the contracts are marked to market daily at the applicable foreign
currency exchange rates. Any resulting unrealized gains and losses are
included in the determination of the Funds' daily net assets. The Funds
record realized gains and losses at the time the forward foreign currency
exchange contract is closed out or offset by a matching contract. Risks
may arise upon entering these contracts from the potential inability of
counterparties to meet the terms of the contract and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
These contracts involve market or credit risk in excess of the unrealized
gain or loss reflected in the Funds' Statement of Assets and Liabilities.
The Funds may also purchase and sell forward contracts to facilitate the
settlement of foreign currency denominated portfolio transactions, under
which they intend to take delivery of the foreign currency. Such contracts
normally involve no market risk if they are offset by the currency amount
of the underlying transaction.
The following Fund had open forward foreign currency exchange contracts at
August 31, 2001:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ---------- ------------
INTERNATIONAL EQUITY FUND
Buys
South African Rand 12,733 September '01 ($10)
============
Sells
Euro 4,608 September '01 $41
Japanese Yen 38,189,551 September '01 (9,449)
------------
($9,408)
============
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.
For federal income tax purposes, the following Funds had capital loss
carryforwards available to the extent provided by regulations to offset
future net realized capital gains. To the extent such carryforwards are
used by the Funds, no capital gain distributions will be made.
CAPITAL LOSS CAPITAL LOSS
CARRYFORWARD CARRYFORWARD
EXPIRING EXPIRING
FUND 2/29/08 2/28/09
- ---- ------- -------
Active Bond $49,819 $79,391
Focused Small Cap Growth -- 332,423
International Equity -- 636,448
Expired capital loss carryforwards are reclassified to capital paid-in, in
the year of expiration.
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 Fund. 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 a monthly management fee
to the Adviser equivalent, on an annual basis, to the following:
FUND RATE
- ---- ----
Active Bond 0.50% of average daily net assets up to $1.5 billion
0.45% of such assets in excess of $1.5 billion
Dividend Performers 0.60% of average daily net assets up to $500 million
0.55% of such assets in excess of $500 million
Medium Capitalization Growth 0.80% of average daily net assets up to $500 million
0.75% of such assets in excess of $500 million
Focused Small Cap Growth 0.80% of average daily net assets
Small Cap Equity 0.70% of average daily net assets up to $500 million
0.65% of such assets in excess of $500 million
International Equity 0.90% of average daily net assets up to $500 million
0.65% of such assets in excess of $500 million
International Equity Fund and the Adviser have a subadvisory contract with
Nicholas-Applegate Capital Management LP. The Fund is not responsible for
payment of the subadvisory fees.
The Adviser has agreed to limit each Fund's expenses to the following:
0.60% of Active Bond Fund's average daily net assets, 0.70% of Dividend
Performers Fund's average daily net assets, 0.90% of Medium Capitalization
Growth Fund's average daily net assets, 0.85% (excluding any 12b-1 and
transfer agent fees) of Focused Small Cap Growth Fund's average daily net
assets, 0.80% of Small Cap Equity Fund's average daily net assets and
1.00% of International Equity 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 as follows: $42,280 for
the Active Bond Fund, $28,825 for the Dividend Performers Fund, $34,873
for the Medium Capitalization Growth Fund, $33,256 for the Focused Small
Cap Growth Fund, $39,020 for the Small Cap Equity Fund and $84,411 for the
International Equity Fund. The Adviser has 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 pays 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 John Hancock Life
Insurance Company. Each Fund pays monthly transfer agent fees at an annual
rate of 0.05% of its average daily net assets, plus certain out-of-pocket
expenses.
The Funds have an agreement with the Adviser to perform necessary tax,
accounting and legal services for the Funds. 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 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 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 assets are always equal and
are marked to market on a quarterly basis to reflect any income earned by
the investments 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 securities and obligations of the U.S. government, during the
six months ended August 31, 2001, were as follows:
PURCHASES SALES
---------- -----------
Active Bond $9,955,086 $7,643,738
Dividend Performers 1,367,028 1,975,149
Medium Capitalization Growth 10,458,247 13,419,960
Focused Small Cap Growth 3,929,228 3,694,119
Small Cap Equity 13,540,663 12,310,143
International Equity 5,483,205 5,542,350
The cost of investments owned on August 31, 2001, (including short-term
investments) and gross unrealized appreciation and depreciation in value
of investments owned by the Funds, for federal income tax purposes, were
as follows:
GROSS GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
---------- ------------ ------------ ------------
Active Bond $8,532,191 $204,603 ($24,095) $180,508
Dividend Performers 4,941,208 936,324 (477,849) 458,475
Medium Capitalization Growth 6,303,601 428,552 (487,146) (58,594)
Focused Small Cap Growth 4,781,686 640,526 (569,560) 70,966
Small Cap Equity 35,596,383 4,898,886 (8,004,118) (3,105,232)
International Equity 5,136,785 171,875 (405,570) (233,695)
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 Active Bond Fund resulted in a $16,519 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
Active Bond Fund the effect of this change in the period ended August 31,
2001 was to decrease net investment income by $8,052, increase unrealized
appreciation on investments by $2,776 and increase net realized gain on
investments by $5,276. 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 $0.01 per share, increase in net
realized and unrealized gain on investments by $0.01 per share and
decrease in the ratio of net investment income to average net assets by
0.20%. The Statements of Changes in Net Assets and the Financial
Highlights for prior periods have not been restated to reflect this change
in presentation.
NOTE E --
SHAREHOLDER MEETING
On April 25, 2001, shareholders of International Equity Fund approved a
new subadvisory management contract among the International Equity Fund,
the Adviser and Nicholas-Applegate Capital Management LP (487,052 FOR; 0
AGAINST; and 0 ABSTAINING).
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.
[A recycled logo in lower left hand corner with caption "Printed on
Recycled Paper."]
KB0SA 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 Sovereign Bond Fund (the "Registrant") on Form N-1A
under the Securities Act of 1933 and the Investment company Act of 1940 (File
Nos. 2-48925 and 811-2402), which information is incorporated herein by
reference.
ITEM 16. EXHIBITS:
1 Registrant's Amended and Restated Filed as Exhibit 99.a to Registrant's
Declaration of Trust Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 47 (file
nos. 811-2402 and 2-48925 on September
27, 1999, accession
no. 0001010521-99-000377) ("PEA 47 ")
1.1 Amendment to Declaration of Trust Filed as Exhibit 99.a.1 to Registrant's
Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 48 (file
nos. 811-2402 and 2-48925 on July 25,
2000, accession no. 0001010521-00-000354)
("PEA 48")
1.2 Amendment to Declaration of Trust Filed as Exhibit 99.a.2 to Registrant's
Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 51 (file
nos. 811-2402 and 2-48925 on August 27,
2001, accession no. 0001010521-01-500145)
("PEA 51")
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. 42 (file
nos. 811-2402 and 2-48925 on April 29,
1997, accession
no. 0001010521-97-000276) ("PEA 42")
2.1 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 A 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 John Hancock Bond Fund Registration Statement on Form N-1A and
and John Hancock Advisers, LLC incorporated herein by reference to
post-effective amendment no. 39 (file
nos. 811-2402 and 2-48925 on April 26,
1995, accession no.0000950146-95-000178)
("PEA 39")
7 Distribution Agreement between the Filed as Exhibit 99.e to PEA 39 and
Registrant and John Hancock Funds incorporated herein by reference.
LLC. (formerly named John Hancock
Broker Distribution Services, Inc
7.1 Amendment to Distribution Agreement Filed as Exhibit 99.e.1 to PEA 47 and
between the Registrant and John incorporated herein by reference.
Hancock Funds, LLC
7.2 Amendment to Distribution Agreement Filed as Exhibit 99.e.2 to PEA 39 and
between the Registrant and John incorporated herein by reference.
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. 52 (file
nos. 811-2402 and 2-48925 on October 25,
2001, accession no. 0001010521-01-500237)
("PEA 52")
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. 45 (file
LLC nos. 811-2402 and 2-48925 on July 16,
1998, accession no.0001010521-98-000293)
("PEA 45")
10.1 Accounting and Legal Services Filed as Exhibit 99. h.1 to Registrant's
Agreement Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 40 (file
nos. 811-2402 and 2-48925 on April 29,
1996, accession no. 0001010521-96-000046)
("PEA 40")
10.2 Service Agreement between Charles Filed as Exhibit 99.h.2 to Registrant's
Schwab and John Hancock Bond Fund Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 49 (file
nos. 811-2402 and 2-48925 on September
25, 2000, accession no.
0001010521-00-000426) ("PEA 49")
11 Class A and Class B Distribution Filed as Exhibit 99.m to PEA 45 and
Plans between Registrant and John incorporated herein by reference.
Hancock Funds, LLC
11.1 Class C Distribution Plans between Filed as Exhibit 99.m.1 to Registrant's
Registrant and John Hancock Funds, LLC Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 46 (file
nos. 811-2402 and 2-48925 on September
28, 1998, accession no.
0001010521-98-000334) ("PEA 46")
12 John Hancock Funds Class A, Class B, Filed herewith as Exhibit 12
Class C and Class I Amended and
restated Multiple Class Plan pursuant
to Rule 18f-3
13 Code of Ethics John Hancock Funds, LLC Filed as Exhibit 99.p to PEA 48 and
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 Consents of Ernst & Young LLP Filed herewith as Exhibit 17
regarding the audited financial
statements of John Hancock Bond Fund
and Consents of Deloitte & Touche LLP
regarding the audited financial
statements of John Hancock Active
Bond Fund.
18 Not applicable
19 Powers of Attorney Filed as addendum to signature pages and
incorporated herein by reference.
20 Prospectus of John Hancock Bond 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
Active Bond Fund, dated July this Registration Statement.
2, 2001
21 Statement of Additional Filed herewith as Exhibit A and B
Information John Hancock to Part B of this Registration
Active Bond Fund, dated Statement.
July 1, 2001
21.1 Statement of Additional Filed herewith as Exhibit A and B
information of John Hancock to Part B of this Registration
Bond Fund dated January 1, 2002 Statement.
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 SOVEREIGN BOND FUND
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
- ------------------------
Dennis S. Aronowitz
* Trustee
- ------------------------
Richard P. Chapman, Jr.
* Trustee
- ------------------------
William J. Cosgrove
* Trustee
- ------------------------
John M. DeCiccio
Signature Title Date
--------- ----- ----
* Trustee
- ------------------------
Richard A. Farrell
* Trustee
- ------------------------
Gail D. Fosler
* Trustee
- ------------------------
William F. Glavin
* Trustee
- ------------------------
John A. Moore
* Trustee
- ------------------------
Patti McGill Peterson
* Trustee
- ------------------------
John W. Pratt
*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 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
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/Gail D. Fosler
- ------------------- -----------------
Maureen R. Ford, as Chairman and Chief Gail D. Fosler
Exective Officer
/s/John M. DeCiccio /s/William F. Glavin
- ------------------- --------------------
John M. DeCiccio, as Trustee William F. Glavin
/s/Dennis S. Aronowitz /s/John A. Moore
- ---------------------- ----------------
Dennis S. Aronowitz John A. Moore
/s/Richard P. Champman, Jr. /s/Patti McGill Peterson
- --------------------------- ------------------------
Richard P. Chapman, Jr. Patti McGill Peterson
/s/William J. Cosgrove /s/John W. Pratt
- ---------------------- ----------------
William J. Cosgrove John W. Pratt
/s/Richard A. Farell
- --------------------
Richard A. Farrell
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
2 Amendment to Amended and Restated By-Laws of Registrant
6 Agreement and Plan of Reorganization between the John Hancock Bond Fund
(the "Acquiring Fund") and John Hancock Active Bond Fund (the "Acquired
Fund") (filed as EXHIBIT A to Part A of this Registration Statement).
12 John Hancock Funds Class A, Class B, Class C and Class I Amended and
restated Multiple Class Plan pursuant to Rule 18f-3.
14 Opinion as to legality of shares and consent.
15 Form of opinion as to tax matters and consent.
17 Consent of Ernst & Young LLP regarding the audited financial statements
and highlights of the Registrant. Consent of Deloitte & Touche LLP
regarding the audited financial statements and highlights of the John
Hancock Active Bond Fund.