As filed with the Securities and Exchange Commission on May 21, 2003
Securities Act File No. 2-29502
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. ___
(Check appropriate box or boxes)
JOHN HANCOCK CAPITAL SERIES
---------------------------
(Exact Name of Registrant as Specified in Charter)
(617) 375-1702
--------------
(Area Code and Telephone Number)
101 Huntington Avenue, Boston, Massachusetts 02199-7603
-------------------------------------------------------
(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)
Susan S. Newton, Esq.
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, MA 02199
----------------
(Name and address of agent for service)
Title of Securities Being Registered: Shares of beneficial interest of John
Hancock Capital Series.
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. 2-29502 and 811-1677).
It is proposed that this filing will become effective on June 23, 2003.
M.S.B. Fund, Inc.
200 Park Avenue
New York, NY 10166
June 27, 2003
Dear Fellow Shareholder:
I am writing to ask for your vote on an important matter that will affect your
investment in M.S.B. Fund.
As you will read in the enclosed proxy statement, John Hancock Funds intends to
acquire the assets of M.S.B. Fund. John Hancock Funds is a premier investment
management company, managing $25.6 billion in open-end funds, closed-end funds,
private accounts, variable annuities and retirement plans for individual and
institutional investors as of March 31, 2003. The firm is a wholly owned
subsidiary of John Hancock Financial Services, Inc.
If the reorganization of your Fund into a John Hancock fund is approved by our
shareholders, Shay Assets Management will be retained as sub-adviser to the John
Hancock fund and John McCabe and Mark Trautman will continue to manage the John
Hancock fund in the same manner they manage your Fund today. As part of the John
Hancock Funds family, you will also enjoy the benefits of being part of a
broadly diversified fund group. These benefits include having the right to
exchange fund shares into any of John Hancock's other funds without a sales
charge and, in a broader context, having access to all John Hancock Funds'
shareholder services. By combining forces with John Hancock Funds, we also hope
to see the assets in the reorganized fund increase significantly. With
additional assets under management, there is the potential to reach economies of
scale which could lower expenses for all shareholders and would enhance the
ability of your portfolio managers to continue to manage the fund at the level
for which M.S.B. Fund is known.
It is important to note that this transaction will not result in any immediate
increase in fund expenses. John Hancock Funds has agreed to cap fund expenses at
1.38% for the next two years, the same level they were for our 2002 fiscal year.
In addition, current shareholders of M.S.B. Fund will be able to purchase
additional shares of the new John Hancock Large Cap Select Fund without
incurring a sales charge.
After careful consideration, your Fund's Board of Directors has unanimously
agreed to the reorganization of the assets of M.S.B. Fund into a John Hancock
fund. The enclosed proxy statement contains further explanation and important
details of the reorganization, which I strongly encourage you to read before
voting. If approved by the shareholders, the reorganization is scheduled to take
place at the close of business on August 22, 2003.
Your vote makes a difference, no matter what the size of your investment. Please
review the enclosed proxy materials and complete, sign and return the enclosed
proxy ballot to us immediately. Your prompt response will help us avoid the need
for additional mailings. For your convenience, we have provided a postage-paid
envelope.
If you have any questions or need additional informational, please contact a
John Hancock Funds Customer Service Representative at 1-800-225-5291 between
8:00A.M. and 8:00P.M. Eastern Time. I thank you for your prompt vote on this
matter.
Best Regards,
/s/Joseph R. Ficalora
- ---------------------
Joseph R. Ficalora
President
Draft 5/19/03
M.S.B. FUND, INC.
200 Park Avenue
New York, NY 10166
NOTICE OF MEETING OF SHAREHOLDERS
SCHEDULED FOR AUGUST 20, 2003
This is the formal agenda for your fund's shareholder meeting (the "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 M.S.B. Fund, Inc. ("MSB Fund" or "your fund"):
A shareholder Meeting for your fund will be held at the offices of Hale and Dorr
LLP, 300 Park Avenue, New York, N.Y. 10022, on Wednesday, August 20, 2003 at
11:00 a.m., Eastern time, to consider the following:
1. A proposal to approve an Agreement and Plan of Reorganization (the
"Agreement") between your fund and John Hancock Large Cap Select Fund (the "John
Hancock Fund"), which involves the sale of substantially all of the assets of
your fund, the cessation of your fund's business as an investment company and
the dissolution of your fund. These matters are referred to collectively as the
"Proposal." Under the Agreement, your fund will transfer all of its assets, with
limited exceptions, to the John Hancock Fund in exchange for Class A shares of
the John Hancock Fund, a newly-created fund with substantially similar
investment objectives and policies as your fund. Class A shares of the John
Hancock Fund will be distributed to your fund's shareholders in proportion to
their holdings on the date of the reorganization. The John Hancock Fund also
will assume your fund's liabilities that are included in the calculation of your
fund's net assets at the closing and liabilities with respect to your fund's
investment operations that are not required by generally accepted accounting
principles to be included in the calculation of net asset value. Your fund's
current investment adviser will act as subadviser to the John Hancock Fund. The
reorganization described above will involve the sale of substantially all of the
assets of your fund, and as a result of the reorganization your fund will cease
its business as an investment company. Following the consummation of the
reorganization, your fund will dissolve and you will be a shareholder of the
John Hancock Fund. Your board of directors recommends that you vote FOR the
Proposal.
2. Any other business that may properly come before the Meeting.
Shareholders of record as of the close of business on June 23, 2003 are entitled
to vote at the Meeting and any related follow-up meetings.
You have the ability to exercise dissenter's rights under New York Business
Corporation Law. See "Information Concerning the Meeting - Dissenter's Rights"
in the accompanying Proxy Statement/Prospectus for a more complete description
of the rights of dissenting shareholders. 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, the fund may be required to
make additional solicitations.
By order of the Board of Directors,
[ ]
Secretary
June 27, 2003
PROXY STATEMENT OF
M.S.B. FUND, INC.
200 Park Avenue
New York, NY 10166
1-800-661-3938
PROSPECTUS FOR CLASS A SHARES OF
JOHN HANCOCK LARGE CAP SELECT FUND
(a series of John Hancock Capital Series)
101 Huntington Avenue
Boston, MA 02199
1-800-225-5291
This proxy statement and prospectus contains the information you should know
before voting on the proposed reorganization of M.S.B. Fund, Inc. ("MSB Fund" or
"your fund") into John Hancock Large Cap Select Fund (the "John Hancock Fund"),
an open-end management investment company and the other matters included in the
Proposal. Please read it carefully and retain it for future reference.
How the Reorganization Will Work
o Your fund will transfer all of its assets, other than certain rights under
contracts with services providers and insurance policies ("Excluded Assets"),
to the John Hancock Fund. The John Hancock Fund will assume your fund's
liabilities that are included in the calculation of your fund's net asset
value at the closing and liabilities with respect to your fund's investment
operations that are not required by generally accepted accounting principles
to be included in the calculation of net asset value and are consistent with
liabilities incurred by registered management investment companies in the
ordinary course of their businesses (i.e., not including any extraordinary
obligations, including, but not limited to legal proceedings, shareholder
claims and distribution payments).
o The John Hancock Fund will issue Class A shares to your fund with an
aggregate net asset value equal to your fund's net assets. Class A shares of
the John Hancock Fund will be distributed to your fund's shareholders in
proportion to their holdings on the reorganization date. As of the close of
the reorganization, you will hold the same number of shares of the John
Hancock Fund as you held in your fund immediately before the reorganization
and the aggregate net asset value of such shares will be the same as the net
asset value of your shares of your fund on the reorganization date.
o Your fund will be liquidated and you will become a shareholder of the John
Hancock Fund.
o John Hancock Advisers, LLC ("JHA") will act as investment adviser to the John
Hancock Fund. Your fund's current investment adviser, Shay Assets Management,
Inc. ("SAMI"), will act as subadviser to the John Hancock Fund. JHA has
agreed to limit the John Hancock Fund's total operating expenses for Class A
shares for two years to 1.38% of average daily net assets.
o The Class A Shares of the John Hancock Fund you receive in the reorganization
will not be subject to any sales charge. If you own shares in your own name
as of the closing of the reorganization (for example, not in the name of a
broker), you may purchase additional Class A shares of the John Hancock Fund
in that same account in the future without paying any sales charge. Except as
described above, Class A shares of the John Hancock Fund are subject to a
front-end sales charge of up to 5.00%. The Class A Shares of the John Hancock
Fund also are subject to 12b-1 fees.
o The reorganization is not intended to result in income, gain or loss for
federal income tax purposes 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 John Hancock Fund.
o As a result of the reorganization, your fund will cease its business as an
investment company, and will be dissolved.
An investment in the John Hancock Fund is not a bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
2
Shares of the John Hancock Fund 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.
Why Your Fund's Directors are Recommending the Reorganization
The directors of your fund believe that reorganizing your fund into an
investment company with substantially similar investment policies that is part
of the John Hancock family of funds and is subadvised by SAMI offers you
potential benefits. These potential benefits include:
o Potential to attract additional assets, which may reduce per share operating
expenses in the long term;
o Continuity of portfolio management, since SAMI will be subadviser to the John
Hancock Fund;
o JHA's experience and resources in managing mutual funds;
o JHA's commitment for two years following the reorganization to limit the total
operating expenses of Class A shares of the John Hancock Fund; and
o The exchange privileges offered to shareholders of the John Hancock Fund as
well as the waiver of sales charges on additional purchases of Class A
shares of the John Hancock Fund.
Therefore, your fund's directors recommend that you vote FOR the reorganization.
===================================================================================================================================
Where to Get More Information
===================================================================================================================================
Your fund's prospectus dated May 1, 2003. Available to you free of charge by calling 1-800-661-3938. This
prospectus, which is also on file with the Securities and Exchange
Commission ("SEC"), is incorporated by reference into this proxy
statement and prospectus.
===================================================================================================================================
The John Hancock Fund's prospectus dated June 23, 2003. In the same envelope as this proxy statement and prospectus. This
prospectus, which is also on file with the SEC, is incorporated by
reference into this proxy statement and prospectus.
===================================================================================================================================
Your fund's annual report to shareholders for the year Available to you free of charge by calling 1-800-661-3938. Also on
2002. file with the SEC. See "Available Information." These reports are
incorporated by reference into this proxy statement and prospectus.
===================================================================================================================================
A statement of additional information (the "SAI") dated Available to you free of charge by calling 1-800-_______. Also on
June 23, 2003. It contains additional information about file with the SEC. This statement of additional information is
your fund and the John Hancock Fund. incorporated by reference into this proxy statement and prospectus.
===================================================================================================================================
To ask questions about this proxy statement and Call your fund's toll-free telephone number: 1-800-661-3938.
prospectus.
===================================================================================================================================
The date of this proxy statement and prospectus is June 27, 2003.
TABLE OF CONTENTS
===============================================================================================
Page
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INTRODUCTION
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SUMMARY
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PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION, THE SALE OF SUBSTANTIALLY ALL
OF THE ASSETS OF MSB FUND, THE CESSATION OF ITS BUSINESS AS AN INVESTMENT COMPANY AND
THE DISSOLUTION OF THE FUND
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CAPITALIZATION
===============================================================================================
BOARDS' EVALUATION AND RECOMMENDATION
===============================================================================================
VOTING RIGHTS AND REQUIRED VOTE
===============================================================================================
ADDITIONAL INFORMATION ABOUT JOHN HANCOCK LARGE CAP SELECT FUND
===============================================================================================
MATERIAL PROVISIONS OF THE MANAGEMENT CONTRACTS AND THE SUB-INVESTMENT MANAGEMENT
CONTRACT
===============================================================================================
JOHN HANCOCK LARGE CAP SELECT FUND CLASS A RULE 12B-1 PLAN
===============================================================================================
COMPARISON OF NEW YORK CORPORATION AND MASSACHUSETTS BUSINESS TRUST
===============================================================================================
FINANCIAL HIGHLIGHTS
===============================================================================================
3
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INFORMATION CONCERNING THE MEETING
===============================================================================================
OWNERSHIP OF SHARES OF THE FUNDS
===============================================================================================
EXPERTS
===============================================================================================
AVAILABLE INFORMATION
===============================================================================================
EXHIBIT A - AGREEMENT AND PLAN OF REORGANIZATION A-1
===============================================================================================
EXHIBIT B - PROSPECTUS OF JOHN HANCOCK LARGE CAP SELECT FUND,
DATED JUNE 23, 2003
===============================================================================================
APPENDIX A - SUMMARY of Section 623 of the New York Business Corporation Law
===============================================================================================
INTRODUCTION
This proxy statement and prospectus is being used by your fund's board of
directors to solicit proxies to be voted at a special meeting (the "Meeting") of
your fund's shareholders. This Meeting will be held at the offices of Hale and
Dorr LLP, 300 Park Avenue, New York, N.Y. 10022, on Wednesday, August 20, 2003
at 11:00 a.m., Eastern time. The purpose of the Meeting is to consider a
proposal to approve an Agreement and Plan of Reorganization (the "Agreement")
providing for the reorganization of your fund into the John Hancock Fund (a
newly created mutual fund that is not yet operational), which involves the sale
of substantially all of the assets of your fund, the cessation of your fund's
business as an investment company and the dissolution of your fund. These
matters are referred to collectively as the "Proposal." You should understand
that if you vote in favor of the Proposal, you are approving a reorganization of
your fund into a class of shares subject to Rule 12b-1 fees. Although the effect
of the Rule 12b-1 fee on the John Hancock Fund's total expenses could be
partially offset by the expense limitation, the aggregate management and Rule
12b-1 fees paid by the John Hancock Fund are higher than the management fee paid
by your fund.
This proxy statement and prospectus is being mailed to your fund's shareholders
on or about June 27, 2003.
Who is Eligible to Vote?
Shareholders of record on June 23, 2003 are entitled to attend and vote at the
Meeting or any adjournment of the 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
Proposal. If any other business comes before the Meeting, your shares will be
voted at the discretion of the persons named as proxies.
SUMMARY
The following is a summary of more complete information appearing later in this
proxy statement and prospectus or incorporated herein. You should read carefully
the entire proxy statement, including the Agreement attached as Exhibit A,
because they contain details that are not in the summary.
Comparison of MSB Fund to the John Hancock Fund
====================================================================================================================================
MSB Fund John Hancock Fund
====================================================================================================================================
Business A diversified, open-end investment management A newly organized diversified series of John Hancock
company organized as a New York corporation. Capital Series, an open-end investment management
company organized as a Massachusetts business trust.
====================================================================================================================================
Net assets as of $46.2 million None. The John Hancock Fund is newly organized and
March 31, 2003 does not expect to commence investment operations
until after the reorganization occurs.
====================================================================================================================================
Investment advisers and Investment adviser: Investment adviser
portfolio managers Shay Assets Management, Inc. (as defined above, John Hancock Advisers, LLC (as defined above, "JHA")
"SAMI")
Investment subadviser:
Portfolio Managers: Shay Assets Management, Inc. (as defined above,
John J. McCabe, Sr. Vice President of SAMI "SAMI")
(portfolio manager since 1991)
Mark F. Trautman, Vice President of SAMI Portfolio Managers:
(portfolio manager since 1993) John J. McCabe, Sr. Vice President of SAMI
(portfolio manager since 1991)
Mark F. Trautman, Vice President of SAMI
(portfolio manager since 1993)
====================================================================================================================================
Investment objectives Each fund seeks long-term growth of capital.
Each fund's investment objective is non-fundamental
and can be changed without shareholder approval.
====================================================================================================================================
4
====================================================================================================================================
MSB Fund John Hancock Fund
====================================================================================================================================
Primary investments Primarily in equity securities of At least 80% of its assets in equity securities of
large-capitalization companies (i.e., companies large-capitalization companies (i.e., companies with
with a market capitalization in excess of $5 a market capitalization in excess of $5 billion).
billion).
The fund may invest up to 25% of its assets in equity
securities of smaller companies.
====================================================================================================================================
Investment Strategies SAMI's investment strategy is to identify U.S.-based companies whose growth, cash flow,
earnings and dividend prospects are promising and whose securities are reasonably priced and have the
potential for capital appreciation. It has applied this strategy to your fund and will continue to do so
when managing the John Hancock Fund.
In managing the funds' portfolios, SAMI looks for companies with strong balance sheets and sustainable
earnings growth. In evaluating the prospects for a company's growth and earnings, SAMI considers, among
other things, the company's historical performance and growth strategy, the growth rate of the industries
in which it operates and the markets into which it sells, the nature of its competitive environment,
technological developments and trends in market share.
In attempting to determine reasonable price levels for a company's securities, SAMI utilizes a variety of
measurement methods, including discounted cash flow analysis of expected earnings streams and an
evaluation of the company's price-to-earnings ratio.
The equity securities in which the funds invest consist primarily of common stocks of
large-capitalization companies.
====================================================================================================================================
Temporary defensive Each fund may invest up to 100% of its assets temporarily in non-equity securities, such as investment
strategies grade corporate bonds, commercial paper and government securities.
====================================================================================================================================
Diversification Each fund is diversified for the purpose of the Investment Company Act of 1940 (the "Investment
Company Act"), and each fund is subject to diversification requirements under the Internal
Revenue Code of 1986 (the "Code").
====================================================================================================================================
Industry Concentration Each fund may not invest more than 25% of its assets in any one industry. For the John
Hancock Fund, this limitation does not apply to investment in obligations of the U.S. government of
any of its agencies, instrumentalities or authorities, and the limitation is applied at market value at
the time of such investment.
====================================================================================================================================
Restricted and Illiquid The fund may not invest in securities whose The fund may not invest more than 15% of its net
Securities sale by the fund would be restricted under the assets in securities which are illiquid.
Securities Act of 1933, and may not invest more than 10% of its total assets in securities that are
otherwise restricted as to disposition.
====================================================================================================================================
Borrowing The fund may not borrow money except for Although it has no intention to do so other than for
temporary administrative or liquidity (not for temporary purposes, the fund may borrow money to the
leveraging) purposes, and then only from banks extent permitted under the 1940 Act.
up to an amount not in excess of 5% of the value
of total assets at the time of the loan,
repayable in not more than 60 days.
====================================================================================================================================
====================================================================================================================================
Other investment As described above, the funds have substantially similar principal investment strategies and policies.
policies and Certain of the non-principal investment policies and restrictions are different. For example, the John
restrictions Hancock Fund is permitted to engage in securities lending, which is a technique for generating extra
income in which your fund does not engage. For a more complete discussion of each fund's other investment
policies and fundamental and non-fundamental investment restrictions, see the SAI.
====================================================================================================================================
Sales charges Shares are offered with no sales charges. The Class A Shares of the John Hancock Fund you
receive in the reorganization will not be subject to
any sales charge. Moreover, if you own shares in
your own name as of the closing of the reorganization
(for example, not in the name of a broker), you may
purchase additional Class A shares of the John
Hancock Fund in the future without paying any sales
charge.
Except as described above, Class A shares of the John
Hancock Fund are subject to a front-end sales charge of
up to 5.00%. The John Hancock Fund also offers several
other classes of shares which are subject to different
sales charges and 12b-1 fees, as well as a class of
shares for institutional investors without any sales
charges or 12b-1 fees.
====================================================================================================================================
5
====================================================================================================================================
MSB Fund John Hancock Fund
====================================================================================================================================
Management and Your fund pays an advisory fee on an annual The John Hancock Fund will pay JHA a management fee
administration fees, basis equal to 0.75% of the first $100 million, equal to 0.75% annually of average daily net assets.
distribution and and 0.50% over $100 million, of average daily JHA pays the fee of SAMI as the subadviser to the
service (12b-1) fee and net assets. In addition, your fund pays a John Hancock Fund. In addition, the John Hancock
overall expenses separate administration and transfer agent fee. Fund pays a separate transfer agent fee and other fees.
Shares of your fund are not subject to a 12b-1 Class A shares are subject to a 12b-1 fee equal to 0.25%
fee. annually of average daily net assets.
SAMI has contractually agreed to limit certain
of your fund's ordinary operating expenses (not For a period of two years following the
including outside legal fees, independent reorganization, JHA has agreed to limit the John
accountants' fees, or directors' fees) to 1.10% Hancock Fund's ordinary operating expenses per Class
of average daily net assets. During the year A share to 1.38% of average daily net assets.
ended December 31, 2002, the fund's total
operating expenses after this limitation were
equal to 1.38% of average daily net assets.
====================================================================================================================================
Buying shares You may buy shares directly through the fund's Subject to sales charges except as noted above (see
transfer agent or other financial "sales charges"), you may buy shares through your
intermediaries as described in detail in your financial representative or directly through the fund's
prospectus. fund's transfer agent as described in detail in the
John Hancock Fund's prospectus.
====================================================================================================================================
Exchange privilege Not applicable. You may exchange shares of the John Hancock Fund
without incurring an exchange fee with the more than
30 other funds in the John Hancock fund family. An
exchange generally is treated as a sale and a new
purchase of shares for federal income tax purposes.
====================================================================================================================================
Redemption Procedures Shares of your fund are redeemed at their net Class A shares of the John Hancock Fund are redeemed
asset value per share next determined after at their net asset value per share next determined
receipt by the fund of the request for after receipt by the fund of the request for
redemption and all other necessary redemption and all other necessary documentation in
documentation in good order, as described in good order, as described in detail in the John
detail in your fund's prospectus. Hancock Fund's prospectus.
====================================================================================================================================
Comparison of Principal Risks of Investing in the Funds
Because each fund has the same portfolio management team and substantially
similar investment objectives, policies and strategies, the funds are subject to
the same principal risks:
The management strategy of both funds has a significant influence on fund
performance. SAMI's investment strategy is to invest in a diversified portfolio
of equity securities, consisting primarily of securities of U.S.-based companies
whose growth, cash flow, earnings and dividend prospects are promising and whose
securities are reasonably priced and have the potential for capital
appreciation. Stocks in the portfolio of either fund may not increase their
earnings at the rate anticipated by fund management and the strategies employed
by the fund may not match the performance of other strategies at different times
or under different market or economic conditions.
In addition, large capitalization stocks as a group could fall out of favor with
the market, causing either fund to underperform investments that focus on small
or medium capitalization stocks.
The value of an investment in either fund will fluctuate in response to stock
market movements or in the particular securities or types of securities held by
the fund. To the extent that either fund makes investments with additional
risks, these risks could increase volatility or reduce performance:
o To the extent either fund invests in a given industry, its performance
will be hurt if that industry performs poorly. In addition, if the
managers' security selection strategies do not perform as expected, the
fund could underperform its peers or lose money.
o To the extent that your fund invests in securities of smaller companies
(i.e., companies with market capitalization of less than $5 billion),
these companies carry additional risks because their earnings tend to be
less predictable, their share prices more volatile and their securities
may be less liquid than securities of larger companies.
Investments in the funds 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 either fund.
6
Other Consequences of the Reorganization
Your fund pays monthly management fees and the John Hancock fund pays daily
management fees as well as Rule 12b-1 fees, equal to the following annual
percentages of average daily net assets:
- -----------------------------------------------------------------------------------------------------------------------
John Hancock Fund
MSB Fund John Hancock Fund Combined Management Fee and Class
Management Fee Management Fee A Rule 12b-1 Fee
- -----------------------------------------------------------------------------------------------------------------------
0.75% -- for average daily net assets up to $100 million 0.75% 1.00%
0.50% -- for average daily net assets over $100 million
- -----------------------------------------------------------------------------------------------------------------------
The annual management fee rate payable by the John Hancock Fund (without giving
effect to expense limitations) is the same as the rate paid by your fund at its
current asset level. In addition to the advisory fee, your fund pays an
administration fee and a transfer agent fee that vary with the size of the fund
and were 0.10% and 0.07%, respectively, of average daily net assets during the
fund's most recent fiscal year. JHA and its affiliates will provide these
services (either under its investment management agreement or under separate
agreements) for approximately 0.03% and 0.23%, respectively, of average daily
net assets. JHA will pay SAMI its subadvisory fee. If you vote in favor of the
reorganization, you are approving a reorganization into a class of shares
subject to a Rule 12b-1 fee. This fee is equal to 0.25% of the average daily net
assets attributable to Class A shares and therefore, when combined with the John
Hancock Fund's management fee, is higher than your fund's management fee (as
shown in the table above).
For its most recent fiscal year, your fund's operating expenses were 1.48% of
average daily net assets (before waiver of fees or reimbursement of expenses).
SAMI has contractually agreed to limit certain of your fund's ordinary operating
expenses, including advisory, administration, custodian and federal and state
registration fees, to 1.10% of average daily net assets. This limitation does
not, however, apply to certain fees of the fund's outside legal counsel,
independent accountants' fees, and directors' fees. After applying this
limitation, your fund's net operating expenses were 1.38% of average daily net
assets for the most recent fiscal year. With regard to the John Hancock Fund,
JHA has agreed to waive, until the second anniversary of the closing of the
reorganization, all or a portion of its management fee or reimburse the John
Hancock Fund to limit the fund's annual ordinary operating expenses (other than
taxes, interest and extraordinary expenses) attributable to Class A Shares to
1.38% of average daily net assets. You will benefit from a lower expense ratio
if the John Hancock Fund's actual operating expenses are less than 1.38% of
average daily net assets due to greater operating efficiencies or economies of
scale.
Performance information for the John Hancock Fund is not presented because the
fund has not yet commenced operations. As accounting successor to your fund, the
John Hancock Fund will assume your fund's historical performance record after
the reorganization.
Set forth below is performance information for your fund. The following
performance information indicates some of the risks of investing in your fund.
The bar chart shows how your fund's total return has varied from year to year.
The table shows your fund's average annual total return (before and after taxes)
over time compared with a broad-based securities market index. Past performance
before and after taxes does not indicate future results.
Calendar Year Total Returns*
20.64 -1.08 24.97 21.16 28.88 31.45 5.79 5.68 -3.73 -15.68
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Your fund's year-to-date return as of March 31, 2003 was - 6.75%.
*During the period shown in the bar chart, your fund's highest quarterly return
was 22.56% for the quarter ended December 31, 1998 and the lowest quarterly
return was - 12.82% for the quarter ended September 30, 2002.
7
Average Annual Total Returns as of December 31, 2002
1 Year 5 Years 10 Years
------ ------- --------
MSB Fund
Return Before Taxes -15.08% 3.74% 10.77%
Return After Taxes on Distributions (1) -16.47% 2.17% 7.69%
Return After Taxes on Distributions and -9.26% 2.94% 7.83%
Sale of Fund Shares (1)
S&P 500 Index (2) -22.09% -0.58% 9.34%
(1) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state and
local taxes. Actual after-tax returns depend on your situation and may
differ from those shown. Furthermore, the after-tax returns shown are not
relevant to investors who hold their shares through tax-deferred
arrangements such as 401(k) plans or IRAs.
(2) The S&P 500 Index is the Standard & Poor's Composite Index of 500 Stocks,
which is a commonly recognized unmanaged price index of 500 widely held
common stocks. Unlike the fund's returns, index returns do not reflect any
fees, expenses or taxes.
The Funds' Fees and Expenses
Shareholders of both funds pay various fees and expenses, either directly or
indirectly. The table below discusses the fees and expenses that you would pay
if you were to buy and hold shares of each fund. The expenses in the table
appearing below are based on (i) for your fund, the expenses of your fund for
its fiscal year ended December 31, 2002 and (ii) for the John Hancock Fund, the
estimated annual expenses of the John Hancock Fund Class A shares for the first
two years of operations. The John Hancock Fund's actual expenses may be greater
or less.
================================================================================================================
John Hancock
MSB Fund
Shareholder transaction fees (paid directly from your investment) Fund Class A
================================================================================================================
Maximum sales charge (load) imposed on purchases (as a % of purchase price) none 5.00%(1)
================================================================================================================
Maximum deferred sales charge (load) as a % of purchase or sale price, whichever none None (2)
is less
================================================================================================================
Redemption fee none none
================================================================================================================
Exchange fee as a % of amount exchanged n/a none
================================================================================================================
Annual fund operating expenses (deducted from fund assets) MSB John Hancock
(as a % of average net assets) Fund Fund
Class A
================================================================================================================
Management fee 0.75% 0.75%
================================================================================================================
Distribution and service (12b-1) fee none 0.25%
================================================================================================================
Other expenses 0.73% 0.38%
================================================================================================================
Total annual fund operating expenses 1.48% 1.38%
================================================================================================================
Expense reduction (3) (0.10)% -
================================================================================================================
Net annual fund operating expenses 1.38% 1.38%
================================================================================================================
(1) As described above, this sales charge does not apply to shares received in
the reorganization or any subsequent purchases of the John Hancock Fund Class A
shares by shareholders of your fund who become shareholders of record of the
John Hancock Fund through the reorganization.
(2) Except for investments of $1 million or more redeemed within one year.
(3) As described above, MSB Fund is subject to an expense limitation for certain
of its ordinary operating expenses. This expense limitation for MSB Fund is
contractual and remains in effect for so long as the fund's investment advisory
agreement remains in effect, unless amended. The investment advisory agreement
may be terminated by the investment adviser upon 90 days' notice to the fund.
The reduction reflects a waiver equal to 0.05% of average net assets by the
fund's transfer agent and administrator and of 0.05% of average net assets by
the investment adviser. The John Hancock Fund Class A shares are subject to a
contractual expense limitation of all ordinary operating expenses at 1.38% of
average daily net assets. This expense limitation for the John Hancock Fund is
contractual and may not be modified or terminated until the second anniversary
of the reorganization.
The hypothetical example below shows what you, as a current shareholder, would
pay if you invested $10,000 over the various time periods indicated in each
fund. The example assumes that you purchased shares without a sales charge,
reinvested all dividends and that the average annual return was 5%. The example
8
for your fund assumes expense limitations and fee waivers that were in effect
during the fund's last fiscal year. The example for the John Hancock Fund
assumes the expense limitation is in effect for two years. The examples are for
comparison purposes only and are not a representation of either fund's actual
expenses or returns, either past or future.
===============================================================================
Example MSB John Hancock
Fund Fund
Class A
===============================================================================
Year 1 $ 151 $ 141
===============================================================================
Year 3 $ 468 $ 437
===============================================================================
Year 5 $ 808 $755
===============================================================================
Year 10 $ 1,768 $ 1,657
===============================================================================
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION, THE SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF MSB FUND, THE CESSATION OF ITS BUSINESS AS AN
INVESTMENT COMPANY AND THE DISSOLUTION OF THE FUND
The Reorganization
o The reorganization is scheduled to occur as of 5:00 p.m., Eastern time, on
August 22, 2003, but may occur on any later date before September 30, 2003,
unless your fund and the John Hancock Fund agree in writing to a later date.
Your fund will transfer all of its assets, other than Excluded Assets, to the
John Hancock Fund. The John Hancock Fund will assume your fund's liabilities
that are included in the calculation of your fund's net assets at the closing
and liabilities with respect to your fund's investment operations that are
not required by generally accepted accounting principles to be included in
the calculation of net asset value and are consistent with liabilities
incurred by registered management investment companies in the ordinary course
of their businesses (i.e., not including any extraordinary obligations,
including, but not limited to legal proceedings, shareholder claims and
distribution payments. The net asset value of both funds will be computed as
of 4:00 p.m., Eastern time, on the reorganization date.
o The John Hancock Fund will issue to your fund Class A shares with an
aggregate net asset value equal to the net assets attributable to your fund's
shares. These shares will immediately be distributed to your fund's
shareholders in proportion to their holdings on the reorganization date. As
of the close of the reorganization, you will hold the same number of shares
of the John Hancock Fund as you held in your fund immediately before the
reorganization and the aggregate net asset value of such shares will be the
same as the net asset value of your shares of your fund on the reorganization
date.
o Your fund will be liquidated and you will become a shareholder of the John
Hancock Fund.
o The reorganization is not intended to result in income, gain or loss for
federal income tax purposes 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 John Hancock Fund.
o John Hancock Advisers, LLC ("JHA") will act as investment adviser to the John
Hancock Fund. Your fund's current investment adviser, Shay Assets Management,
Inc. ("SAMI") will act as subadviser to the John Hancock Fund. JHA has agreed
to limit the John Hancock Fund's total operating expenses for Class A shares
for two years to 1.38% of average daily net assets.
o The Class A Shares of the John Hancock Fund you receive in the reorganization
will not be subject to any sales charge. If you own shares in your own name
as of the closing of the reorganization (for example, not in the name of a
broker), you may purchase additional Class A shares of the John Hancock Fund
in the future without paying any sales charge. Except as described above,
Class A shares of the John Hancock Fund are subject to a front-end sales
charge of up to 5.00%. The Class A Shares of the John Hancock Fund also are
subject to 12b-1 fees.
o As a result of the reorganization, your fund will cease its business as an
investment company, and will be dissolved.
Agreement and Plan of Reorganization
The shareholders of your fund are being asked to approve an Agreement and Plan
of Reorganization, a copy of which is attached as Exhibit A. The description of
the Agreement and Plan of Reorganization contained herein is qualified in its
entirety by the attached copy.
9
Reasons for the Proposed Reorganization
The directors of your fund believe that the proposed reorganization will be
advantageous to the shareholders of your fund for several reasons. The directors
considered the following matters, among others, in approving the Proposal.
First, JHA and its affiliates have greater potential for increasing the size of
the fund due to JHA's experience in distribution of mutual funds through a
broader range of distribution channels than currently available to your fund.
Your fund had $46.2 million in net assets at March 31, 2003. The fund's
relatively small size may make it difficult to control its future expenses. As a
result of increasing regulatory requirements, such as the USA Patriot Act and
the Sarbanes-Oxley Act, the fund is likely to be subject to increased operating
costs, which would have an adverse effect on its expense ratio. The fund's total
operating expenses as a percentage of its net assets was 1.38% for 2002, but
there is no assurance that the fund will be able to limit its expenses to this
level in the future. Over the long-term, if the potential for a larger asset
base is realized as a result of the broader range of distribution channels
available through John Hancock, shareholders may benefit from reduced per-share
operating expenses. Furthermore the possibility of managing a larger amount of
assets may help retain your portfolio managers.
Second, shareholders of your fund will enjoy continuity of portfolio management.
Because JHA will retain SAMI to act as subadviser to the John Hancock Fund, the
portfolio management team of your fund will be the same portfolio management
team for the John Hancock Fund. However, JHA will have certain rights to
terminate the subadvisory agreement with SAMI. (See "Additional Information
About John Hancock Large Cap Select Fund".) JHA will oversee SAMI as subadviser
to the John Hancock Fund in accordance with the terms of their Sub-Investment
Management Contract.
Third, although SAMI will manage the assets of the John Hancock Fund as its
subadviser, JHA will be responsible for the overall management of the John
Hancock Fund's operations, including supervision of compliance with the
investment guidelines and regulatory restrictions. Your fund will benefit from
JHA's experience and resources in managing investment companies. At March 31,
2003, JHA managed 61 investment companies and approximately 100 institution and
private accounts with approximately $25.6 billion in assets. JHA also has
significant experience in overseeing funds managed by subadvisers. At March 31,
2003, JHA employed 7 subadvisers, which acted as subadviser for 10 of JHA's
mutual funds with approximately [$___] million in assets.
Fourth, for the next two years JHA has agreed to limit the expenses of Class A
shares of the John Hancock Fund to 1.38% of average daily net assets. Even after
the termination of the expense limitation, there is potential that the John
Hancock Fund's expenses over time will be the same or lower than your fund's
current expenses. Although the John Hancock Fund's management fee and Rule 12b-1
fee in the aggregate are 0.25% higher than your fund's current management fee,
the long-term asset growth potential, resulting economies of scale and other
efficiencies in other expenses could result in lower overall expenses of the
John Hancock Fund compared to those of your fund. However, if the expense
limitation is not continued beyond the stated two-year period, the expenses of
the John Hancock Fund could be higher than the expenses incurred by your fund in
2002 unless operating efficiencies or economies of scale fully offset the higher
aggregate management fee and 12b-1 fee rates for the John Hancock Fund. There
can be no assurance that such operating efficiencies or economies of scale will
be achieved.
Fifth, the Class A shares of the John Hancock Fund received in the
reorganization will provide your fund's shareholders with substantially the same
investment advantages as they currently have, including the ability to purchase
future shares without paying a sales charge.
Sixth, the John Hancock Fund is part of a diverse family of mutual funds, with
over 30 funds that will be available to your fund's shareholders through
exchanges. Your fund is not entitled to any exchange privileges.
The board of trustees of the John Hancock Fund consider that the reorganization
presents an excellent opportunity for the John Hancock 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 the John Hancock Fund and its
shareholders.
The boards of both funds also considered that each fund's investment adviser, as
well as the John Hancock Fund's principal distributor, will benefit from the
reorganization. Because the John Hancock Fund will be the accounting successor
to your fund and will assume your fund's performance record, JHA expects to be
able to increase the John Hancock Fund's assets at a faster rate than would
otherwise be possible if it began offering a fund with similar objectives with
no historical performance record. Such a growth in asset size benefits JHA by
increasing its management fees and accelerating the point at which management of
the fund is profitable to JHA. As subadviser to the John Hancock Fund, SAMI
would similarly benefit from increased assets. Moreover, as discussed below
under "Certain Agreements between JHA and SAMI," SAMI will receive economic
benefits from JHA if the reorganization is completed. In addition, the principal
distributor of shares of the John Hancock Fund, John Hancock Funds, LLC (the
"Distributor"), will benefit through the adoption of the Class A Rule 12b-1
plan.
10
Comparative Fees and Expense Ratios. As discussed above, the management fee rate
paid by your fund at its current asset level is the same as the rate paid by the
John Hancock Fund. However, the John Hancock Fund's combined management fee and
Class A Rule 12b-1 fee are 0.25% higher than your fund's management fee alone.
Your fund does not have a Rule 12b-1 Fee. JHA estimates that the John Hancock
Fund's other expenses during the current fiscal year will be 0.38% of average
daily net assets, which is lower than your fund's other expenses of 0.68% (after
fee waivers) of average daily net assets. JHA has agreed until the second
anniversary of the closing of the reorganization to limit the John Hancock
Fund's Class A ordinary operating expenses to 1.38% of average daily net assets,
which is the same as your fund's annual total expense ratio after expense
limitations for the fiscal year ended December 31, 2002.
Certain Agreements between JHA and SAMI
In connection with the reorganization, JHA and SAMI have entered into an
agreement dated as of May 14, 2003 (the "Master Agreement"), which provides,
among other things, that JHA shall pay SAMI a fee upon the closing of the
reorganization in consideration of (i) SAMI entering into and performing its
obligations under a subadvisory agreement with JHA (the "Sub-Investment
Management Contract") to serve as subadviser of the John Hancock Fund and (ii)
the performance by SAMI of certain obligations under the Master Agreement. A
director and certain officers of the fund are also affiliated with SAMI and will
benefit directly or indirectly as a result of such arrangement. The terms of the
Sub-Investment Management Contract with SAMI are discussed under "Material
Provisions of the Management Contracts and the Sub-Investment Management
Contract - Sub-Investment Management Contract."
Tax Status of the Reorganization
The reorganization is not intended to result in income, gain or loss for United
States federal income tax purposes and will not take place unless both funds
receive a satisfactory opinion from Hale and Dorr LLP, counsel to the John
Hancock Fund, substantially to the effect that the reorganization described
above will be a "reorganization" within the meaning of Section 368(a) of the
Code.
As a result, for federal income tax purposes:
o No gain or loss will be recognized by your fund upon (1) the transfer of all
of its assets to the John Hancock Fund as described above or (2) the
distribution by your fund of the John Hancock Fund shares to your fund's
shareholders;
o No gain or loss will be recognized by the John Hancock Fund upon the receipt
of your fund's assets solely in exchange for the issuance of the John Hancock
Fund shares to your fund and the assumption of your fund's liabilities by the
John Hancock Fund;
o The basis of the assets of your fund acquired by the John Hancock Fund will
be the same as the basis of those assets in the hands of your fund
immediately before the transfer;
o The tax holding period of the assets of your fund in the hands of the John
Hancock Fund will include your fund's tax holding period for those assets;
o You will not recognize gain or loss upon the exchange of your shares of your
fund solely for the John Hancock Fund shares as part of the reorganization;
o The basis of the John Hancock Fund shares received by you in the
reorganization will be the same as the basis of your shares of your fund
surrendered in exchange; and
o The tax holding period of the John Hancock Fund shares you receive will
include the tax holding period of the shares of your fund surrendered in the
exchange, provided that the shares of your fund were held as capital assets
on the date of the exchange.
In rendering such opinions, counsel shall rely upon, among other things,
reasonable assumptions as well as representations of your fund and the John
Hancock Fund.
No tax ruling has been or will be received from the Internal Revenue Service
("IRS") in connection with the reorganization. An opinion of counsel is not
binding on the IRS or a court, and no assurance can be given that the IRS would
not assert, or a court would not sustain, a contrary position.
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.
11
Additional Terms of 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 may not redeem or
transfer John Hancock Fund shares received in the reorganization until you have
surrendered your fund share certificates or delivered a lost certificate
affidavit, in the form and accompanied by the surety bonds that your fund may
require. The John Hancock Fund will not issue share certificates in the
reorganization.
Conditions to Closing the Reorganization. The obligation of your fund to
consummate the reorganization is subject to the satisfaction of certain
conditions, including the performance by the John Hancock Fund of all its
obligations under the Agreement and the receipt of all consents, orders and
permits necessary to consummate the reorganization (see Sections 6 and 8 of the
Agreement, attached as Exhibit A).
The obligation of the John Hancock Fund to consummate the reorganization is
subject to the satisfaction of certain conditions, including your fund's
performance of all of its obligations under the Agreement, the receipt of
certain documents and financial statements from your fund and the receipt of all
consents, orders and permits necessary to consummate the reorganization (see
Sections 7 and 8 of the Agreement, attached as Exhibit A).
The obligations of both funds are subject to the approval of the Agreement by
the necessary vote of the outstanding shares of your fund, in accordance with
the provisions of your fund's certificate of incorporation and 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 Section 8 of the Agreement, attached as Exhibit A).
Termination of Agreement. The board of either your fund or the John Hancock Fund
may terminate the Agreement (even if the shareholders of your 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 in the best interests
of the shareholders. In addition, the Agreement may be terminated by the mutual
agreement of your fund and the John Hancock Fund, or by either fund in the event
of certain material breaches of the Agreement by the other party or failure of
the other party to satisfy a condition precedent to the reorganization.
Expenses of the Reorganization. JHA will pay up to $200,000 of the aggregate
expenses incurred by your fund in connection with the reorganization and the
other matters included in the Proposal, including (i) the cost of preparing,
printing and mailing the proxy material, (ii) the costs of directors' and
shareholders' meetings in connection with the reorganization, and (iii) legal
and accounting fees and expenses of the Acquired Fund in connection with the
reorganization. SAMI will pay the expenses of your fund incurred in connection
with the reorganization and the other matters included in the Proposal
(including the dissolution and winding up of the fund) in excess of $200,000.
Sale of Substantially All of MSB Fund's Assets and Cessation of the Fund's
Business as an Investment Company
The reorganization involves the sale of substantially all of the assets of your
fund. In accordance with Section 909 of the New York Business Corporation Law,
the board of directors of your fund has approved the sale of substantially all
of the fund's assets and has directed that the reorganization be submitted to
the shareholders of the fund for approval. Approval of the Proposal by the
shareholders of the fund will constitute the shareholders' approval of the sale
of substantially all of the assets of the fund as provided in Section 909 of the
New York Business Corporation Law.
Notwithstanding shareholder approval, the board of directors of your fund may
abandon the proposed reorganization without further action by the shareholders,
subject to the rights, if any, of the John Hancock Fund under the Agreement and
Plan of Reorganization. The Agreement and Plan of Reorganization provides that
prior to the closing of the reorganization, either party may terminate the
Agreement by a resolution of its board of directors or 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 such party or its
shareholders.
As a result of the sale of substantially all of the fund's assets, the fund will
cease its business as an investment company and will file with the Securities
and Exchange Commission an application to terminate is registration as an
investment company under the Investment Company Act. Approval of the Proposal by
the shareholders of the fund will constitute the shareholders' approval of the
cessation of the fund's business as an investment company.
Dissolution of MSB Fund
Following the reorganization, your fund will be dissolved. Approval of the
Proposal by the shareholders of the fund will constitute the shareholders'
approval of the dissolution of the fund as provided in Section 1001 of the New
York Business Corporation Law.
12
Following the dissolution of your fund, it may not carry on any business except
for the purpose of winding up its affairs, and the fund and its board of
directors will continue to have such corporate power as may be necessary for
that purpose. Because the fund is transferring all of its assets to the John
Hancock Fund other than certain contractual rights that may be necessary to the
winding up of the funds' affairs and which, upon expiration, will have no value,
the fund does not contemplate making any final liquidating distribution to its
shareholders other than the distribution of the shares of the John Hancock Fund
received in the reorganization.
The dissolution of the fund will not affect any remedy available to or against
the fund, its directors, officers or shareholders for any right or claim
existing or any liability incurred before such dissolution, except as provided
in section 1007 (Notice to creditors; filing or barring claims) or 1008
(Jurisdiction of supreme court to supervise dissolution and liquidation) of the
New York Business Corporation Law.
CAPITALIZATION
The following table sets forth the capitalization of each fund as of March 31,
2003, and the pro forma combined capitalization of both funds as if the
reorganization had occurred on that date. This table reflects the pro forma
ratio of one Class A share of the John Hancock Fund being issued for each share
of your fund.
=============================================================================================================
March 31, 2003
=============================================================================================================
John Hancock Large Cap
John Hancock Large Cap Select Fund
MSB Fund Select Fund Class A shares
Class A shares Pro Forma
=============================================================================================================
Net Assets $46.2 million N/A $46.2 million
=============================================================================================================
Net Asset Value Per Share $14.24 N/A $14.24
=============================================================================================================
Shares Outstanding 3,246,557 N/A 3,246,557
=============================================================================================================
BOARDS' EVALUATION AND RECOMMENDATION
For the reasons described above, the board of directors of your fund, including
the directors who are not "interested persons" of your fund or SAMI
("independent directors"), approved the reorganization and the Proposal. In
particular, the board of directors determined that the reorganization is in the
best interests of your fund. Similarly, the board of trustees of the John
Hancock Fund, including its independent trustees, approved the reorganization.
They also determined that the reorganization is in the best interests of the
John Hancock Fund.
The directors of your fund recommend that the shareholders of your fund vote FOR
the Proposal.
VOTING RIGHTS AND REQUIRED VOTE
Each share of your fund is entitled to one vote and each fractional share shall
be entitled to a proportionate fractional vote. A quorum is required to conduct
business at the Meeting. The presence in person or by proxy of shareholders
holding a majority of the shares outstanding on the record date and will
constitute a quorum. The favorable vote of two-thirds of the shares outstanding
on the record date is required for approval of the Proposal.
=================================================================================================================================
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.
=================================================================================================================================
Broker Non-Vote (where the Considered "present" at Broker non-votes do not count as a vote "for" and effectively result
underlying holder has not Meeting for purposes of in a vote "against" the Proposal.
voted and the broker does quorum.
not have discretionary
authority to vote the
shares)
=================================================================================================================================
Proxy submitted with No Considered "present" at Voted "for" the Proposal.
Voting Instruction (other Meeting for purposes of
than Broker Non-Vote) quorum.
=================================================================================================================================
Vote to Abstain Considered "present" at Abstentions do not constitute a vote "for" and effectively result in
Meeting for purposes of a vote "against" the Proposal.
quorum.
=================================================================================================================================
13
If the required approval of shareholders is not obtained, the Meeting may be
adjourned as more fully described in this proxy statement and prospectus. Your
fund will continue to engage in business as a separate mutual fund and the board
of directors will consider what further action may be appropriate.
ADDITIONAL INFORMATION ABOUT JOHN HANCOCK LARGE CAP SELECT FUND
Investment Adviser
JHA is the investment adviser to the John Hancock Fund. JHA, located at 101
Huntington Avenue, Boston, Massachusetts 02199-7603, was organized in 1968 and
has approximately $26 billion in assets under management as of March 31, 2003 in
its capacity as investment adviser to the funds in the John Hancock group of
funds, as well as retail and institutional privately managed accounts.
JHA 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 2000. The Life Company is one of the most recognized
and respected financial institutions in the nation. With total assets under
management of approximately $130 billion as of March 31, 2003, 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 board of trustees of the John Hancock Fund is responsible for overseeing the
performance of the fund's investment adviser and subadviser and determining
whether to approve and renew the fund's investment management contract and the
sub-investment management contract. For a discussion of these contracts, see
"Material Provisions of the Management Contracts and the Sub-Investment
Management Contract" below.
Investment Subadviser
SAMI will serve as the John Hancock Fund's investment subadviser, and its
principal office is located at 230 West Monroe Street, Chicago, Illinois 60606.
SAMI has been providing investment advisory services since 1981 and is
controlled by Mr. Rodger D. Shay. SAMI is a wholly-owned subsidiary of Shay
Investment Services, Inc., the holding company for the fund's distributor and
other securities related businesses. SAMI provides investment advisory services
to individual and institutional investors with assets under management of $5.6
billion as of March 31, 2003. SAMI has served as your fund's investment adviser
since May 19, 1995.
MATERIAL PROVISIONS OF THE MANAGEMENT CONTRACT AND THE SUB-INVESTMENT MANAGEMENT
CONTRACT
Management Contract - MSB Fund
The following is a summary of the material terms of the your fund's existing
investment advisory agreement with SAMI (the "SAMI Contract").
Services. Under the SAMI Contract, SAMI furnishes a continuous investment
program for your fund, determines the securities and other investments to be
purchased and sold by your fund, selects broker-dealers to execute such
transactions, and places and negotiates orders with such broker-dealers. In
addition to managing the investments of the fund, SAMI furnishes office space
and other facilities as may be required for carrying out its duties under the
SAMI Contract and pays all compensation of any directors, officers and employees
of the fund who are affiliated persons of SAMI. All operating costs and expenses
relating to the fund not expressly assumed by SAMI under the SAMI Contract are
paid by the fund.
Compensation. As compensation under the SAMI Contract, the fund pays SAMI a
monthly investment advisory fee (accrued daily) based upon the average daily net
assets of the fund at the rate of 0.75% annually for the first $100 million of
net assets and 0.50% of net assets over $100 million. For the fiscal year ended
December 31, 2002, your fund incurred $389,566 in advisory fees (0.70% of
average net assets) after giving effect to the expense limitation described
below.
Under the SAMI Contract, SAMI has agreed to limit certain ordinary operating
expenses, including the general expenses of the fund, advisory, administration,
transfer agent and dividend disbursing agent fees, and the costs and expenses of
federal and state registration, to 1.10% of the average daily net assets of the
fund. This expense limitation does not, however, apply to the fees and expenses
of the fund's outside counsel, independent accountants or directors.
14
For the fiscal year ended December 31, 2002, SAMI waived $26,674 pursuant to the
fee waiver.
Term. The SAMI Contract continues in effect for successive annual periods,
subject to the annual approval of its continuance as described below under
"Termination, Continuance and Amendment."
Limitation of Liability. The SAMI Contract provides that SAMI is not liable for
any error of judgment or mistake of law or for any loss suffered by the fund in
connection with the matters to which the contract relates, except a loss
resulting from a breach of fiduciary duty with respect to compensation (subject
to the limits set forth in Section 36(b)(3) of the Investment Company Act) or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the SAMI.
Termination, Continuance and Amendment. The SAMI Contract continues from year to
year subject to approval of its continuance at least annually by the vote of (1)
the board of directors and (2) a majority of your fund's independent directors,
in each case cast in person at a meeting called for the purpose of voting on
such approval. The SAMI Contract may be terminated at any time, without penalty
(x) by the fund, by the board of directors of the fund, or by vote of a majority
of the outstanding voting securities of the fund, on 30 days' written notice to
SAMI, or (y) by SAMI, on 90 days' written notice to the fund. The SAMI Contract
is automatically terminated in the event of its "assignment," as defined in the
Investment Company Act. The SAMI Contract was last approved by the board of
directors at a meeting called for that purpose on April 17, 2003.
Management Contract - the John Hancock Fund
The following is a summary of the material terms of the John Hancock Fund's
investment management contract with JHA (the "JHA Management Contract").
Services. Under the JHA Management Contract, JHA, subject to the direction of
the trustees, provides the fund with a continuous investment program for the
management of its assets, consistent with the fund's investment objective and
policies. JHA provides for such investment program through the retention of SAMI
as subadviser. In addition, JHA:
o pays the fee of SAMI as subadviser and supervises SAMI's activities as
subadviser;
o advises the fund in connection with policy decisions to be made by the
trustees;
o provides day-to-day administration; and
o provides required reports and recommendations to the trustees and maintains
the records of the fund.
JHA provides the fund with office space, supplies and other facilities required
for the business of the fund. JHA pays the compensation of all officers and
employees of the fund and pays the expenses of clerical services related to the
administration of the fund. Other than expenses specifically assumed by JHA, all
expenses incurred in the continuing operation of the fund are borne by the fund,
including fees of the independent trustees and all fees of lawyers and
accountants.
Compensation. The John Hancock Fund pays an investment management fee, paid
daily, to JHA equal on an annual basis to 0.75% of the average daily net assets
of the fund. Because the fund is not yet operational and does not expect to be
operational until the consummation of the reorganization, the fund has not paid
management fees in the past.
As described above, JHA has agreed until the second anniversary of the closing
of the reorganization to reduce its fees and/or pay expenses of the John Hancock
Fund to ensure that the fund's aggregate annual ordinary operating expenses
(excluding interest, tax expenses and other extraordinary items) will not exceed
1.38% of the fund's average daily net assets.
Term. The JHA Management Contract will take effect on the closing date of the
reorganization and will remain in effect for two years. Thereafter, the JHA
Management Contract will continue in effect from year to year subject to the
annual approval of its continuance as described below under "Termination,
Continuance and Amendment."
Limitation of Liability. The JHA Management Contract provides that JHA is not
liable for any error of judgment or mistake of law or for any loss suffered by
the fund in connection with the matters to which the contract relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the JHA in the performance of its duties or from the reckless disregard
of its obligations and duties under the contract.
Termination, Continuance and Amendment. Except as described above the JHA
Management Contract continues from year to year subject to annual approval of
its continuance by a majority of the independent trustees, cast in person at a
meeting called for the purpose of voting on such approval, and annual approval
by either (a) the fund's trustees, or (b) a majority of the fund's outstanding
voting securities, as defined in the Investment Company Act. The contract may be
terminated at any time without penalty on 60 days' written notice by the
trustees, by a vote of a majority of the fund's outstanding voting securities,
or by JHA. The contract terminates automatically in the event of its assignment
or in the event that JHA ceases to act as the fund's investment adviser.
15
Use of Name "John Hancock." Under the JHA Management Contract, if JHA ceases to
act as the fund's investments adviser, the fund (to the extent that it lawfully
can) must cease to use the name " John Hancock Classic Value Fund" or any name
derived from the name "John Hancock" or any other name indicating that the fund
is advised by or otherwise associated with JHA.
Sub-Investment Management Contract - the John Hancock Fund
SAMI will serve as subadviser to the John Hancock Fund pursuant to a
sub-investment management contract among the fund, JHA and SAMI (the
"Sub-Investment Management Contract"). The following is a summary of certain of
the material terms of the Sub-Investment Management Contract.
Services. Under the Sub-Investment Management Contract SAMI will, at its own
expense:
o furnish JHA and the fund with investment management and advisory services
with respect to the purchase, holding and disposition of portfolio
securities;
o at JHA's request, consult with JHA and the fund as to exercise of voting
rights, subscription rights, rights to consent to corporate action and any
other rights pertaining to the fund's assets;
o furnish JHA and the fund with research, economic and statistical data in
connection with the fund's investments and investment policies;
o submit reports relating to the valuation of the fund's securities and
monitor valuations in accordance with the fund's valuation procedures;
o make reports of SAMI's performance of its services and compliance with
applicable statutory and regulatory requirements;
o maintain certain books and records with respect to the fund's securities
transactions; and
o cooperate with and provide reasonable assistance to JHA, the fund, and the
fund's other agents and representatives with respect to requests for
information and preparation of regulatory filings and reports.
SAMI is required to place all trades for the John Hancock Fund through JHA's
trading desk. JHA shall have complete authority to determine the brokers or
dealers through which any trade by the fund is placed and as to the timing and
manner of the execution of any such trade.
Compensation. JHA will pay SAMI a monthly fee equal on an annual basis to the
following percentages of the actual management fee received by JHA from the
fund:
o 45% of the JHA fee with respect to the first $250,000,000 of the average
daily net asset value of the fund;
o 40% of the JHA fee with respect to the average daily net asset value of the
fund in excess of $250,000,000 up to $500,000,000;
o 35% of the JHA fee with respect to the average daily net asset value of the
fund in excess of $500,000,000 up to $750,000,000;
o 30% of the JHA fee with respect to the average daily net asset value of the
fund in excess of $750,000,000 up to $1,000,000,000; and
o 25% of the JHA fee with respect to the average daily net asset value of the
fund in excess of $1,000,000,000.
During the first year of the agreement, JHA has agreed to pay SAMI a minimum fee
under the Sub-Investment Management Contract of $375,000.
Limitation of Liability. The Sub-Investment Management Contract provides that
SAMI shall not be liable for any losses, claims, damages, liabilities or
litigation (including legal and other expenses) incurred or suffered by JHA, the
fund or any of their affiliates as a result of any error of judgment or mistake
of law by SAMI with respect to the fund, except that SAMI shall be liable for
and shall indemnify JHA and the fund from any loss arising out of or based on
(i) SAMI causing the fund to be in violation of any applicable federal or state
law, rule or regulation or any investment policy or restriction set forth in the
fund's prospectus or statement of additional information or any written
policies, procedures, guidelines or instructions provided in writing to SAMI by
the trustees of the fund or JHA, (ii) SAMI causing the fund to fail to satisfy
the requirements for qualification as a regulated investment company under the
Code other than requirements with respect to dividends, or (iii) SAMI's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties hereunder or its reckless disregard of its obligations and duties under
the Sub-Investment Management Contract.
16
Term, Termination. The Sub-Investment Management Contract shall remain in force
until June 30, 2008 and from year to year thereafter, provided its continuance
is approved prior to June 30, 2005 and annually thereafter as required by the
Investment Company Act. The Sub-Investment Management Contract may be terminated
at any time on 10 days' written notice without penalty by (a) JHA, (b) the John
Hancock Fund's board of trustees, or (c) a majority of the John Hancock Fund's
outstanding voting securities, as defined in the Investment Company Act, and may
be terminated upon 30 days written notice by SAMI. Termination of the
Sub-Investment Management Contract with respect to the John Hancock Fund shall
not be deemed to terminate or otherwise invalidate any provisions of any
contract between SAMI and any other series of the John Hancock Capital Series.
The Sub-Investment Management Contract shall automatically terminate in the
event of its assignment or upon termination of the JHA Management Contract.
JOHN HANCOCK LARGE CAP SELECT FUND CLASS A RULE 12b-1 PLAN
As described above, the John Hancock Fund has adopted a Rule 12b-1 plan for its
Class A shares (the "Plan"). Because the 12b-1 fees payable under the Plan are
an ongoing expense, over time they may increase the cost of your investment and
your shares may cost more than shares that are not subject to a distribution or
service fee or sales charge.
Compensation and Services. Under the Plan, the John Hancock Fund will pay
distribution and service fees at an aggregate annual rate of up to 0.25% of the
John Hancock Fund's average daily net assets attributable to Class A shares. The
distribution fee will be used to reimburse the John Hancock Funds, LLC (the
"Distributor") for its distribution expenses, including but not limited to: (i)
initial and ongoing sales compensation to selling brokers and others (including
affiliates of the Distributor) engaged in the sale of the John Hancock Fund
shares; and (ii) marketing, promotional and overhead expenses incurred in
connection with the distribution of the John Hancock Fund shares. 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 the
Distributor is not fully reimbursed for payments or expenses incurred under the
Plan, these expenses will not be carried beyond twelve months from the date they
were incurred. Because the John Hancock Fund is not yet operational and does not
expect to be operational until the consummation of the reorganization, the John
Hancock Fund has not paid Rule 12b-1 fees in the past.
Trustee Approval and Oversight. The Plan was approved by the board of trustees
of the John Hancock Fund, including a majority of the John Hancock Fund's
independent trustees, by votes cast in person at meetings called for the purpose
of voting on the Plan on May 20, 2003. Pursuant to the Plan, at least quarterly,
the Distributor will provide the fund with a written report of the amounts
expended under the Plan and the purpose for which these expenditures were made.
The trustees review these reports on a quarterly basis to determine their
continued appropriateness.
Term and Termination. The Plan provides that it will continue in effect only so
long as its continuance is approved at least annually by a majority of both the
John Hancock Fund's board of trustees and the independent trustees. The Plan
provides that it may be terminated without penalty, (a) by the vote of a
majority of the John Hancock Fund's board of trustees, independent trustees, or
by a vote of a majority of the John Hancock Fund's outstanding Class A shares or
(b) by the Distributor upon 60 days' written notice to the fund. The Plan
further provides that it may not be amended to increase the maximum amount of
the fees for the services described therein without the approval of a majority
of the outstanding Class A shares of the John Hancock Fund. The Plan provides,
that no material amendment to the Plan will be effective unless it is approved
by a majority vote of the trustees and the independent trustees. The holders of
Class A shares have exclusive voting rights with respect to the Plan. In
adopting the Plan, the board of trustees concluded that, in their judgment,
there is a reasonable likelihood that the Plan will benefit the holders of the
applicable class of shares of the John Hancock Fund.
Joint Expenditures. Amounts paid to the Distributor under the Plan will not be
used to pay the expenses incurred with respect to any other class of shares;
provided, however, that expenses attributable to the John Hancock 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 board
of trustees. From time to time, the John Hancock 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 fund.
COMPARISON OF NEW YORK CORPORATION AND MASSACHUSETTS BUSINESS TRUST
MSB Fund is a New York corporation, and the John Hancock Fund is a series of
John Hancock Capital Series, which is a Massachusetts business trust. Upon
consummation of the reorganization, the shareholders of MSB Fund will become
shareholders of the John Hancock Fund, and their rights will be governed by the
laws of Massachusetts and the governing instrument of the John Hancock Fund.
17
Characteristics of M.S.B. Fund, Inc. (a New York corporation)
o Governance and Management. The governing instruments of MSB Fund are its
certificate of incorporation and by-laws. The business of the fund is
managed under the direction of its board of directors. The directors of the
fund, in addition to reviewing the actions of the fund's investment
adviser, decide upon matters of general policy at their regular meetings.
The fund's officers supervise the business operations of the fund.
o Share Capital and Classes. The fund is authorized to issue five classes of
shares, par value $.001 each. At present, shares of only one class are
outstanding ("Class A"), and each Class A share represents a proportionate
interest in the fund's existing investment portfolio. Each share has one
vote on all matters submitted to a vote of the shareholders. In the event
of the liquidation of the fund, shareholders are entitled to receive a pro
rata portion of the assets of the fund after provision for the fund's debts
and expenses. All shares are entitled to share pro rata in all dividends
and distributions paid, including liquidating dividends. Shares are freely
transferable and have no conversion, subscription or pre-emptive rights.
o Meetings. A New York corporation is required to hold a meeting of
shareholders annually for the election of directors and the transaction of
other business at such time as the board of directors may specify. Special
meetings of the shareholders may be called by the board of directors or by
the holders of not less than 10 percent of the outstanding shares of the
fund. At any such special meeting only such business may be transacted
which is related to the purpose or purposes set forth in the notice of the
meeting.
o Liability of Shareholders. Under New York law, the shareholders of the fund
are not liable for the acts or obligations of the fund.
o Shareholder Vote Required To Approve Certain Transactions. The New York
Business Corporation Law requires the affirmative vote of two-thirds of the
fund's outstanding shares to authorize a merger, consolidation, the
disposition of substantially all of the fund's assets or the dissolution of
the fund, unless the fund's certificate of incorporation authorizes a
lesser number, which may not be less than a majority of the outstanding
shares. The fund's certificate of incorporation does not include such a
provision.
o Indemnification of Officers and Directors. The New York Business
Corporation Law provides that indemnification of a corporation's directors
and officers may not be made by the corporation in connection with
derivative actions in which the claim is settled or in which the director
or officer is adjudged to be liable to the corporation, unless and only to
the extent that, in view of all the circumstances, such director or officer
is fairly and reasonably entitled to such indemnification.
o Written Actions of Shareholders. The New York Business Corporation Law
provides that any action by shareholders may be taken without a meeting
with the written consent of all shareholders who would be entitled to vote
at a meeting held for such purposes or, if the certificate of incorporation
so provides, of the shareholders of the requisite number of shares of
outstanding voting stock necessary to take such action at a meeting at
which all shares entitled to vote thereon were present and voted. The
fund's certificate of incorporation does not contain such a provision.
Characteristics of the John Hancock Fund (a series of a Massachusetts business
trust)
o Governance and Management. The John Hancock Fund is a series of John
Hancock Capital Series, a Massachusetts business trust. The governing
instrument of John Hancock Capital Series is the Declaration of Trust. The
trustees of John Hancock Capital Series are responsible for the management
and supervision of the John Hancock Fund.
o Share Capital and Classes. The Declaration of Trust of John Hancock
Capital Series permits the trustees to issue an unlimited number of full
and fractional shares of beneficial interest of the John Hancock Fund
without par value. As of the date of this Proxy Statment and Prospectus,
the trustees have authorized shares of the John Hancock Fund and three other
series and have authorized the issuance of three classes of shares of the
John Hancock Fund, designated as Class A, Class B, Class C and Class I. The
shares of each class of the John Hancock Fund represent an equal
proportionate interest in the aggregate net assets attributable to that
class of the John Hancock 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 John Hancock Fund may bear
different expenses relating to the cost of holding shareholder meetings
necessitated by the exclusive voting rights of any class of shares. In the
event of liquidation, shareholders of each class are entitled to share pro
rata in the net assets of the John Hancock 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.
o Meetings. Unless otherwise required by the Investment Company Act or the
Declaration of Trust, the John Hancock 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
18
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.
o Liability of Shareholders. Under Massachusetts law, shareholders of a
Massachusetts business trust could, under certain circumstances, be held
personally liable for acts or obligations of the John Hancock Fund.
However, the John Hancock Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
John Hancock Fund. The Declaration of Trust also provides for
indemnification out of the John Hancock Fund's assets for all losses and
expenses of any shareholder held personally liable for 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 John Hancock Fund itself
would be unable to meet its obligations, and the possibility of this
occurrence is remote.
o Shareholder Vote Required To Approve Certain Transactions. The
shareholders of the John Hancock Fund are entitled to vote in connection
with the termination of the fund, the merger, sale of substantially all the
assets or reorganization of the John Hancock Fund into another entity or
the reincorporation of John Hancock Fund in another jurisdiction, except
that the board of trustees may terminate the fund in limited circumstances
without shareholder approval. Approval of two thirds of the outstanding
shares entitled to vote are required to approve termination of the fund or
its merger, sale of substantially all of its assets or reorganization,
provided that if the board of trustees has recommended the transaction,
approval of a majority of the outstanding shares (as such term in used in
the 1940 Act) is required. Approval of a majority of the outstanding shares
is required in the case of a reincorporation,
o Indemnification of Officers and Directors. John Hancock Fund's
Declaration of Trust provides that each trustee and officer shall be
indemnified by the Trust against liabilities incurred in such capacity to
the maximum extent permitted by law. However, no indemnification shall be
provided hereunder to a trustee or officer: (i) against any liability by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office; (ii) with
respect to any matter as to which the trustee or officer shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that their action was in the best interest of the trust or the fund;
or (iii) in the event of a settlement or other disposition not involving a
final adjudication unless certain findings are made by a court or the Board
of trustees.
o Written Actions of Shareholders. If there are more than 150 shareholders
of John Hancock Fund, shareholders may not take any action by written
action.
FINANCIAL HIGHLIGHTS
This table shows MSB Fund's financial performance for the past five fiscal
years. Certain information reflects financial results for a single fund share.
"Total return" shows how much your investment in MSB Fund would have increased
or decreased during each period, assuming you had reinvested all dividends and
distributions. This information for the fiscal year ended December 31, 2002 has
been audited by Ernst & Young LLP, the fund's independent auditors. Their report
and MSB Fund's financial statements are included in its annual report, which is
available upon request. The information for fiscal years ended 1998-2001 was
audited by other independent auditors.
Selected data for each share of capital stock outstanding throughout each year
19
Year Ended December 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------- -------------- ------------- ------------- ------------- -------------
Net asset value, beginning of year $18.78 $20.74 $21.09 $21.49 $17.73
------ ------ ------ ------ ------
Income (Loss) from Operations:
Net investment income (loss) --(2) (0.03) --(2) 0.01 0.01
Net realized and unrealized
gain (losses) from investments (2.83) (0.74) 1.18 1.20 5.55
------ ------ ---- ---- ----
Total from operations (2.83) (0.77) 1.18 1.21 5.56
------ ------ ---- ---- ----
Distributions:
From net investment income -- -- -- (0.01) (0.01)
From net realized gains on investments (0.68) (1.19) (1.53) (1.60) (1.79)
------ ------ ------ ------ ------
Total distributions (0.68) (1.19) (1.53) (1.61) (1.80)
------ ------ ------ ------ ------
Net change in net asset value per share (3.51) (1.96) (0.35) (0.40) 3.76
Net asset value, end of year $15.27 $18.78 $20.74 $21.09 $21.49
====== ====== ====== ====== ======
Total return (15.08)% (3.73)% 5.68% 5.79% 31.45%
Ratios/supplemental data:
Ratio of net expenses to average net assets 1.38% 1.44% 1.31% 1.24% 1.32%
Ratio of net investment income (loss) to (0.01)% (0.14)% (0.01)% 0.03% 0.02%
average net assets
Ratio of expenses to average net assets (1) 1.48% 1.52% 1.43% 1.26% 1.39%
Portfolio turnover rate 18% 13% 15% 22% 32%
Net assets, end of year (000's) $49,803 $58,634 $63,794 $67,655 $65,824
(1) During the period, certain fees were waived. If such fee waivers had not
occurred, the ratio would have been as indicated.
(2) Net loss per share was less than $0.005.
INFORMATION CONCERNING THE MEETING
Solicitation of Proxies
In addition to the mailing of these proxy materials, proxies may be solicited by
telephone, by fax or in person by the directors, officers and employees of your
fund; by personnel of your fund's investment adviser, SAMI, and your fund's
transfer agent, [BISYS Fund Services Ohio, Inc.] by the John Hancock Fund's
transfer agent, John Hancock Signature Services, Inc. ("JHSS "), or by
broker-dealer firms. JHSS, together with a third party solicitation firm, has
agreed to provide proxy solicitation services to your fund at a cost of
approximately $_____. JHA or SAMI will bear the cost of such solicitation.
Revoking Proxies
A MSB 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 Secretary of the fund, or
o By returning a duly executed proxy with a later date before the time of the
Meeting, or
o If a shareholder has executed a proxy but is present at the Meeting and
wishes to vote in person, by notifying the inspectors of election of your
fund at the Meeting at any time before the proxy is voted.
Being present at the Meeting alone does not revoke a previously executed and
returned proxy.
Outstanding Shares and Quorum
As of June 23, 2003, [_______________] shares of your fund were outstanding.
Only shareholders of record on June 23, 2003 (the "record date") are entitled to
notice of and to vote at the Meeting. The presence in person or by proxy of
shareholders of your fund holding a majority of the shares outstanding on the
record date will constitute a quorum.
Dissenter's Rights
The proposed reorganization that is part of the Proposal involves the sale of
substantially all of MSB Fund's assets. Accordingly, pursuant to Section 910 of
New York Business Corporation Law, holders of MSB Fund shares at the close of
business on the record date have the right to dissent from the Proposal and, if
the Proposal is approved and the reorganization is consummated, receive payment
20
of the fair value of their MSB Fund shares (in lieu of receiving the John
Hancock Fund shares they would otherwise receive pursuant to the reorganization)
by complying with the requirements of Section 623 of New York Business
Corporation Law. Among other things, Section 623 requires that any such
shareholder who wishes to exercise such appraisal rights must not vote in favor
of the Proposal, and must file with MSB Fund, before shareholders vote on the
Proposal, a written objection which must include a notice of his election to
dissent, his name and residence address, the number of shares as to which he
dissents (shareholders may not dissent as to less than all of their shares) and
a demand for payment of the fair value of his shares if the reorganization is
effected. A summary of the material terms of Section 623 is set forth as
Appendix A to this proxy statement/prospectus.
Notwithstanding the requirements of the New York Business Corporation Law, the
exercise of any dissenter's rights is subject to the "forward pricing"
requirements of Rule 22c-1 under the Investment Company Act, and that rule
supersedes any contrary provisions of state law, including Sections 910 and 623
of the New York Business Corporation Law. Rule 22c-1 prohibits the fund from
redeeming or repurchasing any of its shares except at a price based on the
current net asset value of such shares which is next computed after receipt of
the tender of the shares for redemption. Accordingly, the exercise of any
dissenter's rights would not result in any payment to a shareholder that is
greater than the proceeds the shareholder would have received by redeeming his
shares.
Other Business
Your fund's board of directors knows of no business to be presented for
consideration at the Meeting other than the Proposal. 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, by the time scheduled for the Meeting, a quorum of shareholders is not
present or if a quorum is present but sufficient votes "for" the Proposal have
not been received, the persons named as proxies may propose one or more
adjournments of the Meeting to another date and time, and the Meeting may be
held as adjourned within a reasonable time after the date set for the original
Meeting without further notice. Any such adjournment will require the
affirmative vote of a majority of the votes cast on the question in person or by
proxy at the session of the Meeting to be adjourned. The persons named as
proxies will vote all proxies in favor of the adjournment that voted in favor of
the Proposal. They will vote against such adjournment those proxies required to
be voted against the Proposal. Broker non-votes will be disregarded in the vote
for adjournment. If the time and place to which the Meeting is adjourned are
announced at the Meeting, the fund will not be required to give any notice to
shareholders of the adjourned meeting. The record date for determining
shareholders entitled to vote at the Meeting will also apply to such adjourned
meeting.
Telephone Voting
In addition to soliciting proxies by mail, by fax or in person, your fund may
also arrange to have votes recorded by telephone by officers and employees of
your fund 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
the 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.
21
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 Meeting. 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 to 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 by you.
o Read the proxy statement and have your proxy card at hand.
o Go to the Web site on the proxy card
o Enter control number found on your proxy card.
o Follow the simple instructions on the Web site. Please call
[__________________] us at [1-800-________] 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 e-mail if chosen.
Shareholders' Proposals
Any shareholders desiring to present a proposal for consideration at the next
meeting of shareholders of MSB Fund must submit the proposal in writing, so that
it is received by the your fund at 230 West Monroe Street, Chicago, Illinois
60606 within a reasonable time before any meeting. If the reorganization is
completed, your fund will not hold another shareholder meeting.
OWNERSHIP OF SHARES OF THE FUNDS
To the knowledge of your fund, as of June 23, 2003, the following persons owned
of record or beneficially 5% or more of the outstanding shares of MSB Fund. No
shares of the John Hancock Fund were outstanding as of that date.
- --------------------------------------------------------------------------------
Name and Address % Ownership* Type of Ownership
- --------------------------------------------------------------------------------
% Record
% Record
% Record
* Percentage ownership also represents pro-forma percentage ownership of the
John Hancock Fund.
As of April 4, 2003, the directors and officers of your fund, as a group, owned
in the aggregate approximately 5.9% of the _________ shares outstanding on such
date. The trustees and officers of the John Hancock Fund, as a group, owned in
the aggregate less than 1% of the outstanding shares of the John Hancock Fund.
EXPERTS
The financial statements and the financial highlights of MSB Fund for the fiscal
year ended December 31, 2002 are incorporated by reference into this proxy
statement and prospectus. The financial statements and financial highlights for
MSB Fund for the year ended December 31, 2002 have been audited by Ernst & Young
LLP as stated in their report appearing in the fund's annual report to
shareholders. The financial highlights for prior years were audited by other
independent auditors. These financial statements and financial highlights
have been included in reliance on their reports given on their authority as
experts in accounting and auditing.
AVAILABLE INFORMATION
MSB Fund is and the John Hancock Fund will be subject to the informational
requirements of the Securities Exchange Act of 1934 and the Investment Company
Act, and will file reports, proxy statements and other information with the
Securities and Exchange Commission. These reports, proxy statements and other
information filed by the funds can be inspected and copied (for a duplication
22
fee) at the public reference facilities of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. Copies of these materials
can also be obtained by mail from the Public Reference Section of the Securities
and Exchange Commission 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.
23
APPENDIX A
Summary of the Material Provisions of Section 623 of the New York Business
Corporation Law
The proposed reorganization that is part of the Proposal involves the sale of
substantially all of MSB Fund's assets. Accordingly, pursuant to Section 910 of
New York Business Corporation Law, holders of MSB Fund shares at the close of
business on the Record Date have the right to dissent from the Proposal and, if
the Proposal is approved and the reorganization is consummated, receive payment
of the fair value of their MSB Fund shares (in lieu of receiving the John
Hancock Fund shares they would otherwise receive pursuant to the reorganization)
by complying with the requirements of Section 623 of New York Business
Corporation Law.
Section 623 requires that any such shareholder who wishes to exercise such
appraisal rights must not vote in favor of the Proposal, and must file with MSB
Fund, before shareholders vote on the Proposal, a written objection which must
include a notice of his election to dissent, his name and residence address, the
number of shares as to which he dissents (shareholders may not dissent as to
less than all of their shares) and a demand for payment of the fair value of his
shares if the reorganization is effected. Such objection is not required from
any shareholder who held MSB Fund shares as of the record date to whom MSB Fund
did not give proper notice of the Meeting. A negative vote on the Proposal does
not constitute a "written objection" required to be filed by a dissenting
shareholder.
Within 10 days after the vote of shareholders authorizing the Proposal, MSB Fund
must give written notice of such authorization to each dissenting shareholder
who filed written objection or from whom written objection was not required. Any
shareholder from whom written objection was not required and who elects to
dissent from the Proposal must file with MSB Fund, within 20 days after the
giving of such notice to him, a written notice of such election, stating his
name and residence address, the number of shares as to which he dissents and a
demand for payment of the fair value of his shares. At the time of filing the
notice of election to dissent or within one month thereafter, the shareholder
must submit the certificates, if any, representing his shares to MSB Fund or its
transfer agent for notation thereon of the election to dissent, after which such
certificates will be returned to the shareholder. Failure to submit the
certificates for such notation may result in the loss of appraisal rights.
Within 15 days after the expiration of the period within which shareholders may
file their notices of election to dissent, or within 15 days after consummation
of the reorganization, whichever is later (but not later than 90 days after the
shareholders' vote authorizing the Proposal), MSB Fund must make a written offer
(which if the reorganization has not been consummated, may be conditioned upon
such consummation) to each shareholder who has filed such notice of election to
pay for his shares at a specified price which MSB Fund considers to be their
fair value. If MSB Fund fails to make the offer within such 15-day period, or if
any dissenting shareholder fails to agree to it within 30 days after it is made,
MSB Fund shall institute a judicial proceeding within 20 days after the
expiration of the applicable period to determine the rights of dissenting
shareholders and to fix the fair market value of their MSB Fund shares. If MSB
Fund fails to institute such proceeding within such 20 day period, a dissenting
shareholder may institute a proceeding for the same purpose not later than 30
days after the expiration of such 20 day period. If such proceeding is not
instituted within such 30 day period, all dissenter's rights may be lost. A
negative vote on the Proposal does not constitute a "written objection" required
to be filed by a dissenting shareholder.
A vote in favor of the Proposal will constitute a waiver of appraisal rights.
Because a proxy left blank will be voted FOR the Proposal, any MSB Fund
shareholder who wishes to exercise his appraisal rights must either vote AGAINST
the Proposal or abstain.
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this 14th
day of May, 2003, by and between John Hancock Capital Series, a Massachusetts
business trust (the "Acquiring Trust"), on behalf of John Hancock Large Cap
Select Fund (the "Acquiring Fund"), a series of the Acquiring Trust with its
principal place of business at 101 Huntington Avenue, Boston, Massachusetts
02199, and M.S.B. Fund, Inc. (the "Acquired Fund") with its principal place of
business at 200 Park Avenue, New York, NY 10166. The Acquiring Fund and the
Acquired Fund are sometimes referred to collectively herein as the "Funds" and
each 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 United States Internal Revenue Code
of 1986, as amended (the "Code"). The reorganization (the "Reorganization") will
consist of (1) the transfer of all of the assets of the Acquired Fund (other
than Excluded Assets as defined in Section 1.2) to the Acquiring Fund in
exchange solely for (A) the issuance of Class A shares of beneficial interest of
the Acquiring Fund (collectively, the "Acquiring Fund Shares" and each, an
"Acquiring Fund Share") to the Acquired Fund, and (B) the assumption by the
Acquiring Fund of (i) the liabilities of the Acquired Fund that are included in
the calculation of net asset value ("NAV") on the Closing Date set forth below
(the "Closing Date") and (ii) the liabilities of the Acquired Fund on the
Closing Date with respect to its investment operations that are both (a) not
required by generally accepted accounting principles ("GAAP") to be included in
the calculation of NAV and (b) are consistent with liabilities incurred by
registered management investment companies in the ordinary course of their
businesses (i.e., not including any extraordinary obligations, including, but
not limited to legal proceedings, shareholder claims and distribution payments)
(collectively, the "Assumed Liabilities"), and (2) the distribution by the
Acquired Fund, on or promptly after the Closing Date as provided herein, of the
Acquiring Fund Shares to the shareholders of the Acquired Fund in liquidation
and termination of the Acquired Fund, all upon the terms and conditions
hereinafter set forth in this Agreement.
WHEREAS, Acquiring Trust and the Acquired Fund are each registered investment
companies classified as management companies of the open-end type, and the
Acquired Fund owns securities that are generally assets of the character in
which the Acquiring Fund is permitted to invest.
WHEREAS, the Acquiring Fund is authorized to issue shares of beneficial
interest.
WHEREAS, the Board of Trustees of the Acquiring Trust has determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares,
and the assumption of the Assumed Liabilities of the Acquired Fund by the
Acquiring Fund are in the best interests of the Acquiring Fund shareholders.
WHEREAS, the Board of Directors of the Acquired Fund has determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares,
and the assumption of the Assumed Liabilities of the Acquired Fund by the
Acquiring Fund are in the best interests of the Acquired Fund shareholders.
NOW, THEREFORE, 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 THE ACQUIRING FUND
SHARES AND ASSUMPTION OF THE ASSUMED LIABILITIES; LIQUIDATION AND TERMINATION OF
THE ACQUIRED FUND.
1.1 Subject to the terms and conditions herein set forth and on the basis of the
representations and warranties contained herein, the Acquired Fund will transfer
all of its assets (other than Excluded Assets) as set forth in Paragraph 1.2
(the "Acquired Assets") to the Acquiring Fund free and clear of all liens and
encumbrances (other than those arising under the Securities Act of 1933, as
amended (the "Securities Act"), liens for taxes not yet due and contractual
restrictions on the transfer of the Acquired Assets) and the Acquiring Fund
agrees in exchange therefor: (i) to issue to the Acquired Fund the number of
Acquiring Fund Shares, including fractional Acquiring Fund Shares, determined in
the manner set forth in Paragraph 2.2; and (ii) to assume the Assumed
Liabilities, as set forth in Paragraph 1.3. As used herein, "Excluded Assets"
means (i) any "tail" or "run off" insurance acquired in connection with the
Reorganization, (ii) the rights of the Acquired Fund under this Agreement; the
rights of the Acquired Fund under agreements entered into with service providers
solely to facilitate the termination of the Acquired Fund in accordance with
this Agreement; and (iv) the rights of the Acquired Fund under the expense
undertakings referred to in Section 9.2. Such transactions shall take place at
the Closing (as defined in Paragraph 3.1 below). Prior to the Closing, the
Acquired Fund shall estimate and accrue the expenses that the Acquired Fund
anticipates that it will incur subsequent to the Closing in connection with the
deregistration and termination of the Acquired Fund (other than expenses to be
assumed as provided in Section 9.2) and the Acquiring Fund shall pay after the
Closing Date any expense for which such an accrual has been made, up to the
amount of such accrual.
1.2 (a) The Acquired Assets shall consist of all of the Acquired Fund's property
(other than the Excluded Assets), including, without limitation, all portfolio
securities and instruments, dividends and interest receivables, cash, goodwill,
contractual rights of the Acquired Fund, all other intangible property owned by
the Acquired Fund, originals or copies of all books and records of the Acquired
Fund, and all other assets of the Acquired Fund on the Closing Date. The
Acquiring Fund shall also be entitled to receive (or to the extent agreed upon
between the Acquired Fund and the Acquiring Trust, be provided access to) copies
of all books and records that the Acquired Fund is required to maintain under
the Investment Company Act of 1940, as amended (the "Investment Company Act"),
and the rules of the Securities and Exchange Commission (the "Commission")
thereunder.
(b) The Acquired Fund has provided the Acquiring Fund with a list of all of the
Acquired Fund's securities and other assets as of the date immediately preceding
the date of execution of this Agreement, and the Acquiring Fund has provided the
Acquired Fund with a copy of the current fundamental investment policies and
restrictions and fair value procedures applicable to the Acquiring Fund. The
Acquired Fund reserves the right to sell any of such securities or other assets
before the Closing Date (except to the extent sales may be limited by
representations of the Acquired Fund contained herein and made in connection
with the issuance of the tax opinion provided for in Paragraph 8.5 hereof), but
will not, without the prior approval of the Acquiring Fund, acquire any
additional securities of the type in which the Acquiring Fund is not permitted
to invest in accordance with its fundamental investment policies and
restrictions that have been provided to the Acquired Fund in writing or any
securities that are valued at "fair value" under the valuation procedures of
either the Acquired Fund or the Acquiring Fund.
1.3 The Acquired Fund will endeavor to discharge all the Acquired Fund's known
liabilities and obligations that are or will become due prior to the Closing.
The Acquiring Fund shall assume all of the Assumed Liabilities at Closing.
1.4 On or as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund shall be liquidated and the Acquired Fund
shall distribute pro rata to its 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 Acquired Fund instructing the Acquiring
Fund to transfer the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the share records of the Acquiring Fund to open accounts on
such share records in the names of the Acquired Fund Shareholders and
representing the respective pro rata number of Acquiring Fund Shares due to each
such Shareholder. The Acquired Fund shall promptly provide the Acquiring Fund
with evidence of such liquidation and distribution. All issued and outstanding
shares of the Acquired Fund will simultaneously be cancelled on the books of the
Acquired Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent for its Class A shares. If any Acquired Fund
Shareholders holding certificates representing their ownership of shares of
beneficial interest of the Acquired Fund do not 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. on or prior to the
Closing Date, then unless and until any such certificate shall be so surrendered
or an Affidavit relating thereto shall be delivered by an Acquired Fund
Shareholder, dividends and other distributions payable by the Acquiring Fund
subsequent to the Closing Date with respect to Acquiring Fund Shares shall be
paid to such Acquired Fund Shareholder, but such Acquired Fund Shareholder 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 Acquired Fund shall effect, following the Closing Date, the transfer of
the Acquired Assets by the Acquired Fund to the Acquiring Fund, and the
distribution of the Acquiring Fund Shares by the Acquired Fund to the Acquired
Fund Shareholders pursuant to Paragraph 1.5, and the Acquired Fund's existence
as a management investment company organized as a corporation under the laws of
the State of New York shall be terminated in accordance with the Acquired Fund's
Certificate of Incorporation and By-Laws.
1.8 Any reporting responsibility of Acquired Fund, including, but not limited
to, the responsibility for filing of regulatory reports, Tax Returns (as defined
in Paragraph 4.1), or other documents with 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
2. VALUATION
2.1 The NAV of the Acquiring Fund Shares and the NAV of the Acquired Assets
shall, in each case, be determined as of the close of business (4:00 p.m.,
Boston time) on the Closing Date (the "Valuation Time"). The NAV of each
Acquiring Fund Share shall be computed by The Bank of New York (the "Acquiring
Fund Custodian") in the manner set forth in the Acquiring Trust'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;
provided, however, if the Acquiring Fund has no assets as of the Closing Date,
the NAV of each Acquiring Fund Share shall be the same as the NAV of each share
of the Acquired Fund. The NAV of the Acquired Assets shall be computed by The
Bank of New York (the "Acquired Fund Custodian") by calculating the value of the
Acquired Assets and by subtracting therefrom the amount of the liabilities of
the Acquired Fund on the Closing Date included on the face of the statement of
assets and liabilities of the Acquired Fund delivered pursuant to Paragraph 5.7
(the "Statement of Assets and Liabilities"), 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. The Acquiring Fund Custodian shall
confirm the NAV of the Acquired Assets.
2.2 The number of Acquiring Fund Shares to be issued (including fractional
shares, if any) in exchange for the Acquired Assets and the assumption of the
Assumed Liabilities shall be determined by the Acquiring Fund Custodian by
dividing the NAV of the Acquired Assets, as determined in accordance with
Paragraph 2.1, by the NAV of each Acquiring Fund Share, as determined in
accordance with Paragraph 2.1.
2.3 The Acquiring Fund and the Acquired Fund shall cause the Acquiring Fund
Custodian and the Acquired Fund Custodian, respectively, to deliver a copy of
its valuation report, reviewed by the Acquiring Fund's independent accountants,
to the other party at Closing. All computations of value shall be made by the
Acquiring Fund Custodian and the Acquired Fund Custodian in accordance with its
regular practice as custodian and pricing agent for the Acquiring Fund and the
Acquired Fund, respectively.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be August 22, 2003 or such later date as the parties
may agree to in writing. All acts taking place at the Closing shall be deemed to
take place simultaneously as of 5:00 p.m. (Eastern time) on the Closing Date
unless otherwise provided (the "Closing"). The Closing shall be held at the
offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, or
at such other place as the parties may agree.
3.2 Portfolio securities that are not held in book-entry form in the name of the
Acquired Fund Custodian, as custodian of the Acquired Fund and as record holder
for the Acquired Fund, shall be presented by the Acquired Fund to the Acquiring
Fund 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 Acquiring Fund 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 Acquired Fund
Custodian in book-entry form on behalf of the Acquired Fund shall be delivered
to the Acquiring Fund by the Acquired Fund Custodian by recording the transfer
of beneficial ownership thereof on the Acquired Fund Custodian's records.
3.3 The Acquiring Fund Custodian shall deliver within one business day after the
Closing a certificate of an authorized officer stating that: (a) the Acquired
Assets have been delivered in proper form to the Acquiring Fund on the Closing
Date, and (b) all necessary transfer taxes including all applicable federal and
state stock transfer stamps, if any, have been paid, or provision for payment
shall have been made in conjunction with the delivery of portfolio securities as
part of the Acquired Assets. Any cash delivered shall be in the form of currency
or by the Acquired Fund Custodian crediting the Acquiring Fund's account
maintained with the Acquiring Fund Custodian with immediately available funds by
wire transfer pursuant to instructions delivered prior to Closing.
3.4 In the event that on the Closing Date (a) the New York Stock Exchange is
closed to trading or trading thereon is restricted, or (b) trading or the
reporting of trading on such exchange or elsewhere is disrupted so that accurate
appraisal of the NAV of the Acquiring Fund Shares or the Acquired Assets
pursuant to Paragraph 2.1 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.
3.5 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 and percentage ownership of outstanding shares of beneficial interest of
the Acquired Fund owned by each such Acquired Fund Shareholder as of the
Valuation Time, certified by the President or a Secretary of the Acquired Fund
and its Treasurer, Secretary or other authorized officer (the "Shareholder
List") as being an accurate record of the information (a) provided by the
3
Acquired Fund Shareholders, (b) provided by the Acquired Fund Custodian, or (c)
derived from the Acquired Fund's records by such officers or one of the Acquired
Fund's service providers. The Acquiring Fund shall issue and deliver to the
Acquired Fund at the Closing (i) an instrument of assumption satisfactory to the
Acquired Fund assuming all the Assumed Liabilities and (ii) 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 Except as set forth on Schedule 4.1 hereto, the Acquired Fund represents and
warrants and to the Acquiring Fund, which representations and warrantees will be
true and correct on the date hereof and at the time of the Closing on the
Closing Date as though made on and as of the time of the Closing on the Closing
Date, as follows:
(a) The Acquired Fund is a corporation validly existing and in good standing
under the laws of the State of New York and has the corporate power to own
all of its properties and assets and, subject to approval by the Acquired
Fund Shareholders, to perform its obligations under this Agreement. The
Acquired Fund is not 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 Acquired Fund 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 Acquired Fund is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the Investment Company Act is in
full force and effect. The Acquired Fund is a diversified investment
company under the Investment Company Act;
(c) The Acquired Fund is not in violation in any material respect of, and the
execution, delivery of this Agreement and performance of its obligations
under this Agreement will not result in a violation in any material respect
of, any provision of the Acquired Fund's Certificate of Incorporation or
By-Laws or any agreement, indenture, instrument, contract, lease or other
undertaking with respect to the Acquired Fund to which the Acquired Fund is
a party or by which the Acquired Fund or its assets are bound;
(d) No litigation or administrative proceeding or investigation of or before
any court or governmental body is currently pending or to its knowledge
threatened against the Acquired Fund or any of the Acquired Fund's
properties or assets. The Acquired Fund knows of no facts which might form
the basis for the institution of such proceedings. The Acquired Fund is not
a party to or subject to the provisions of any order, decree or judgment of
any court or governmental body which materially adversely affects the
Acquired Fund's business or its ability to consummate the transactions
herein contemplated or would be binding upon the Acquiring Fund as the
successor to the Acquired Fund;
(e) Except as set forth on Schedule 4.1(e), the Acquired Fund has no material
contracts or other commitments (other than this Agreement or agreements for
the purchase and sale of securities entered into in the ordinary course of
business and consistent with its obligations under this Agreement or
agreements with service providers solely for the purpose of facilitating
the termination of the Acquired Fund) which will not be terminated at or
prior to the Closing Date, and no such termination will result in material
liability to the Acquired Fund or the Acquiring Fund;
(f) The statement of assets and liabilities of the Acquired Fund, and the
related statements of income and changes in net asset value as of and for
the period ended December 31, 2002, have been audited by Ernst & Young LLP,
independent auditors, and are in accordance with GAAP consistently applied
and fairly present, in all material respects, the financial condition of
the Acquired Fund as of such dates and the results of its operations for
the periods then ended, and all known liabilities, whether actual or
contingent, of the Acquired Fund required to be disclosed therein as of the
respective dates thereof are disclosed therein. The Statement of Assets and
Liabilities of the Acquired Fund to be delivered as of the Closing Date
pursuant to Paragraph 5.7 will be in accordance with GAAP consistently
applied and will fairly present, in all material respects, the financial
condition of the Acquired Fund as of such date and the results of its
operations for the period then ended. Except for the Assumed Liabilities
and subject to the undertakings referenced in Section 9.2, the Acquired
Fund will not have any known or contingent liabilities on the Closing Date.
No significant deficiency, material weakness, fraud, significant change or
other factor that could significantly affect the internal controls of the
Acquired Fund has been disclosed in the Acquired Fund's reports on Form
N-SAR or Form N-CSR to enable the chief executive officer and chief
financial officer or other officers of the Acquired Fund to make the
certifications required by the Sarbanes-Oxley Act, and no deficiency,
weakness, fraud, change, event or other factor exists in the Acquired
Fund's internal controls that would require the Acquiring Fund to make any
such disclosure in the Acquiring Fund's Form N-CSR after the Closing Date;
4
(g) Since December 31, 2002, except as specifically disclosed in the Acquired
Fund's prospectus or statement of additional information as in effect on
the date of this Agreement, there has not been any material adverse change
in the Acquired Fund's financial condition, assets, liabilities, business
or prospects, or any incurrence by the Acquired Fund of indebtedness,
except for normal contractual obligations incurred in the ordinary course
of business or in connection with the settlement of purchases and sales of
portfolio securities. For the purposes of this subparagraph (g), a decline
in NAV per share of the Acquired Fund arising out of its normal investment
operations or a decline in market values of securities in the Acquired
Fund's portfolio or a decline in net assets of the Acquired Fund as a
result of redemptions shall not constitute a material adverse change;
(h) (A) For each taxable year of its operation since its inception (including
the current taxable year), the Acquired Fund has met the requirements of
Subchapter M of the Code for qualification and treatment as a regulated
investment company and has elected to be treated as such and will qualify
as such as of the time of the Closing on the Closing Date and will satisfy
the diversification requirements of Section 851(b)(3) of the Code without
regard to the last sentence of Section 851(d) of the Code. The Acquired
Fund has not taken any action which has caused or will cause the Acquired
Fund to fail to qualify as a regulated investment company under the Code
for any taxable period ending on or prior to the Closing Date.
(B) Within the times and in the manner prescribed by law, the Acquired
Fund has filed all material Tax Returns required to be filed by it, and all
such Tax Returns were complete and accurate in all material respects. The
Acquired Fund has timely paid, in the manner prescribed by law, all the
Acquired Fund's due and payable Taxes (as defined below);
(C) All Tax Returns filed by the Acquired Fund constitute complete and
accurate reports in all material respects of the respective Tax liabilities
of the Acquired Fund or, in the case of information returns and payee
statements, the amounts required to be reported and accurately set forth
all items required to be included or reflected in such returns except for
such instances of misreporting with respect to which, individually or in
the aggregate, the Acquired Fund is not required to notify any shareholder
or any governmental or regulatory authority or agency;
(D) The Acquired Fund has not waived or extended any applicable statute
of limitations relating to the assessment of federal, state, local or
foreign Taxes;
(E) The Acquired Fund has not been notified that any examinations of
the federal, state, local or foreign Tax Returns of the Acquired Fund are
currently in progress or threatened, and no deficiencies have been asserted
or assessed against the Acquired Fund as a result of any audit by the
Internal Revenue Service or any state, local or foreign taxing authority,
and no such deficiency has been proposed or threatened. The Acquired Fund
has not been informed by any jurisdiction that the jurisdiction believes
that the Acquired Fund was required to file any Tax Return that was not
filed; and the Acquired Fund does not know of any basis upon which a
jurisdiction could assert such a position;
(F) The Acquired Fund has no actual or, in the knowledge of the
Acquired Fund, any potential liability for any Tax obligation of any
taxpayer other than itself. Acquired Fund is not and has never been a
member of a group of corporations with which it has filed (or been required
to file) consolidated, combined or unitary Tax Returns. The Acquired Fund
is not a party to any Tax allocation, sharing, or indemnification
agreement;
(G) The unpaid Taxes of the Acquired Fund for tax periods ending on or
before the Closing Date do not exceed the accruals and reserves for Taxes
(excluding accruals and reserves for deferred Taxes established to reflect
timing differences between book and Tax income) set forth on the Statement
of Assets and Liabilities (rather than in any notes thereto). All Taxes
that the Acquired Fund is or was required by law to withhold or collect
have been duly withheld or collected and, to the extent required, have been
paid to the proper court, arbitrational tribunal, administrative agency or
commission or other governmental or regulatory authority or agency;
(H) The Acquired Fund has delivered to Acquiring Fund or made available
to Acquiring Fund complete and accurate copies of all Tax Returns of the
Acquired Fund, together with all related examination reports and statements
of deficiency for all periods not closed under the applicable statutes of
limitations;
(I) The Acquired Fund has not undergone, has not agreed to undergo, and
is not required to undergo, on account of operations or transactions before
the Closing, a change in its method of accounting resulting in an
adjustment to its taxable income pursuant to Section 481 of the Code. The
Acquired Fund will not be required to include any material item of income
in, or exclude any material item of deduction from, taxable income for any
taxable period (or portion thereof) ending after the Closing Date as a
result of any (i) change in method of accounting for a taxable period
ending on or prior to the Closing Date under Section 481(c) of the Code (or
any corresponding or similar provision of state, local or foreign income
Tax law); (ii) "closing agreement" as described in Section 7121 of the Code
(or any corresponding or similar provision of state, local or foreign
income Tax law) executed on or prior to the Closing Date; (iii) installment
sale or open transaction disposition made on or prior to the Closing Date;
or (iv) prepaid amount received on or prior to the Closing Date;
5
(J) The Acquired Fund has not taken or agreed to take any action that
would prevent the Reorganization from constituting a reorganization
qualifying under Section 368(a) of the Code. The Acquired Fund is not aware
of any agreement, plan or other circumstance that would prevent the
Reorganization from qualifying as a reorganization under Section 368(a) of
the Code;
(K) There are no material liens on the assets of the Acquired Fund
relating to or attributable to Taxes, except for Taxes not yet due and
payable;
(L) The Tax bases of the assets of the Acquired Fund are accurately
reflected in all material respects on the Acquired Fund's Tax books and
records;
(M) The Acquired Fund does not own any interest in an entity that is
characterized as a partnership for federal income tax purposes;
(N) The Acquired Fund's Tax attributes are not limited under the Code
(including but not limited to any capital loss carryforward limitations
under Section 382 or 383 of the Code and the Treasury Regulations
thereunder) or comparable provisions of state law; and
(O) For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies or other similar assessments or liabilities,
including without limitation income, gross receipts, ad valorem, premium,
value-added, excise, real property, personal property, sales, use,
transfer, withholding, employment, unemployment, insurance, social
security, business license, business organization, environmental, workers
compensation, payroll, profits, license, lease, service, service use,
severance, stamp, occupation, windfall profits, customs, duties, franchise
and other taxes imposed by the United States of America or any state, local
or foreign government, or any agency thereof, or other political
subdivision of the United States or any such government, and any interest,
fines, penalties, assessments or additions to tax resulting from,
attributable to or incurred in connection with any tax or any contest or
dispute thereof; and "Tax Returns" shall mean all reports, returns,
declarations, statements or other information required to be supplied to a
governmental or regulatory authority or agency, or to any other person, in
connection with Taxes and any associated schedules or work papers produced
in connection with such items.
(i) The authorized capital of the Acquired Fund consists of 515,000,000 shares
of common stock, at $0.001 par value, divided into five classes. All issued
and outstanding shares of common stock of the Acquired Fund are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid
and nonassessable by the Acquired Fund. All of the issued and outstanding
shares of common stock of the Acquired Fund will, at the time of Closing,
be held of record by the persons and in the amounts set forth in the
Shareholder List submitted to the Acquiring Fund pursuant to Paragraph 3.5
hereof. The Acquired Fund does not have outstanding any options, warrants
or other rights to subscribe for or purchase any of its shares of common
stock of the Acquired Fund, nor is there outstanding any security
convertible into any of its shares of common stock of the Acquired Fund;
(j) At the Closing Date, the Acquired Fund will have good and marketable title
to the Acquired Assets, and full right, power and authority to sell,
assign, transfer and deliver the Acquired Assets to the Acquiring Fund,
and, upon delivery and payment for the Acquired Assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions
on the full transfer thereof, except such restrictions as might arise under
the Securities Act;
(k) The Acquired Fund has the corporate power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement by the Acquired Fund has been duly authorized
by all necessary action on the part of the Acquired Fund's Board of
Directors, and, subject to the approval of the Acquired Fund Shareholders,
assuming due authorization, execution and delivery by the Acquiring Fund,
this Agreement will constitute a valid and binding obligation of the
Acquired Fund, enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights and to general equity
principles;
(l) 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 and any information necessary to compute
the total return of the Acquired Fund shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto;
6
(m) The information included in the proxy statement (the "Proxy Statement")
forming part of the Acquiring Trust's Registration Statement on Form N-14
filed in connection with this Agreement (the "Registration Statement") that
has been furnished by the Acquired Fund to the Acquiring Fund for inclusion
in the Registration Statement, on the effective date of that Registration
Statement and on the Closing Date, will conform in all material respects to
the applicable requirements of the Securities Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the Investment Company
Act and the rules and regulations of the Commission thereunder and will 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 not misleading;
(n) Upon the effectiveness of the Registration Statement, no consent, approval,
authorization or order of any court or governmental authority is required
on the part of the Acquired Fund for the consummation by the Acquired Fund
of the transactions contemplated by this Agreement;
(o) All of the issued and outstanding shares of common stock of the Acquired
Fund have been offered for sale and sold in conformity in all material
respects with all applicable federal and state securities laws, except as
may have been previously disclosed in writing to the Acquiring Fund;
(p) The prospectus and statement of additional information of the Acquired
Fund, each dated May 1, 2003 (collectively, the "Acquired Fund
Prospectus"), and any amendments or supplements thereto, furnished to the
Acquiring Fund, conform in all material respects with the applicable
requirements of the Securities Act and the Investment Company Act and the
rules and regulations of the Commission thereunder, and did not as of their
dates or the dates of their distribution to the public 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 such statements were made, not misleading;
(q) The Acquired Fund currently complies in all material respects with, and, to
the knowledge of the Acquired Fund, since its organization has complied in
all material respects with, the requirements of, and the rules and
regulations under, the Investment Company Act, the Securities Act, the
Exchange Act, state "Blue Sky" laws, and all other applicable federal and
state laws or regulations. The Acquired Fund currently complies in all
material respects with, and since its organization has complied in all
material respects with, all investment objectives, policies, guidelines and
restrictions and any compliance procedures established by the Acquired
Fund. All advertising and sales material used by the Acquired Fund complies
in all material respects with and has complied in all material respects
with the applicable requirements of the Securities Act, the Investment
Company Act, the rules and regulations of the Commission, and, to the
extent applicable, the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD") and any applicable state regulatory
authority. All registration statements, prospectuses, reports, proxy
materials or other filings required to be made or filed with the
Commission, the NASD or any state securities authorities by the Acquired
Fund have been duly filed and have been approved or declared effective, if
such approval or declaration of effectiveness is required by law. Such
registration statements, prospectuses, reports, proxy materials and other
filings under the Securities Act, the Exchange Act and the Investment
Company Act (i) are or were in compliance in all material respects with the
requirements of all applicable statutes and the rules and regulations
thereunder and (ii) do not or did 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 false or misleading;
(r) The Acquired Fund has previously provided to the Acquiring Fund (and at the
Closing will provide an update through the Closing Date of such
information) data which supports a calculation of the Acquired Fund's total
return for all periods since the organization of the Acquired Fund. Such
data has been prepared in accordance in all material respects with the
requirements of the Investment Company Act and the regulation thereunder
and the rules of the NASD;
(s) Neither the Acquired Fund nor, to the knowledge of the Acquired Fund, any
"affiliated person" of the Acquired Fund has been convicted of any felony
or misdemeanor, described in Section 9(a)(1) of the Investment Company Act
or been the subject, or presently is the subject, of any proceeding or
investigation with respect to any disqualification that would be a basis
for denial, suspension or revocation of registration as an investment
adviser under Section 203(e) of the Investment Advisers Act of 1940, as
amended (the "Investment Adviser Act") or Rule 206(4)-4(b) thereunder or of
a broker-dealer under Section 15 of the Exchange Act, or for
disqualification as an investment adviser, employee, officer or director of
an investment company under Section 9 of the Investment Company Act; and
(t) The Acquired Fund Tax Representation Certificate to be delivered by the
Acquired Fund to the Acquiring Fund and Hale and Dorr LLP at the Closing
pursuant to Paragraph 7.4 (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. The Acquired Fund does not know as of
the date of this Agreement of any redemption that would be required to be
disclosed on a schedule to the Acquired Fund Tax Representation
Certificate.
7
4.2 Except as set forth on Schedule 4.2 hereto, the Acquiring Trust, for itself
and on behalf of the Acquiring Fund represents and warrants to the Acquired
Fund, which representations and warranties will be true and correct on the
date hereof and on the Closing Date as though made on and as of the Closing
Date, as follows:
(a) The Acquiring 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 perform
the obligations under this Agreement. Neither the Acquiring 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 Acquiring Trust and the
Acquiring Fund have 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. The Acquiring Fund is a series of the Acquiring Trust and
will have no issued or outstanding shares prior to the Closing Date other
than those issued to John Hancock Advisers, LLC (or one of its affiliates);
(b) The Acquiring Trust is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the Investment Company Act is in
full force and effect;
(c) The Acquiring Trust's post-effective amendment to its registration
statement on Form N-1A that will be in effect on the Closing Date, and the
prospectus and statement of additional information of the Acquiring Fund
included therein, will conform in all material respects with the applicable
requirements of the Securities Act and the Investment Company Act and the
rules and regulations of the Commission thereunder, and did not as of its
date and will not as of the Closing Date contain 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 in which they were made, not misleading;
(d) The Registration Statement, the Proxy Statement, prospectus and statement
of additional information with respect to the Acquiring Fund, each dated
June 23, 2003, and any amendments or supplements thereto on or prior to the
Closing Date included in 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
Securities Act, the Exchange Act and the Investment Company Act and the
rules and regulations of the Commission thereunder. Neither the
Registration Statement nor the Proxy Statement nor the prospectus and
statement of additional information with respect to the Acquiring Fund (any
amendments or supplements thereto on or prior to the Closing Date) included
in 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) includes, or as of the Closing Date
will include, any untrue statement of a material fact or omits 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;
(e) The Acquiring Trust and the Acquiring Fund are not in violation of, and the
execution and delivery of this Agreement and performance of their
obligations under this Agreement will not result in a violation of, any
provisions of the Acquiring Trust's Declaration or By-Laws or any material
agreement, indenture, instrument, contract, lease or other undertaking with
respect to which the Acquiring Trust or the Acquiring Fund is a party or by
which the Acquiring Trust or the Acquiring Fund or any of their assets is
bound;
(f) No litigation or administrative proceeding or investigation of or before
any court or governmental body is currently pending or threatened against
the Acquiring Trust or the Acquiring Fund or any of the Acquiring Fund's
properties or assets. The Acquiring Trust knows of no facts which might
form the basis for the institution of such proceedings. Neither the
Acquiring 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 adversely affects the Acquiring Fund's business or
its ability to consummate the transactions contemplated herein;
(g) The Acquiring Fund intends to elect to qualify as a regulated investment
company under Section 851 of the Code. The Acquiring Fund is and as of and
after the Closing will be a "fund" as defined in Section 851(g)(2) of the
Code. The Acquiring Fund currently complies in all material respects with,
and since its organization has complied in all material respects with, the
requirements of, and the rules and regulations under, the Investment
Company Act, the Securities Act, the Exchange Act, state "Blue Sky" laws
and all other applicable federal and state laws or regulations. The
Acquiring Fund currently complies in all material respects with, and since
its organization has complied in all material respects with, all investment
objectives, policies, guidelines and restrictions and any compliance
8
procedures established by the Acquiring Trust with respect to the Acquiring
Fund. All advertising and sales material used by the Acquired Fund complies
in all material respects with and has complied in all material respects
with the applicable requirements of the Securities Act, the Investment
Company Act, the rules and regulations of the Commission, and, to the
extent applicable, the Conduct Rules of the NASD and any applicable state
regulatory authority. All registration statements, prospectuses, reports,
proxy materials or other filings required to be made or filed with the
Commission, the NASD or any state securities authorities by the Acquiring
Fund have been duly filed and have been approved or declared effective, if
such approval or declaration of effectiveness is required by law. Such
registration statements, prospectuses, reports, proxy materials and other
filings under the Securities Act, the Exchange Act and the Investment
Company Act (i) are or were in compliance in all material respects with the
requirements of all applicable statutes and the rules and regulations
thereunder and (ii) do not or did 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 false or misleading;
(h) The authorized capital of the Acquiring Trust consists of an unlimited
number of shares of beneficial interest, no par value per share. As of the
Closing Date, the Acquiring Fund will be authorized to issue an unlimited
number of shares of beneficial interest, no par value per share. The
Acquiring Fund Shares to be issued and delivered to the Acquired Fund for
the account of the Acquired Fund Shareholders pursuant to the terms of this
Agreement, will have been duly authorized on the Closing Date and, when so
issued and delivered, will be issued in compliance with all applicable
federal and sate securities laws and will be duly and validly issued, fully
paid and non-assessable. The Acquiring Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any
Acquiring Fund Shares, nor is there outstanding any security convertible
into any of the Acquiring Fund Shares;
(i) The Acquiring Trust has the trust power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement by the Acquiring Trust and/or the Acquiring
Fund has been duly authorized by all necessary action on the part of the
Acquiring Trust, the Acquiring Fund and their Board of Trustees, and,
assuming due authorization, execution and delivery by the Acquired Fund,
this Agreement will constitute a valid and binding obligation of the
Acquiring Trust and Acquiring Fund, enforceable in accordance with its
terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(j) The information to be furnished by the Acquiring Trust, the Acquiring Fund
or John Hancock Advisers, LLC 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 in all material respects and shall comply in all
material respects with federal securities and other laws and regulations
applicable thereto or the requirements of any form for which its use is
intended, and shall not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the information provided
not misleading;
(k) No consent, approval, authorization or order of or filing with any court or
governmental authority is required for the execution of this Agreement or
the consummation of the transactions contemplated by the Agreement by the
Acquiring Fund or the Acquiring Trust, except for the registration of the
Acquiring Fund Shares under the Securities Act and the Investment Company
Act;
(l) Neither the Acquiring Fund nor, to the knowledge of the Acquiring Fund, any
"affiliated person" of the Acquiring Fund has been convicted of any felony
or misdemeanor, described in Section 9(a)(1) of the Investment Company Act,
nor, to the knowledge of the Acquiring Fund, has any affiliated person of
the Acquiring Fund been the subject, or presently is the subject, of any
proceeding or investigation with respect to any disqualification that would
be a basis for denial, suspension or revocation of registration as an
investment adviser under Section 203(e) of the Investment Advisers Act or
Rule 206(4)-4(b) thereunder or of a broker-dealer under Section 15 of the
Exchange Act, or for disqualification as an investment adviser, employee,
officer or director of an investment company under Section 9 of the
Investment Company Act; and
(m) The Acquiring Fund Tax Representation Certificate to be delivered by the
Acquiring Fund to the Acquired Fund and Hale and Dorr LLP 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.
(n) Neither the Acquiring Trust nor the Acquiring Fund has taken, or caused to
be taken, or agreed to take, or caused to be taken, any action that would
prevent the Reorganization from constituting a reorganization qualifying
under Section 368(a) of the Code. The Acquiring Trust is not aware of any
agreement, plan or other circumstance that would prevent the Reorganization
from qualifying as a reorganization under Section 368(a) of the Code.
(o) Prior to the Closing, the Acquiring Fund shall not have commenced
investment operations and shall not have conducted any business, except for
business in connection with its organization or incidental to the
performance of its obligations under this Agreement.
9
(p) The Statement of Assets and Liabilities of the Acquiring Fund delivered
pursuant to Section 5.8 will fairly present in all material respects the
financial condition of the Acquiring Fund as of that date.
5. COVENANTS OF EACH OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as contemplated by this Agreement, the Acquired Fund will operate the
Acquired Fund's business in the ordinary course between the date hereof and the
Closing Date. It is understood that such ordinary course of business will
include the declaration and payment of dividends and distributions determined by
the Acquired Fund to be necessary or advisable (except to the extent dividends
or distributions that are not customary may be limited by representations made
in connection with the issuance of the tax opinion described in paragraph 8.5
hereof), in each case payable either in cash or in additional shares.
5.2 The Acquired Fund will call a special meeting of Acquired Fund Shareholders
to consider approval of this Agreement and act upon the matters set forth in the
Proxy Statement.
5.3 The Acquiring Trust will prepare the notice of meeting, form of proxy and
Proxy Statement (collectively, "Proxy Materials") to be used in connection with
such meeting, and will promptly prepare and file with the Commission the
Registration Statement on Form N-14 relating to the Reorganization. The Acquired
Fund will provide the Acquiring Trust with information reasonably necessary for
the preparation of the Registration Statement in compliance with the Securities
Act, the Exchange Act, and the Investment Company Act. The Acquiring Trust and
Acquiring Fund will provide the Acquired Fund and its counsel with the substance
of communications received from the staff of the Commission with regard to the
Registration Statement, and the parties will cooperate in revising, if
necessary, the Registration Statement to comply with such comments.
5.4 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.
5.5 The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requires concerning the beneficial
ownership of the Acquired Fund's shares.
5.6 Subject to the provisions of this Agreement, each of the Acquired Fund and
the Acquiring Fund will take, or cause to be taken, all actions, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
the transactions contemplated by this Agreement.
5.7 The Acquired Fund shall furnish to the Acquiring Fund on the Closing Date
the Statement of Assets and Liabilities of the Acquired Fund as of the Closing
Date setting forth the NAV of the Acquired Assets and the Assumed Liabilities as
of the Valuation Time, which statement shall be prepared in accordance with GAAP
consistently applied and certified by the Acquired Fund's Treasurer or Assistant
Treasurer. As promptly as practicable, but in any case within 30 days after the
Closing Date, the Acquired Fund shall furnish to the Acquiring Fund, in such
form as is reasonably satisfactory to the Acquiring Fund, 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 under the Code, and which statement will be certified by the
Treasurer of the Acquired Fund.
5.8 The Acquiring Fund shall furnish to the Acquired Fund on the Closing Date
the Statement of Assets and Liabilities of the Acquiring Fund as of the Closing
Date setting forth the NAV of the Acquiring Fund's assets and liabilities as of
the Valuation Time, which statement shall be certified by the Acquiring Trust's
Treasurer or Assistant Treasurer
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.
5.10 The Acquired Fund shall maintain errors and omissions insurance covering
management to the Acquired Fund prior to and including the Closing Date.
5.11 From and after the date of this Agreement, each of the Funds and the
Acquiring Trust and the Trust shall use its commercially reasonable efforts to
cause the Reorganization to qualify, and will not knowingly take any action,
cause any action to be taken, fail to take any action or cause any action to
fail to be taken which action or failure to act could prevent the Reorganization
from qualifying as a reorganization under the provisions of Section 368(a) of
the Code. The parties hereto hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
income tax regulations promulgated under the Code. Unless otherwise required
pursuant to a "determination" within the meaning of Section 1313(a) of the Code,
the parties hereto shall treat and report the transactions contemplated hereby
as a reorganization within the meaning of Section 368(a)(1)(F) of the Code, and
shall not take any position inconsistent with such treatment.
10
5.12 From and after the date of this Agreement and through the time of the
Closing on the Closing Date, the Acquired Fund shall use its commercially
reasonable efforts to cause the Acquired Fund to qualify, and will not knowingly
take any action, cause any action to be taken, fail to take any action or cause
any action to fail to be taken which action or failure to act could prevent the
Acquired Fund from qualifying as a regulated investment company under the
provisions of Subchapter M of the Code. From and after the date of this
Agreement, the Acquiring Trust shall use its commercially reasonable efforts to
cause the Acquiring Fund to qualify, and will not knowingly take any action,
cause any action to be taken, fail to take any action or cause any action to
fail to be taken which action or failure to act could prevent the Acquiring Fund
from qualifying, as a regulated investment company under the provisions of
Subchapter M of the Code.
5.13 Acquired Fund shall prepare, or cause to be prepared, any Tax Returns of
the Acquired Fund for its taxable year that ends on or before the Closing Date
and shall timely file, or cause to be timely filed, such Tax Returns.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to complete the transactions provided for
herein shall be, at its election, subject to the performance by the Acquiring
Fund and the Acquiring Trust of all the obligations to be performed by them
hereunder on or before the Closing Date, and, in addition thereto, the following
further conditions, unless waived by the Acquired Fund in writing:
6.1 All representations and warranties by or on behalf of the Acquiring Trust
and the Acquiring Fund contained in this Agreement shall be true and correct in
all material respects (without giving effect to any materiality qualification
included in such representation and warranties) 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;
6.2 The Acquiring Fund shall have delivered to the Acquired Fund a certificate
executed in its name by the Acquiring Trust's President or Vice President and
its Treasurer or Assistant Treasurer, in form and substance satisfactory to the
Acquired Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquiring Trust on behalf of the Acquiring
Fund made in this Agreement are true and correct in all material respects
(without giving effect to any materiality qualification included in such
representation and warranties) at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, that each of the
conditions to closing in this Section 6 have been met, and as to such other
matters as the Acquired Fund shall reasonably request;
6.3 The Acquiring Fund shall have delivered to the Acquired Fund and Hale and
Dorr LLP an Acquiring Fund Tax Representation Certificate, satisfactory to the
Acquired Fund, substantially in the form attached to this Agreement as Annex A,
concerning certain tax-related matters with respect to the Acquiring Fund; and
6.4 The Board of Trustees of the Acquiring Trust shall have determined that the
Reorganization is in the best interests of the Acquiring Fund and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of the Reorganization.
6.5 The Acquired Fund shall have received an opinion of counsel, who may be an
employee or officer of John Hancock Advisers, LLC, dated as of the Closing Date
in form and substance reasonably satisfactory to the Acquired Fund to the effect
that (a) the Acquiring Trust is a business trust validly existing under the laws
of Massachusetts, (b) the Acquiring Fund is a legally designated, separate
series of the Acquiring Trust, (c) the Acquiring Fund Shares to be issued to the
Acquiring Fund and credited to the accounts of the Acquiring Fund Shareholders
pursuant to this Agreement are duly registered under the Securities Act on the
appropriate form and are duly authorized and upon issuance will be validly
issued and outstanding in fully paid and non-assessable and (d) each of the
Registration Statement and Acquiring Trust's post-effective amendment to its
registration statement on Form N-1A reflecting the creation of the Acquiring
Fund has become effective with the Commission and, to the best of such counsel's
knowledge, no stop order suspending the effectiveness thereof has been issued
and no proceedings for that purpose have been instituted or are pending or
threatened.
6.6 The Acquiring Trust on behalf of the Acquiring Fund and John Hancock
Advisers, LLC shall have entered into an investment advisory agreement, and John
Hancock Advisers, LLC and Shay Assets Management, Inc. shall have entered into a
subadvisory agreement with respect to the management of the investment portfolio
of the Acquired Fund and with such agreement to be effective no later than the
Closing.
11
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided for
herein shall be, at its election, subject to the performance by 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 further conditions, unless
waived by the Acquiring Fund in writing:
7.1 All representations and warranties by the Acquired Fund contained in this
Agreement shall be true and correct in all material respects (without giving
effect to any materiality qualification included in such representations and
warranties) as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement or set forth in writing in a
disclosure schedule delivered to the Acquiring Fund prior to the execution of
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 Acquired Fund shall have delivered to the Acquiring Fund the Statement
of Assets and Liabilities of the Acquired Fund pursuant to Paragraph 5.7,
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 Acquired Fund's Treasurer or Assistant Treasurer;
7.3 The Acquired Fund, shall have delivered to the Acquiring Fund on the Closing
Date a certificate executed in the name of the Acquired Fund by its President or
Secretary and a Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Acquiring Fund and dated as of the Closing Date,
to the effect that the representations and warranties of the Acquired Fund
contained in this Agreement are true and correct in all material respects
(without giving effect to any materiality qualification included in such
representation and warranties) at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement or set forth in
writing in a disclosure schedule delivered to the Acquiring Fund prior to the
execution of this Agreement, that each of the conditions to closing in this
Section 7 have been met, and as to such other matters as the Acquiring Fund
shall reasonably request;
7.4 The Acquired Fund shall have delivered to the Acquiring Fund and Hale and
Dorr LLP an Acquired Fund Tax Representation Certificate, satisfactory to the
Acquiring Fund, substantially in the form attached to this Agreement as Annex B,
concerning certain tax-related matters with respect to the Acquired Fund; and
7.5 The Board of Directors of the Acquired Fund shall have determined that the
Reorganization is in the best interests of the Acquired Fund and that the
interests of the existing the Acquired Fund Shareholders would not be diluted as
a result of the Reorganization.
8. FURTHER CONDITIONS PRECEDENT
If any of the conditions set forth below are not satisfied as of the Closing
Date with respect to either party hereto, the other party to this Agreement
shall, at its option, not be required to consummate the transactions
contemplated by this Agreement:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the Acquired Fund Shareholders in accordance
with the provisions of the Acquired Fund's Certificate of Incorporation 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 Acquiring Fund. Notwithstanding anything herein to the contrary, neither
party hereto may waive the conditions set forth in this Paragraph 8.1;
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 damages 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 of state Blue Sky and securities authorities) deemed necessary by
either party hereto 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 properties of either party hereto,
provided that either party may waive any such conditions for itself;
8.4 Each of the Acquiring Trust's Registration Statement on Form N-14 and the
post-effective amendment to the Acquiring Trust's Registration Statement on Form
N-1A adding the Acquiring Fund as a series of the Acquiring Trust (and
reflecting the Acquiring Fund as the accounting successor of the Acquired Fund)
shall have become effective under the Securities Act and no stop orders
suspending the effectiveness of either of such Registration Statements 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 Securities Act;
12
8.5 The parties shall have received an opinion of Hale and Dorr LLP,
satisfactory to the Acquired Fund and the Acquiring Trust, substantially to the
effect that for federal income tax purposes the acquisition by the Acquiring
Fund of the Acquired Assets solely in exchange for the issuance of Acquiring
Fund Shares to the Acquired Fund and the assumption of the Assumed 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 Acquired Fund
Shareholders 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 of the Acquiring Trust
and the Acquired Fund may waive the conditions set forth in this Paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 Each party hereto represents and warrants to the other party hereto that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
9.2 The parties have been informed by John Hancock Advisers, LLC that it will
pay the expenses of the Acquired Fund incurred by or on behalf of the Acquired
Fund in connection with the Reorganization; provided, that John Hancock
Advisers, LLC will not pay for any such expenses beyond the aggregate amount of
$200,000. The parties have been informed by Shay Assets Management, Inc. that it
will pay any expenses incurred by or on behalf of the Acquired Fund in
connection with the Reorganization in excess of $200,000.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Acquired Fund each agree that neither party has
made any representation, warranty or covenant not set forth herein or referred
to in Paragraphs 4.1 or 4.2 hereof and that this Agreement constitutes the
entire agreement between the parties.
10.2 The representations and warranties contained in this Agreement or in any
document delivered pursuant hereto or in connection herewith shall not survive
the consummation of the transactions contemplated hereunder and consequently,
after the Closing, no party shall have recourse against any other party (or John
Hancock Advisers LLC) with respect to a breach of such representation and
warranties.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Acquiring
Fund and 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 that has not been cured within ten (10) business days after
written notice thereof;
(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 Acquiring 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;
(d) by resolution of the Acquired Fund's Board of Directors 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 or the Acquired Fund Shareholders; or
(e) if the transactions contemplated by this Agreement shall not have occurred
on or prior to December 31, 2003 or such other date as the parties may
mutually agree upon in writing.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of the Acquiring Trust, the Acquiring Fund, or the Acquired
Fund, or the Trustees, directors or officers of the Acquiring Trust or the
Acquired Fund, but, subject to Paragraph 9.2, each party shall bear the expenses
incurred by it incidental to the preparation and carrying out of this Agreement.
13
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as may be
mutually agreed upon in writing by the authorized officers of the Acquired Fund
and the Acquiring Trust; provided, however, that following the meeting of the
Acquired Fund Shareholders called by the Acquired Fund 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 the Acquired Fund Shareholders without their further approval;
provided that nothing contained in this Section 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 (i) the Acquired Fund, c/o Joseph R.
Ficalora, New York Community Bank, 615 Merrick Avenue, Westbury, NY 11590, with
copies to Shay Assets Management, Inc., 230 West Monroe Street, Chicago,
Illinois 60606, Attention: Edward E. Sammons, Jr., Vice President, and Hughes
Hubbard & Reed LLP, One Battery Park Plaza, New York, New York, Attention: James
H. Bluck, Esq., and (ii) the Acquiring Fund c/o John Hancock Advisers, LLC, 101
Huntington Avenue, Boston, Massachusetts 02199, Attention: Maureen R. Ford, with
copies to Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109,
Attention: David C. Phelan, 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 either party
without the prior written consent of the other party hereto. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, or other entity, other than the parties hereto
and their respective successors and assigns, any rights or remedies under or by
reason of this Agreement.
14.5 It is expressly agreed that the obligations of the Acquiring Trust or the
Acquired Fund shall not be binding upon any of their respective trustees,
directors, shareholders, nominees, officers, agents or employees personally, but
bind only to the property of the Acquiring Fund or the Acquired Fund, as the
case may be, as provided in the instruments governing the Acquiring Trust and
the Acquired Fund, respectively. The execution and delivery of this Agreement
have been authorized by the trustees of the Acquiring Trust and the directors
the Acquired Fund, and this Agreement has been executed by the authorized
officers of the Acquiring Trust and the Acquired Fund, and neither such
authorization by such trustees and directors nor the execution and delivery by
such officers shall be deemed to have been made by any of them individually or
shall impose any liability on any of them personally, but shall bind only the
property of the Acquiring Fund and the Acquired Fund, as the case may be, as
provided in the instruments governing the Acquiring Trust and the Acquired Fund,
respectively.
14
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 attested by its Secretary or Assistant Secretary.
Attest: M.S.B. FUND, INC.
By:_____________________________ By:_______________________________________
Name: Name:
Title: Title:
Attest: JOHN HANCOCK CAPITAL SERIES, on behalf of
JOHN HANCOCK LARGE CAP SELECT FUND
By:_____________________________ By:_______________________________________
Name: Susan S. Newton Name: Maureen R. Ford
Title: Secretary Title: Chairman, President and
Chief Executive Officer
15
VOTE TODAY BY MAIL, TOUCH-TONE
PHONE OR THE INTERNET CALL TOLL-
FREE 1-888-221-0697 OR LOG ON TO
www.proxyweb.com
M.S.B. FUND, INC
SPECIAL MEETING OF SHAREHOLDERS- August 20, 2003
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s)
____________________________ with full power of substitution in each, to vote
all the shares of beneficial interest of M.S.B. Fund, Inc. (your fund) which the
undersigned is (are) entitled to vote at the Special Meeting of Shareholders
(the "Meeting") of your fund to be held at the offices of Hale and Dorr LLP, 300
Park Avenue, New York , NY 10022, on August 20, 2003 at 11:00 a.m., Eastern
time, and 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 June 27,
2003 is hereby acknowledged.
Date________________________________, 2003
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN 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
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 M.S.B. Fund,
Inc. (your fund) and John Hancock Large Cap Select Fund (the "John Hancock
Fund"). Under this Agreement, as more fully described in the accompanying
proxy statement, your fund will transfer all of its assets to the John
Hancock Fund in exchange for Class A shares of the John Hancock Fund, a
newly-created fund with substantially similar investment objectives and
policies as your fund.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD
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JOHN HANCOCK FUNDS
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Proxy Voting Form
John Hancock Funds
M.S.B. Fund, Inc.
THE TRUSTEES RECOMMEND A VOTE "FOR" THE FOLLOWING PROPOSAL.
Proposal 1. To approve an Agreement and Plan of oFOR oAGAINST oABSTAIN
Reorganization between M.S.B. Fund,
Inc. (your fund) and John Hancock
Large Cap Select Fund (the "John Hancock
Fund"). Under the Agreement, as more
fully described in the accompanying proxy
statement, your fund will transfer all of
its assets to the John Hancock Fund in
exchange for Class A shares of the John
Hancock Fund, a newly-created fund with
substantially similar investment objectives
and policies as your fund.
- --------------------------------------------------------------------------------
Please refer to the proxy statement for discussion of each of these matters.
If not revolked, this proxy shall be voted "FOR" the proposal. Thank you for
voting.
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will be considered valid.
John Hancock
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JOHN HANCOCK FUNDS
Internet Proxy Voting Service
Proxy Voting Form
John Hancock Funds
M.S.B. Fund, Inc.
- --------------------------------------------------------------------------------
Thank you! Your vote has been submitted
- --------------------------------------------------------------------------------
THE TRUSTEES RECOMMEND A VOTE "FOR" THE FOLLOWING PROPOSAL.
Proposal 1. To approve an Agreement and Plan of oFOR
Reorganization between M.S.B. Fund,
Inc. (your fund) and John Hancock
Large Cap Select Fund (the "John Hancock
Fund"). Under the Agreement, as more
fully described in the accompanying proxy
statement, your fund will transfer all of
its assets to the John Hancock Fund in
exchange for Class A shares of the John
Hancock Fund, a newly-created fund with
substantially similar investment objectives
and policies as your fund.
Please refer to the proxy statement for discussion of each of these matters.
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JOHN HANCOCK LARGE CAP SELECT FUND
STATEMENT OF ADDITIONAL INFORMATION
June 23, 2003
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with the related Prospectus (also dated June 23, 2003) which
covers Class A shares of beneficial interest of John Hancock Large Cap Select
Fund to be issued in exchange for shares of beneficial interest of M.S.B. Fund,
Inc. Please retain this Statement of Additional Information for further
reference.
The Prospectus is available to you free of charge (please call 1-312-214-6590).
EXHIBITS...................................................................1
INTRODUCTION...............................................................1
INCORPORATION BY REFERENCE.................................................1
ADDITIONAL INFORMATION ABOUT M.S.B. FUND, INC..............................1
FUND HISTORY......................................................1
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISKS..................1
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...............2
INVESTMENT ADVISORY AND OTHER SERVICES............................2
BROKERAGE ALLOCATION AND OTHER PRACTICES..........................2
CAPITAL STOCK AND OTHER SECURITIES................................2
PURCHASE, REDEMPTION AND PRICING OF SHARES........................2
TAXATION OF THE FUND..............................................2
UNDERWRITERS......................................................2
CALCULATION OF PERFORMANCE DATA...................................2
FINANCIAL STATEMENTS..............................................2
ADDITIONAL INFORMATION ABOUT JOHN HANCOCK LARGE CAP SELECT FUND............1
FUND HISTORY......................................................3
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISKS..................3
MANAGEMENT OF JOHN HANCOCK LARGE CAP SELECT FUND..................3
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...............3
INVESTMENT ADVISORY AND OTHER SERVICES............................3
1
BROKERAGE ALLOCATION AND OTHER PRACTICES..........................3
CAPITAL STOCK AND OTHER SECURITIES................................3
PURCHASE, REDEMPTION AND PRICING OF SHARES........................3
TAXATION Of THE FUND..............................................3
UNDERWRITERS......................................................4
CALCULATION OF PERFORMANCE DATA...................................4
FINANCIAL STATEMENTS..............................................4
2
EXHIBITS
The following documents are attached as exhibits to this Statement of
Additional Information ("SAI"):
Exhibit A - SAI, dated June 23, 2003, of John Hancock Large Cap Select
Fund (the "John Hancock Fund")
Exhibit B - SAI, dated May 1, 2003, of M.S.B. Fund, Inc.
(the "MSB Fund ")
Exhibit C - Annual Report, dated December 31, 2002, of MSB Fund
Pro forma financial statements are not included since MSB Fund is being
combined with John Hancock Large Cap Select Fund, which is newly
created and does not have material assets or liabilities.
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in a Proxy Statement and Prospectus dated June 27, 2003
(the "Proxy Statement and Prospectus") relating to the proposed reorganization
of MSB Fund into John Hancock Fund in connection with the solicitation by the
management of MSB Fund of proxies to be voted at the Meeting of Shareholders of
MSB Fund to be held on August 20, 2003.
INCORPORATION BY REFERENCE
The following documents are incorporated by reference into this SAI:
o The MSB Fund SAI (file no. 002-22542), filed with the Securities and Exchange
Commission on April 30, 2003 (accession Number: 0000950137-03-002548)
o Annual Report for the period ended December 31, 2002 of MSB Fund (file no.
811-1273 ), filed with the Securities and Exchange Commission on
March 3, 2003 (accession number: 000095017-03-001244)
o The John Hancock Fund SAI (file no. 2-29502), filed with the Securities and
Exchange Commission on May 21, 2003 (accession number: 0001010521-03-000148)
ADDITIONAL INFORMATION ABOUT
MSB FUND
FUND HISTORY
For additional information about MSB Fund generally and its history, see "The
Fund" in the MSB Fund SAI.
1
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISKS
For additional information about the MSB Fund's investment objective,
policies, risks and restrictions, see "Investment Objective, Policies and
Risks" in the MSB Fund SAI.
For additional information about MSB Fund's Board of Directors, and the
officers and management personnel of MSB Fund, see "Officers and Directors of
the Fund" in the MSB Fund SAI.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For additional information about ownership of shares of MSB Fund, see
"Directors' and Officers' Investment in the Fund" in the MSB Fund SAI.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about advisory and other services, see "Investment
Advisory and Other Services", "Investment Adviser", "Administrator, Transfer
Agent and Custodian" and "Distributor" in the MSB Fund SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
For additional information about MSB Fund's brokerage allocation practices,
see "Purchase and Sale of Portfolio Securities" in the MSB Fund SAI.
CAPITAL STOCK AND OTHER SECURITIES
For additional information about the voting rights and other characteristics
of MSB Fund's shares, see "Description of Capital Stock" in the MSB Fund SAI.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about share purchase, redemption and pricing of
MSB Fund shares, see "Purchase and Redemption of Shares" in the MSB Fund SAI.
TAXATION OF THE FUND
For additional information about tax matters, see "Income Tax Status,
Dividends, and Distributions" in the MSB Fund SAI.
UNDERWRITERS
For additional information, see "Distributor" in the MSB Fund SAI.
CALCULATION OF PERFORMANCE DATA
For additional information about the investment performance of MSB Fund, see
"Performance Information" in the MSB Fund SAI.
FINANCIAL STATEMENTS
For additional information, see "Financial Statements" in the MSB Fund SAI.
2
ADDITIONAL INFORMATION ABOUT
JOHN HANCOCK LARGE CAP SELECT FUND
FUND HISTORY
For additional information about the John Hancock Fund generally and its
history, see "Organization of the Fund" in the John Hancock Fund SAI.
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISKS
For additional information about John Hancock Fund's investment objective,
policies, risks and restrictions see "Investment Objectives and Policies" and
"Investment Restrictions" in the John Hancock Fund SAI.
MANAGEMENT OF JOHN HANCOCK CLASSIC VALUE FUND
For additional informational about John Hancock Fund's Board of Trustees,
officers and management personnel, see "Those Responsible for Management" in the
John Hancock Fund SAI.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Not Applicable.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information, see "Investment Advisory and Other Services,"
Transfer Agent Services," "Custody of Portfolio" and "Independent Auditors" in
the John Hancock Fund SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
For additional information about John Hancock Fund's brokerage allocation
practices, see "Brokerage Transactions" in the John Hancock Fund SAI.
CAPITAL STOCK AND OTHER SECURITIES
For additional information about the voting rights and other characteristics
of shares of beneficial interest of John Hancock Fund, see "Description of the
Fund's Shares" in the John Hancock Fund SAI.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about purchase, redemption and pricing, see "Net
Asset Value," "Initial Sales Charge on Class A Shares," "Deferred Sales Charge
on Class B and Class C Shares," "Special Redemptions," "Additional Services and
Programs" and "Purchase and Redemptions through Third Parties" in the John
Hancock Fund SAI.
TAXATION Of THE FUND
For additional information about tax matters, see "Tax Status" in the John
Hancock Fund SAI.
3
UNDERWRITERS
For additional information about John Hancock Fund's principal underwriter
and distribution plans, see "Distribution Contracts" and "Sales Compensation" in
the John Hancock Fund SAI.
CALCULATION OF PERFORMANCE DATA
For additional information about the investment performance of John Hancock
Fund, see "Calculation of Performance" in the John Hancock Fund SAI.
FINANCIAL STATEMENTS
For additional information, see "Financial Statements" in the John Hancock
Fund SAI.
4
Sign up for electronic delivery at www.jhancock.com/funds/edelivery
490PN 6/03
Draft: 5/16/03
JOHN HANCOCK
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Large Cap Select Fund
Prospectus 6.23.03
[LOGO](R)
------------------
JOHN HANCOCK FUNDS
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved this fund or determined whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
CONTENTS
- --------------------------------------------------------------------------------
A summary of the fund's LARGE CAP SELECT FUND 4
goals, strategies, risks,
performance and expenses.
Policies and instructions for YOUR ACCOUNT
opening, maintaining and
closing an account. Choosing a share class 6
How sales charges are calculated 6
Sales charge reductions and waivers 7
Opening an account 8
Buying shares 9
Selling shares 10
Transaction policies 12
Dividends and account policies 12
Additional investor services 13
Further information on the FUND DETAILS
fund.
Business structure 14
Financial highlights 15
For more information back cover
Large Cap Select 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 its assets in equity securities of
large-capitalization companies (companies with market capitalizations in excess
of $5 billion). The fund invests primarily in U.S.-based companies whose growth,
cash flow, earnings and dividend prospects are promising and whose securities
are reasonably priced and have the potential for capital appreciation, in the
opinion of the management team.
In managing the portfolio, the management team looks for companies with strong
balance sheets and sustainable earnings growth. In evaluating the prospects for
a company's growth and earnings, the management team considers, among other
things, the company's historical performance and growth strategy, the growth
rate of the industries in which it operates and the markets into which it sells,
the nature of its competitive environment, technological developments and trends
in market share.
In attempting to determine reasonable price levels for a company's securities,
the management team utilizes a variety of measurement methods, including
discounted cash flow analysis of expected earnings streams and an evaluation of
the company's price-to-earnings ratio.
Under normal market conditions, the fund invests substantially all of its assets
in equity securities.
In abnormal conditions, the fund may invest extensively in investment-grade
short-term securities. In these and other cases, the fund may not achieve its
goal.
================================================================================
PAST PERFORMANCE
[Clip Art] The graph shows how the fund's total return has varied from year to
year, while the table shows performance over time (along with a broad-based
market index for reference). This information may help to provide an indication
of the fund's risks. Year-by-year and average annual figures for the period
prior to August 22, 2003, reflect the actual performance of the sole class of
M.S.B. Fund, Inc., the fund's predecessor. On August 22, 2003, the fund acquired
all of the assets of M.S.B. Fund, Inc., pursuant to an agreement and plan of
reorganization in exchange for Class A shares of the fund. The total expenses
for the fund's Class A shares are estimated to be substantially the same as the
predecessor fund's sole class of shares. The average annual returns for Class A
have been restated to reflect applicable sales charges. This adjustment will
have the effect of reducing the previously reported performance of the M.S.B.
Fund, Inc. Since Class B and C shares have no operational history, no annual
returns have been provided for Classes B and C. Total expenses for Classes B and
C should be substantially similar to Class A, except for Rule 12b-1 fees.
Year-by-year and index figures do not reflect sales charges and would be lower
if they did. All figures assume dividend reinvestment. Past performance before
and after taxes does not indicate future results.
Class A, total returns
2003 return as of 3-31-03: -6.75%
Best quarter: Q4 '98, 22.56%
Worst quarter: Q3 `02, -12.82%
After-tax returns
After-tax returns are shown for Class A shares only and would be different for
the other classes. They are calculated using the historical highest individual
federal marginal income-tax rates and do not reflect the impact of state and
local taxes. Actual after-tax returns depend on the investor's tax situation and
may differ from those shown. The after-tax returns shown are not relevant to
investors who hold their fund shares through tax-deferred arrangements such as
401(k) plans or individual retirement accounts.
Index (reflects no fees or taxes)
Standard & Poor's 500 Index, an unmanaged index of 500 stocks.
- -------------------------------------------------------------------------------------------------------------------
Class A calendar year total returns (without sales charges)
- -------------------------------------------------------------------------------------------------------------------
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
20.64% -1.68% 24.97% 21.16% 28.88% 31.45% 5.79% 5.68% -3.73% -15.08%
- -------------------------------------------------------------------------------------
Average annual total returns (including sales charge) for periods ending 12-31-02
- -------------------------------------------------------------------------------------
1 year 5 year 10 year
Class A before tax -19.33% 2.68% 10.21%
Class A after tax on distributions -20.05% 1.28% 7.21%
Class A after tax on distributions, with sale -11.28% 2.22% 7.40%
- -------------------------------------------------------------------------------------
Standard & Poor's 500 Index -22.09% -0.59% 9.34%
4
MAIN RISKS
[Clip Art] The value of your investment will fluctuate in response to stock
market movements.
The fund's management strategy has a significant influence on fund performance.
Large-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform investments that focus on small- or
medium-capitalization stocks.
To the extent that the fund invests in a given industry, its performance will be
hurt if that industry performs poorly. In addition, if the management team's
security selection strategies do not perform as expected, the fund could
underperform its peers or lose money.
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] Transaction expenses are charged directly to your account. Operating
expenses are paid from the fund's assets, and therefore are paid by shareholders
indirectly. The figures below show estimated annual expenses. Actual expenses
may be greater or less.
- ----------------------------------------------------------------------------------------
Shareholder transaction expenses(1) Class A Class B Class C
- ----------------------------------------------------------------------------------------
Maximum sales charge (load) 5.00% 5.00% 2.00%
Maximum front-end sales charge (load) on purchases
as a % of purchase price 5.00% none 1.00%
Maximum deferred sales charge (load)
as a % of purchase or sale price, whichever is less none(2) 5.00% 1.00%
- ----------------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- ----------------------------------------------------------------------------------------
Management fee 0.75% 0.75% 0.75%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
Other expenses 0.38% 0.38% 0.38%
Total fund operating expenses 1.38% 2.13% 2.13%
Expense reimbursement (at least until 8-22-05) -- -- --
Net annual operating expenses 1.38% 2.13% 2.13%
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 A $633 $915 $1,217 $2,075
Class B with redemption $716 $967 $1,344 $2,271
Class B without redemption $216 $667 $1,144 $2,271
Class C with redemption $413 $760 $1,233 $2,537
Class C without redemption $314 $760 $1,233 $2,537
(1) A $4.00 fee will be charged for wire redemptions.
(2) Except for investments of $1 million or more; see "How sales charges are
calculated."
================================================================================
SUB ADVISER
Shay Assets Management, Inc.
Founded in 1981
Supervised by the adviser
PORTFOLIO MANAGERS
John J. McCabe
Senior vice president of
subadviser Managed fund since 1991
Began business career in 1965
Mark F. Trautman
Vice president of subadviser
Managed fund since 1993
Began business career in 1986
FUND CODES
Class A Ticker --
CUSIP
Newspaper --
SEC number 811-1677
JH fund number 49
Class B Ticker --
CUSIP
Newspaper --
SEC number 811-1677
JH fund number 149
Class C Ticker --
CUSIP
Newspaper --
SEC number 811-1677
JH fund number 549
5
Your account
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each share class has its own cost structure, including a Rule 12b-1 plan that
allows it to pay fees for the sale, distribution and service of its shares. Your
financial representative can help you decide which share class is best for you.
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
o A front-end sales charge, as described at right.
o Distribution and service (12b-1) fees of 0.25%.
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
o No front-end sales charge; all your money goes to work for you right away.
o Distribution and service (12b-1) fees of 1.00%.
o A deferred sales charge, as described on following page.
o Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses.
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
o A front-end sales charge, as described at right.
o Distribution and service (12b-1) fees of 1.00%.
o A 1.00% contingent deferred sales charge on shares sold within one year of
purchase.
o No automatic conversion to Class A shares, so annual expenses continue at
the Class C level throughout the life of your investment.
Because 12b-1 fees are paid on an ongoing basis, they may cost shareholders more
than other types of sales charges.
Investors purchasing $1 million or more of Class B or Class C shares may want to
consider the lower operating expenses of Class A shares.
Your broker/dealer receives a percentage of these sales charges and fees. In
addition, John Hancock Funds may pay significant compensation out of its own
resources to your broker/dealer.
Your broker/dealer or agent may charge you a fee to effect transactions in fund
shares.
- --------------------------------------------------------------------------------
HOW SALES CHARGES ARE CALCULATED
Class A and Class C Sales charges are as follows:
- --------------------------------------------------------------------------------
Class A sales charges
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $49,999 5.00% 5.26%
$50,000 - $99,999 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63%
$250,000 - $499,000 2.50% 2.56%
$500,000 - $999,999 2.00% 2.04%
$1,000,000 and over See below
- --------------------------------------------------------------------------------
Class C sales charges
- --------------------------------------------------------------------------------
As a % of As a % of your
Your investment offering price investment
Up to $1,000,000 1.00% 1.01%
$1,000,000 and over none
Investments of $1 million or more Class A and Class C shares are available with
no front-end sales charge. However, there is a contingent deferred sales charge
(CDSC) on any Class A shares sold within one year of purchase, as follows:
- --------------------------------------------------------------------------------
CDSC on $1 million+ investments
- --------------------------------------------------------------------------------
CDSC on shares
Your investment being sold
First $1M - $4,999,999 1.00%
Next $1 - $5M above that 0.50%
Next $1 or more above that 0.25%
For purposes of this CDSC, all purchases made during a calendar month are
counted as having been made on the first day of that month.
6 YOUR ACCOUNT
The CDSC is based on the lesser of the original purchase cost or the current
market value of the shares being sold, and is not charged on shares you acquired
by reinvesting your dividends. To keep your CDSC as low as possible, each time
you place a request to sell shares we will first sell any shares in your account
that are not subject to a CDSC.
Class B Shares are offered at their net asset value per share, without any
initial sales charge.
Class B and Class C A CDSC may be charged if you sell Class B or Class C shares
within a certain time after you bought them, as described in the tables below.
There is no CDSC on shares acquired through reinvestment of dividends. The CDSC
is based on the original purchase cost or the current market value of the shares
being sold, whichever is less. The CDSCs are as follows:
- --------------------------------------------------------------------------------
Class B deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC on shares being sold
1st year 5.00%
2nd year 4.00%
3rd or 4th year 3.00%
5th year 2.00%
6th year 1.00%
After 6th year none
- --------------------------------------------------------------------------------
Class C deferred charges
- --------------------------------------------------------------------------------
Years after purchase CDSC
1st year 1.00%
After 1st year none
For purposes of these CDSCs, all purchases made during a calendar month are
counted as having been made on the first day of that month.
CDSC calculations are based on the number of shares involved, not on the value
of your account. To keep your CDSC as low as possible, each time you place a
request to sell shares we will first sell any shares in your account that carry
no CDSC. If there are not enough of these to meet your request, we will sell
those shares that have the lowest CDSC.
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
Reducing your Class A sales charges There are several ways you can combine
multiple purchases of Class A shares of John Hancock funds to take advantage of
the breakpoints in the sales charge schedule. These three ways can be combined
in any manner.
o Accumulation Privilege -- lets you add the value of any Class A shares you
already own to the amount of your next Class A investment for purposes of
calculating the sales charge. Retirement plans investing $1 million in
Class B shares may add that value to Class A purchases to calculate
charges.
o Letter of Intention -- lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had
been purchased at once.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize: complete the appropriate section of your application, or contact
your financial representative or Signature Services, or consult the SAI (see the
back cover of this prospectus).
Group Investment Program A group may be treated as a single purchaser under the
accumulation and combination privileges. Each investor has an individual
account, but the group's investments are lumped together for sales charge
purposes, making the investors potentially eligible for reduced sales charges.
There is no charge or obligation to invest (although initial investments must
total at least $250) and individual investors may close their accounts at any
time.
To utilize: contact your financial representative or Signature Services to find
out how to qualify, or consult the SAI (see the back cover of the prospectus).
CDSC waivers As long as Signature Services is notified at the time you sell, the
CDSC for each share class will generally be waived in the following cases:
o to make payments through certain systematic withdrawal plans
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize: if you think you may be eligible for a CDSC waiver, contact your
financial representative or Signature Services, or consult the SAI (see the back
cover of this prospectus).
YOUR ACCOUNT 7
Reinstatement privilege If you sell shares of a John Hancock fund, you may
reinvest some or all of the proceeds in the same share class of any John Hancock
fund within 120 days without a sales charge, as long as Signature Services is
notified before you reinvest. If you paid a CDSC when you sold your shares, you
will be credited with the amount of the CDSC. All accounts involved must have
the same registration.
To utilize: contact your financial representative or Signature Services.
Waivers for certain investors Class A shares may be offered without front-end
sales charges or CDSCs to various individuals and institutions, including:
o selling brokers and their employees and sales representatives
o financial representatives utilizing fund shares in fee-based investment
products under signed agreement with John Hancock Funds
o fund trustees and other individuals who are affiliated with these or other
John Hancock funds
o individuals transferring assets from an employee benefit plan into a John
Hancock fund
o participants in certain retirement plans with at least 100 eligible
employees (one-year CDSC applies)
o any shareholder account of M.S.B. Fund, Inc. registered on this fund's
books in the shareholder's name as of August 22, 2003.
Class C shares may be offered without front-end sales charges to various
individuals and institutions.
To utilize: if you think you may be eligible for a sales charge waiver, contact
Signature Services or consult the SAI (see the back cover of this prospectus).
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
1 Read this prospectus carefully.
2 Determine how much you want to invest. The minimum initial investments for
the John Hancock funds are as follows:
o non-retirement account: $1,000
o retirement account: $250
o group investments: $250
o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must
invest at least $25 a month
o fee-based clients of selling brokers who have placed at least $2
billion in John Hancock funds: $250
3 Complete the appropriate parts of the account application, carefully
following the instructions. You must submit additional documentation when
opening trust, corporate or power of attorney accounts. You must notify
your financial representative or Signature Services if this information
changes. For more details, please contact your financial representative or
call Signature Services at 1-800-225-5291.
4 Complete the appropriate parts of the account privileges application. By
applying for privileges now, you can avoid the delay and inconvenience of
having to file an additional application if you want to add privileges
later.
5 Make your initial investment using the table on the next page. You and
your financial representative can initiate any purchase, exchange or sale
of shares.
8 YOUR ACCOUNT
- ------------------------------------------------------------------------------------------------------------------------------
Buying shares
- ------------------------------------------------------------------------------------------------------------------------------
Opening an account Adding to an account
By check
[Clip Art] o Make out a check for the investment amount, payable to o Make out a check for the investment
"John Hancock Signature Services, Inc." amount payable to "John Hancock Signature
Services, Inc."
o Deliver the check and your completed application o Fill out the detachable investment slip
to your financial representative, or mail them from an account statement. If no slip is
to Signature Services (address below). available, include a note specifying the
fund name, your share class, your account
number and the name(s) in which the account
is registered.
o Deliver the check and your investment slip
or note to financial representative, or
mail them to Signature Services
(address below).
By exchange
[Clip Art] o Call your financial representative or o Log on to www.jhfunds.com to process
Signature Services to request an exchange. exchanges between funds.
o Call EASI-Line for automated service
24 hours a day using your touch-tone phone
at 1-800-338-8080.
o Call your financial representative or
Signature Services to request an exchange.
By wire
[Clip Art] o Deliver your completed application to your financial o Instruct your bank to wire the amount
representative, or mail it to Signature Services. of your investment to:
First Signature Bank & Trust
o Obtain your account number by calling your financial Account # 900000260
representative or Signature Services. Routing # 211475000
o Instruct your bank to wire the amount Specify the fund name, your share class, your
of your investment to: account number and the name(s) in which the
First Signature Bank & Trust account is registered. Your bank may charge a
Account # 900000260 fee to wire funds.
Routing # 211475000
Specify the fund name, your choice of share class, the
new account number and the name(s) in which the account
is registered. Your bank may charge a fee to wire funds.
By Internet
[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 "Bank Information" section on
your account application.
o Log on to www.jhfunds.com to initiate
purchases using your authorized bank
account.
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 "Bank Information" section
on your account application.
o Call EASI-Line for automated service
24 hours a day using your touch-tone phone
at 1-800-338-8080.
o Call your financial representative or
Signature Services between 8 A.M. and 4 P.M
Eastern Time on most business days.
To open or add to an account using the Monthly Automatic Accumulation Program,
see "Additional investor services."
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative for instructions and assistance.
YOUR ACCOUNT 9
- -----------------------------------------------------------------------------------------------------------------------
Selling shares
- -----------------------------------------------------------------------------------------------------------------------
Designed for To sell some or all of your shares
By letter
[Clip Art] o Accounts of any type. o Write a letter of instruction or complete a stock
power indicating the fund name, your share
o Sales of any amount. your account number, the name(s) in which the
account is registered and the dollar value
number of shares you wish to sell.
o Include all signatures and any additional
documents that may be required (see next page).
o Mail the materials to Signature Services.
o A check will be mailed to the name(s) and address
in which the account is registered, or otherwise
according to your letter of instruction.
By Internet
[Clip Art] o Most accounts. o Log on to www.jhfunds.com to initiate redemptions
from your funds.
o Sales of up to $100,000.
By phone
[Clip Art] o Most accounts. o Call EASI-Line for automated service 24 hours a
day using your touch-tone phone at 1-800-338-8080
o Sales of up to $100,000.
o Call your financial representative or Signature
Services between 8 A.M. and 4 P.M. Eastern Time on
most business days.
By wire or electronic funds transfer (EFT)
[Clip Art] o Requests by letter to sell any amount. o To verify that the Internet or telephone
redemption privilege is in place on an account
o Requests by Internet or phone to sell to request the form to add it to an existing
up to $100,000. account, call Signature Services.
o Amounts of $1,000 or more will be wired on the
next business day. A $4 fee will be deducted from
your account.
o Amounts of less than $1,000 may be sent by EFT or
by check. Funds from EFT transactions are
generally available by the second business day.
Your bank may charge a fee for this service
By exchange
[Clip Art] o Accounts of any type. o Obtain a current prospectus for the fund into
which you are exchanging by Internet or by
o Sales of any amount. your financial representative or Signature
Services.
o Log on to www.jhfunds.com to process exchanges
between your funds.
o Call EASI-Line for automated service 24 hour
day using your touch-tone phone at 1-800-338-8080.
o Call your financial representative or Signature
Services to request an exchange.
To sell shares through a systematic withdrawal plan, see
"Additional investor services."
10 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, unless they were previously provided to Signature Services and are
still accurate. These items are shown in the table below. You may also need to
include a signature guarantee, which protects you against fraudulent orders. You
will need a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o you are requesting payment other than by a check mailed to the address of
record and payable to the registered owner(s)
You will need to obtain your signature guarantee from a member of the Signature
Guarantee Medallion Program. Most brokers and securities dealers are members of
this program. A notary public CANNOT provide a signature guarantee.
- -----------------------------------------------------------------------------------------------------------------------
Seller Requirements for written requests
- -----------------------------------------------------------------------------------------------------------------------
Owners of individual, joint or UGMA/UTMA accounts o Letter of instruction.
(custodial accounts for minors).
o On the letter, the signatures and titles of all
persons authorized to sign for the account,
exactly as the account is registered.
o Signature guarantee if applicable (see above).
Owners of corporate, sole proprietorship, general o Letter of instruction.
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 Signature guarantee if applicable (see above).
Owners or trustees of trust accounts. o Letter of instruction.
o On the letter, the signature(s) of the trustee(s).
o Copy of the trust document certified within the
past 12 months or a John Hancock Funds trust
certification form.
o Signature guarantee if applicable (see above).
Joint tenancy shareholders with rights of survivorship o Letter of instruction signed by surviving tenant.
whose co-tenants are deceased.
o Copy of death certificate.
o Signature guarantee if applicable (see above).
Executors of shareholder estates. o Letter of instruction signed by executor.
o Copy of order appointing executor, certified
within the past 12 months.
o Signature guarantee if applicable (see above).
Administrators, conservators, guardians and other o Call 1-800-225-5291 for instructions.
sellers or account types not listed above.
Address:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
Phone Number: 1-800-225-5291
Or contact your financial representative for instructions and
assistance.
YOUR ACCOUNT 11
- --------------------------------------------------------------------------------
TRANSACTION POLICIES
Valuation of shares The net asset value (NAV) per share for each class of the
fund is determined each business day at the close of regular trading on the New
York Stock Exchange (typically 4 P.M. Eastern Time). The fund uses market prices
in valuing portfolio securities, but may use fair-value estimates if reliable
market prices are unavailable. The fund may also value securities at fair value
if the value of these securities has been materially affected by events
occurring after the close of a foreign market. Foreign stock or other portfolio
securities held by the fund may trade on U.S. holidays and weekends, even though
the fund's shares will not be priced on those days. This may change the fund's
NAV on days when you cannot buy or sell shares.
Buy and sell prices When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable deferred sales charges.
Execution of requests 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 using EASI-Line, accessing www.jhfunds.com, or
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
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 shares of one John Hancock fund for shares of the
same class of any other, generally without paying any additional sales charges.
The registration for both accounts involved must be identical. Class B and Class
C shares will continue to age from the original date and will retain the same
CDSC rate. However, if the new fund's CDSC rate is higher, then the rate will
increase. A CDSC rate that has increased will drop again with a future exchange
into a fund with a lower rate.
To protect the interests of other investors in the fund, the 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 may also refuse any exchange
order. The fund may change or cancel its exchange policies at any time, upon 60
days' notice to its shareholders.
Account Information John Hancock Funds is required by law to obtain information
for verifying an account holder's identity. If you do not provide the required
information, we may not be able to open your account. If verification is
unsuccessful, John Hancock Funds may close your account, redeem your shares at
the next NAV minus any applicable sales charges and take other steps that it
deems reasonable.
Certificated shares The fund does not issue share certificates. Shares are
electronically recorded.
Sales in advance of purchase payments When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the fund will not release the proceeds to you
until your purchase payment clears. This may take up to ten business days after
the purchase.
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment) that affects your
account balance
o after any changes of name or address of the registered owner(s)
o in all other circumstances, every quarter
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
Dividends The fund generally distributes most or all of its net earnings in the
form of dividends. The fund declares and pays any income dividends annually.
Capital gains, if any, are typically distributed annually.
Dividend reinvestments Most investors have their dividends reinvested in
additional shares of the same fund and class. If you choose this option, or if
you do not indicate any choice, your dividends will be reinvested on the
dividend record date. Alternatively, you can choose to have a check for your
dividends and capital gains in the amount of more than $10 mailed to you.
However, if the check is not deliverable or the combined dividend and capital
gains amount is $10 or less, your proceeds will be reinvested.
12 YOUR ACCOUNT
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.
Taxability of dividends Dividends you receive from a fund, whether reinvested or
taken as cash, are generally considered taxable. Dividends from the fund's
long-term capital gains are taxable as capital gains; dividends from the fund's
income and short-term capital gains are generally taxable as ordinary income.
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. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions.
Small accounts (non-retirement only) If you draw down a non-retirement account
so that its total value is less than $1,000, you may be asked to purchase more
shares within 30 days. If you do not take action, your fund may close out your
account and mail you the proceeds. Alternatively, Signature Services may charge
you $10 a year to maintain your account. You will not be charged a CDSC if your
account is closed for this reason, and your account will not be closed if its
drop in value is due to fund performance or the effects of sales charges.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTOR SERVICES
Monthly Automatic Accumulation Program (MAAP) MAAP lets you set up regular
investments from your paycheck or bank account to the John Hancock fund(s) of
your choice. You determine the frequency and amount of your investments, and you
can terminate your program at any time. To establish:
o Complete the appropriate parts of your account application.
o If you are using MAAP to open an account, make out a check ($25 minimum)
for your first investment amount payable to "John Hancock Signature
Services, Inc." Deliver your check and application to your financial
representative or Signature Services.
Systematic withdrawal plan This plan may be used for routine bill payments or
periodic withdrawals from your account. To establish:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account
(buying shares during a period when you are also selling shares of the
same fund is not advantageous to you, because of sales charges).
o Specify the payee(s). The payee may be yourself or any other party, and
there is no limit to the number of payees you may have, as long as they
are all on the same payment schedule.
o Determine the schedule: monthly, quarterly, semi-annually, annually or in
certain selected months.
o Fill out the relevant part of the account application. To add a systematic
withdrawal plan to an existing account, contact your financial
representative or Signature Services.
Retirement plans John Hancock Funds offers a range of retirement plans,
including traditional, Roth and Education IRAs, SIMPLE plans and SEPs. Using
these plans, you can invest in any John Hancock fund (except tax-free income
funds) with a low minimum investment of $250 or, for some group plans, no
minimum investment at all. To find out more, call Signature Services at
1-800-225-5291.
YOUR ACCOUNT 13
Fund details
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The diagram below shows the basic business structure used by the fund. The
fund's board of trustees oversees the fund's business activities and retains the
services of the various firms that carry out the fund's operations.
The trustees have the power to change the fund's investment goal without
shareholder approval. The trustees also have the power to change the fund's
policy of investing at least 80% of its assets in large-capitalization companies
without shareholder approval. The fund will provide shareholders with written
notice at least 60 days prior to a change in this 80% policy.
The management firm The fund is managed by John Hancock Advisers, LLC. Founded
in 1968, John Hancock Advisers is a wholly owned subsidiary of John Hancock
Financial Services, Inc. and managed approximately $26 billion in assets as of
March 31, 2003.
The subadviser Shay Assets Management, Inc. ("SAM") was founded in 1981 and is
controlled by Rodger D. Shay, Chairman. SAM managed approximately $5.6 billion
in assets as of March 31, 2003, and was the investment adviser to the
predecessor fund.
Management fee The fund pays the investment adviser a management fee at an
annual rate of 0.75% of the fund's average net assets.
Shareholders
- --------------------------------------------------------------------------------
Distribution and shareholder services
Financial services firms and their representatives
Advise current and prospective shareholders on their fund investments, often in
the context of an overall financial plan.
- --------------------------------------------------------------------------------
Principal distributor
John Hancock Funds, LLC
Markets the fund and distributes shares through selling brokers, financial
planners and other financial representatives.
- --------------------------------------------------------------------------------
Transfer agent
John Hancock Signature Services, Inc.
Handles shareholder services, including record-keeping and statements,
distribution of dividends and processing of buy and sell requests.
- --------------------------------------------------------------------------------
Subadviser
Shay Assets Management, Inc.
230 West Monroe Street
Chicago, IL 60606
Provides portfolio management to the fund.
- --------------------------------------------------------------------------------
Investment adviser
John Hancock Advisers, LLC
101 Huntington Avenue
Boston, MA 02199-7603
Manages the fund's business and investment activities.
- --------------------------------------------------------------------------------
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Holds the fund's assets, settles all portfolio trades and collects most of the
valuation data required for calculating the fund's NAV.
- --------------------------------------------------------------------------------
Asset management
[Clip Art]
Trustees
Oversee the fund's activities.
- --------------------------------------------------------------------------------
14 YOUR ACCOUNT
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
This table details the performance of the M.S.B. Fund, Inc., the fund's
predecessor, including total return information showing how much an investment
in the fund has increased or decreased each year. On August 22, 2003, the fund
acquired all of the assets of M.S.B. Fund, Inc. pursuant to an agreement and
plan of reorganization in exchange for Class A shares of the fund. The
information for the year ended December 31, 2002 has been audited by Ernst &
Young LLP, Independent Auditors. Their report and the predecessor fund's
financial statements are included in the predecessor fund's Annual Report, which
is available upon request. The financial highlights for the years ended prior to
December 31, 2002 were audited by other independent auditors.
M.S.B. Fund, Inc.
CLASS A SHARES
Selected data for each share of capital stock
outstanding throughout each year
Year Ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------
Net asset value, beginning of year $ 18.78 $ 20.74 $ 21.09 $ 21.49 $ 17.73
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
- --------------------------------------------------------------------------------------------------------------
Net investment income (loss) --(2) (0.03) --(2) 0.01 0.01
Net realized and unrealized gain (loss)
on investments (2.83) (0.74) 1.18 1.20 5.55
Total from investment operations (2.83) (0.77) 1.18 1.21 5.56
Less distributions
From net investment income -- -- -- (0.01) (0.01)
From net realized gains (0.68) (1.19) (1.53) (1.60) (1.79)
Total distributions (0.68) (1.19) (1.53) (1.61) (1.80)
Net change in net asset value per share (3.51) (1.96) (0.35) (0.40) 3.76
Net asset value, end of year $ 15.27 $ 18.78 $ 20.74 $ 21.09 $ 21.49
Total return (%) (15.08) (3.73) 5.68 5.79 31.45
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $49,803 $58,634 $63,794 $67,655 $65,824
Ratio of net expenses to average net assets (%) 1.38 1.44 1.31 1.24 1.32
Ratio of net investment income (loss)
to average net assets (%) (0.01) (0.14) (0.01) 0.03 0.02
Ratio of expenses to average net assets(1)(%) 1.48 1.52 1.43 1.26 1.39
Portfolio turnover rate (%) 18 13 15 22 32
(1) During the period, certain fees were waived. If such fee waivers had not
occurred, the ratio would have been as indicated.
(2) Net loss per share was less than $0.005.
YOUR ACCOUNT 15
For more information
Two documents are available that offer further To request a free copy of the current annual/semiannual
information on John Hancock Large Cap Select Fund: report or the SAI, please contact John Hancock:
Annual/Semiannual Report to Shareholders By mail:
Includes financial statements, a discussion of the John Hancock Signature Services, Inc.
market conditions and investment strategies that 1 John Hancock Way, Suite 1000
significantly affected performance, as well as the Boston, MA 02217-1000
auditors' report (in annual report only).
By phone: 1-800-225-5291
Statement of Additional Information (SAI)
The SAI contains more detailed information on all By EASI-Line: 1-800-338-8080
aspects of the fund. The current annual report is
included in the SAI. By TDD: 1-800-554-6713
On the Internet: www.jhfunds.com
A current SAI has been filed with the Securities and Or you may view or obtain these documents from the SEC:
Exchange Commission and is incorporated by reference
into (is legally a part of) this prospectus.
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)
(C)2003 JOHN HANCOCK FUNDS, LLC 490PN 6/03 On the Internet: www.sec.gov
[LOGO](R)
- -----------------------
John Hancock Funds, LLC
MEMBER NASD
101 Huntington Avenue
Boston, MA 02199-7603
www.jhfunds.com
- --------------------------------------------------------------------------------
PRSRT STD
U.S.POSTAGE
PAID
BOSTON, MA
PERMIT NO. 11
- --------------------------------------------------------------------------------
DRAFT 5/14/03
JOHN HANCOCK LARGE CAP SELECT FUND
Class A, Class B, Class C and Class I Shares
Statement of Additional Information
June 23, 2003
This Statement of Additional Information provides information about John Hancock
Large Cap Select Fund (the "Fund") in addition to the information that is
contained in the Fund's current Prospectus for Class A, B and C shares and in
the Fund's current Prospectus for Class I shares (the "Prospectuses"). The Fund
is a diversified series of John Hancock Capital Series (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
1-800-225-5291
TABLE OF CONTENTS
Page
Organization of the Fund................................................. 2
Investment Objective and Policies........................................ 2
Investment Restrictions.................................................. 13
Those Responsible for Management......................................... 15
Investment Advisory and Other Services................................... 22
Distribution Contracts................................................... 26
Sales Compensation....................................................... 27
Net Asset Value.......................................................... 29
Initial Sales Charge on Class A Shares................................... 29
Deferred Sales Charge on Class B and Class C Shares...................... 32
Special Redemptions...................................................... 36
Additional Services and Programs......................................... 36
Purchase and Redemptions through Third Parties........................... 38
Description of the Fund's Shares......................................... 38
Tax Status............................................................... 39
Calculation of Performance............................................... 44
Brokerage Allocation..................................................... 47
Transfer Agent Services.................................................. 49
Custody of Portfolio..................................................... 49
Independent Auditors..................................................... 49
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 series of the Trust, an open-end investment management company
organized as a Massachusetts business trust in 1984 under the laws of The
Commonwealth of Massachusetts. The Fund is the successor to M.S.B. Fund, Inc.
(the "Predecessor Fund"), a New York corporation incorporated in 1964. On August
22, 2003, the Fund acquired all of the assets of M.S.B. Fund, Inc. pursuant to
an agreement and plan of reorganization (the "Reorganization") in exchange for
Class A shares of the fund and the assumption of certain liabilities of M.S.B.
Fund, Inc.
John Hancock Advisers, LLC (prior to February 1, 2002, John Hancock Advisers,
Inc.) (the "Adviser") is the Fund's investment adviser. The Adviser is an
indirect, wholly-owned subsidiary of John Hancock Life Insurance Company
(formerly John Hancock Mutual Life Insurance Company)(the "Life Company"), a
Massachusetts life insurance company chartered in 1862, with national
headquarters at John Hancock Place, Boston, Massachusetts. The Life Company is
wholly owned by John Hancock Financial Services, Inc., a Delaware corporation
organized in February, 2000. Shay Assets Management, Inc. is the Fund's
Sub-Adviser, and was the investment adviser to the Predecessor Fund.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's investment
objective and policies discussed in the Prospectus. Appendix A contains further
information describing investment risks. The investment objective is
non-fundamental and may be changed by the Trustees without shareholder approval.
There is no assurance that the Fund will achieve its investment objective.
The Fund seeks long-term growth of capital. To pursue this goal, the Fund
normally invests at least 80% of its assets in equity securities of large
capitalization companies (companies with market capitalizations in excess of $5
billion). The Fund invests primarily in U.S. based companies whose growth, cash
flow, earnings and dividend prospects are promising and whose securities are
reasonably priced and have the potential for capital appreciation, in the
opinion of the management team.
With respect to the Fund's investment policy of investing at least 80% of its
Assets in large capitalization companies, "Assets" is defined as net assets plus
the amount of any borrowings for investment purposes. In addition, the Fund will
notify shareholders at least 60 days prior to any change in this policy.
In managing the portfolio, the management team looks for companies with strong
balance sheets and sustainable earnings growth. In evaluating the prospects for
a company's growth and earnings, the management team considers, among other
things, the company's historical performance and growth strategy, the growth
rate of the industries in which it operates and the markets into which it sells,
the nature of its competitive environment, technological developments and trends
in market share.
In attempting to determine reasonable price levels for a company's securities,
the management team utilizes a variety of measurement methods, including
discounted cash flow analysis of expected earnings streams and an evaluation of
the company's price-to-earnings ratio.
Under normal market conditions, the fund invests substantially all of its assets
in equity securities. In abnormal circumstances, such as situations where the
Fund experiences unusually large cash inflows or anticipates unusually large
redemptions, and in adverse market, economic, political or other conditions, the
Fund may temporarily invest extensively in investment-grade short-term
securities, cash and cash equivalents. In these and other cases, the Fund may
not achieve its goal.
2
Preferred stocks. The 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. The Fund may invest in convertible securities which may
include corporate notes or preferred stock, although it is not expected that the
Fund's holdings of convertible debt securities would ordinarily exceed 5% of the
Fund's total assets. 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.
Investment Companies. Subject to the Fund's non-fundamental investment
restriction set forth below, the Fund may invest in shares of other investment
companies in pursuit of its investment objective. This may include investments
in money market mutual funds in connection with the Fund's management of daily
cash positions. In addition to the advisory and operational fees the Fund bears
directly in connection with its own operation, the Fund and its shareholders
will also bear the pro rata portion of each other investment company's advisory
and operational expenses.
Debt securities. The Fund may invest in debt securities that are rated Baa or
better by Moody's or BBB or better by S&P, or if unrated, determined to be of
comparable quality by the Adviser and the Sub-Adviser ("investment grade debt
securities"). In addition, debt securities rated BBB or Baa and unrated debt
securities of comparable quality are considered medium grade obligations and
have speculative characteristics. Adverse changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payment than in the case of higher grade obligations.
Debt securities of corporate and governmental issuers in which the Fund 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).
Government Securities. The Fund may invest in government securities. Certain
U.S. Government securities, including U.S. Treasury bills, notes and bonds, and
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.
3
Certificates of Deposit, Bankers' Acceptances and Time Deposits. The Fund may
acquire certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
Deposited in a commercial bank for a definite period of time and earning a
Specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
Merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic banks, savings and loan associations
or financial institutions which, at the time of purchase, have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully insured
by the U.S. Government. In addition to purchasing certificates of deposit and
bankers' acceptances, to the extent permitted under its investment objective and
policies stated above and in its prospectus, the Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
Commercial Paper and Short-Term Notes. The Fund may invest a portion of its
assets in commercial paper and short-term notes. Commercial paper consists of
unsecured promissory notes issued by corporations. Issues of commercial paper
and short-term notes will normally have maturates of less than nine months and
fixed rates of return, although such instruments may have maturates of up to one
year. Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by Standard & Poor's Ratings Group, "Prime-1"
or "Prime-2" by Moody's Investors Service, Inc., or similarly rated by another
nationally recognized statistical rating organization or, if unrated, will be
determined by the Adviser to be of comparable quality. These rating symbols are
described in Appendix B.
Ratings as Investment Criteria. In general, the ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("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
Fund as initial criteria for the selection of debt securities. Among the factors
which will be considered are the long-term ability of the issuer to pay
principal and interest and general economic trends. Appendix B contains further
information concerning the rating of Moody's and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund.
Investments in Foreign Securities. The Fund may invest directly in the
securities of foreign issuers as well as securities in the form of sponsored or
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts (GDRs), convertible preferred stocks,
preferred stocks and warrants or other securities convertible into securities of
foreign issuers. ADRs are receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Issuers of unsponsored ADRs are not contractually
obligated to disclose material information, including financial information, in
the United States. Generally, ADRs are designed for use in the United States
securities markets and EDRs are designed for use in European securities markets.
4
An investment in foreign securities including ADRs may be affected by changes in
currency rates and in exchange control regulations. Issuers of unsponsored ADRs
are not contractually obligated to disclose material information including
financial information, in the United States and, therefore, there may not be a
correlation between such information and the market value of the unsponsored
ADR. Foreign companies may not be subject to accounting standards or government
supervision comparable to U.S. companies, and there is often less publicly
available information about their operations. Foreign companies may also be
affected by political or financial instability abroad. These risk considerations
may be intensified in the case of investments in ADRs of foreign companies that
are located in emerging market countries. ADRs of companies located in these
countries may have limited marketability and may be subject to more abrupt or
erratic price movements.
Foreign Currency Transactions. The 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.
The Fund may also enter into forward foreign currency exchange contracts to
hedge against fluctuations in currency exchange rates affecting a particular
transaction or portfolio position. Forward contracts are agreements to purchase
or sell a specified currency at a specified future date and price set at the
time of the contract. Transaction hedging is the purchase or sale of forward
foreign currency contracts with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities quoted or denominated in the same or related foreign currencies.
Portfolio hedging is the use of forward foreign currency contracts to offset
portfolio security positions denominated or quoted in the same or related
foreign currencies. The Fund may elect to hedge less than all of its foreign
portfolio positions as deemed appropriate by the Adviser. The Fund will not
engage in speculative forward foreign currency exchange transactions.
If the Fund purchases a forward contract, the Fund will segregate cash or liquid
securities in a separate account 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 to the
amount of the Fund's commitment in forward contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
Risks of Foreign Securities. Investments in foreign securities may involve a
greater degree of risk than those in domestic securities. There is generally
less publicly available information about foreign companies in the form of
reports and ratings similar to those that are published about issuers in the
United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
5
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.
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 and the expense of enforcing its rights.
Reverse Repurchase Agreements and Other Borrowings. The Fund may also enter into
reverse repurchase agreements which involve the sale of U.S. Government
securities held in its portfolio to a bank with an agreement that the Fund will
buy back the securities at a fixed future date at a fixed price plus an agreed
amount of "interest" which may be reflected in the repurchase price. Reverse
repurchase agreements are considered to be borrowings by the Fund. Reverse
repurchase agreements involve the risk that the market value of securities
purchased by the Fund with proceeds of the transaction may decline below the
repurchase price of the securities sold by the Fund which it is obligated to
repurchase. The Fund will also continue to be subject to the risk of a decline
in the market value of the securities sold under the agreements because it will
reacquire those securities upon effecting their repurchase. 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.
6
The Fund will not enter into reverse repurchase agreements and other borrowings
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 total return. The Fund will enter into reverse repurchase agreements
only with federally insured banks which are approved in advance as being
creditworthy by the Trustees. Under procedures established by the Trustees, the
Advisers will monitor the creditworthiness of the banks involved.
Restricted and Illiquid Securities. The Fund may purchase securities that are
not registered ("restricted securities") under the Securities Act of 1933 ("1933
Act"), including commercial paper issued in reliance on Section 4(2) of the 1933
act and securities offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act. The Fund will not invest more than 15% of its net
assets in illiquid investments. If the Trustees determines, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments. The Trustees have adopted guidelines and delegate to
the Advisers the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Options on Securities, Securities Indices and Currency. The Fund may purchase
and write (sell) call and put options on any securities in which it may invest,
on any securities index based on securities in which it may invest or on any
currency in which Fund investments may be denominated. These options may be
listed on national domestic securities exchanges or foreign securities exchanges
or traded in the over-the-counter market. The Fund may write covered put and
call options and purchase put and call options as a substitute for the purchase
or sale of securities or currency or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing Covered Options. A call option on securities or currency written by the
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by the Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive the Fund of the opportunity to profit from an increase in the market
price of the securities or foreign currency assets in its portfolio. Writing
covered put options may deprive the Fund of the opportunity to profit from a
decrease in the market price of the securities or foreign currency assets to be
acquired for its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account with a value at least equal to the Fund's obligation under the option,
(ii) entering into an offsetting forward commitment and/or (iii) purchasing an
offsetting option or any other option which, by virtue of its exercise price or
7
otherwise, reduces the Fund's net exposure on its written option position. A
written call option on securities is typically covered by maintaining the
securities that are subject to the option in a segregated account. The Fund may
cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index.
The Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities or currencies of the type
in which it may invest. The Fund may also sell call and put options to close out
its purchased options.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. The Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle the Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by
the Fund for the purpose of affirmatively benefiting from a decline in the price
of securities or currencies which it does not own. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities or currency decreased below the exercise price sufficiently to cover
the premium and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect 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.
8
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
The Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. The 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. The Fund may purchase and sell futures and options on futures
for hedging or other non-speculative purposes. The 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").
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
9
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.
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.
10
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. The 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. 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 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.
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
11
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.
Lending of Securities. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities and money market
funds. When the Fund lends portfolio securities, there is a risk that the
borrower may fail to return the loaned securities 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 in excess of 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.
Forward Commitment and When-Issued Securities. The Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. The Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, the Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
When the Fund engages in forward commitment and when-issued transactions, it
relies on the seller to consummate the transaction. The failure of the issuer or
seller to consummate the transaction may result in the Fund's losing the
opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued or forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities equal, of any type or maturity, in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, the Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments, or to take advantage of yield disparities between various fixed
12
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
higher brokerage expenses. The Fund's portfolio turnover rate is set forth in
the table under the caption "Financial Highlights" in the Prospectus.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions will
not be changed without the approval of a majority of the Fund's outstanding
voting securities which, as used in the Prospectus and this Statement of
Additional Information, means the approval by the lesser of (1) the holders of
67% or more of the Fund's shares represented at a meeting if more than 50% of
the Fund's outstanding shares are present in person or by proxy at that meeting
or (2) more than 50% of the Fund's outstanding shares.
The Fund may not:
1. Issue senior securities, except as permitted by the Fund's fundamental
investment restrictions on borrowing, lending and investing in
commodities and as otherwise permitted under the 1940 Act. 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 and options on futures
contracts, forward commitments, forward foreign exchange contracts and
repurchase agreements entered into in accordance with the Fund's
investment policies are not deemed to be senior securities.
2. Borrow money, except: (i) 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; (iv) 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;
and (v) as otherwise permitted under the 1940 Act. 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.
3. Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
4. Purchase, sell or invest in real estate, but subject to its other
investment policies and restrictions may invest in securities of
companies that deal in real estate or are engaged in the real estate
business. These companies include real estate investment trusts and
securities secured by real estate or interests in real estate. The fund
may hold and sell real estate acquired through default, liquidation or
other distributions of an interest in real estate as a result of the
fund's ownership of securities.
5. Invest in commodities or commodity futures contracts, other than
financial derivative contracts. Financial derivatives include forward
currency contracts; financial futures contracts and options on
financial futures contracts; options and warrants on securities,
currencies and financial indices; swaps, caps, floors, collars and
swaptions; and repurchase agreements entered into in accordance with
the fund's investment policies.
13
6. Make loans, except that the fund may (i) 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, (ii) enter into repurchase
agreements, and (iii) 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. 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.
8. With respect to 75% of the fund's total assets, invest more than 5% of
the fund's total assets in the securities of any single issuer or own
more than 10% of the outstanding voting securities of any one issuer,
in each case other than (i) securities issued or guaranteed by the U.S.
Government, its agencies or its instrumentalities or (ii) securities of
other investment companies.
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:
1. 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 of 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.
2. Invest in the securities of an issuer for the purpose of exercising
control or management.
3. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of securities
transactions.
4. Invest more than 15% of its net assets in securities which are
illiquid.
Except with respect to borrowing money, 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 Fund 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.
14
If allowed by the Fund's other investment policies and restrictions, the Fund
may invest up to 5% of its total assets in Russian equity securities and up to
10% of its total assets in Russian fixed income securities. All Russian
securities must be: (1) denominated in U.S. dollars, Canadian dollars, euros,
sterling, or yen; (2) traded on a major exchange; and (3) held physically
outside of Russia.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees, including certain Trustees
who are not "interested persons" of the Fund or the Trust (as defined by the
Investment Company Act of 1940) (the "Independent Trustees"), who elect officers
who are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers or Directors of the Adviser, or officers and Directors of
the Fund's principal distributor, John Hancock Funds, LLC (prior to February 1,
2002, John Hancock Funds, Inc.) ("John Hancock Funds").
15
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Independent Trustees
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Dennis S. Aronowitz Trustee 2003 Professor of Law, Emeritus, Boston University 21
Born: 1931 School of Law (as of 1996); Director,
Brookline Bancorp.
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Richard P. Chapman, Jr. Trustee 2003 President and Chief Executive Officer, 21
Born: 1935 Brookline Bancorp., Inc. (lending) (since
1972); Chairman and Director, Lumber Insurance
Co. (insurance) (until 2000); Chairman and
Director, Northeast Retirement Services, Inc.
(retirement administration) (since 1998).
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
William J. Cosgrove Trustee 2003 Vice President, Senior Banker and Senior 21
Born: 1933 Credit Officer, Citibank, N.A. (banking)
(retired 1991); Executive Vice President,
Citadel Group Representatives, Inc. (financial
reinsurance); Director, Hudson City Bancorp
(banking); Trustee, Scholarship Fund for Inner
City Children (since 1986).
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Richard A. Farrell Trustee 2003 President, Farrell, Healer & Co., Inc., 21
Born: 1932 (venture capital management firm)(since 1980)
and General Partner of the Venture Capital Fund
of NE; Trustee, Marblehead Savings Bank
(since 1994). Prior to 1980, headed the venture
capital group at Bank of Boston Corporation.
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02199.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
16
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
William F. Glavin Trustee 2003 President Emeritus, Babson College (as of 21
Born: 1932 1998); Vice Chairman, Xerox Corporation (until
1989); Director, Reebok, Inc. (until 2002) and
Inco Ltd. (until 2002).
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
John A. Moore Trustee 2003 President and Chief Executive Officer, 30
Born: 1939 Institute for Evaluating Health Risks,
(nonprofit institution)(until 2001); Senior
Scientist, Sciences International (health
research)(since 1998); Principal, Hollyhouse
(consulting)(since 2000); Director, CIIT(nonprofit
research) (since 2002).
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Patti McGill Peterson Trustee 2003 Executive Director, Council for International 30
Born: 1943 Exchange of Scholars (since 1998); Vice
President, Institute of International Education
(since 1998); Senior Fellow, Cornell Institute
of Public Affairs, Cornell University (until
1997); President Emerita of Wells College and St.
Lawrence University; Director, Niagara Mohawk
Power Corporation (electric utility).
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
John W. Pratt Trustee 2003 Professor of Business Administration 21
Born: 1931 Emeritus, Harvard University Graduate School
of Business Administration (as of 1998).
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02199.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
17
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Interested Trustees
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
John M. DeCiccio (3) Trustee 2003 Executive Vice President and Chief Investment 52
Born: 1948 Officer, John Hancock Financial Services,
Inc.; Director, Executive Vice President and
Chief Investment Officer, John Hancock Life
Insurance Company; Chairman of the Committee
of Finance of John Hancock Life Insurance
Company; Director, John Hancock Subsidiaries,
LLC, Hancock Natural Resource Group,
Independence Investment LLC, Independence
Fixed Income LLC, John Hancock Advisers, LLC
(the "Adviser") and The Berkeley Financial
Group, LLC ("The Berkeley Group"), John
Hancock Funds, LLC ("John Hancock Funds"),
Massachusetts Business Development
Corporation; Director, John Hancock Insurance
Agency, Inc. ("Insurance Agency, Inc.") (until
1999).
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Maureen R. Ford (3) Trustee, 2003 Executive Vice President, John Hancock 52
Born: 1955 Chairman, Financial Services, Inc., John Hancock Life
President Insurance Company; Chairman, Director,
and Chief President and Chief Executive Officer, the
Executive Advisers and The Berkeley Group; Chairman,
Officer Director, President and Chief Executive
Officer, John Hancock Funds; Chairman, Director
and Chief Executive Officer, Sovereign Asset
Management Corporation ("SAMCorp."); Director,
John Hancock Subsidiaries, LLC;
Independence Investment LLC, Independence Fixed
Income LLC and Signature Services; Senior Vice
President, MassMutual Insurance Co. (until
1999).
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02199.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
18
- ---------------------------- ------------- ----------- ------------------------------------------------ -------------
Number of
John
Hancock
Position(s) Trustee/ Funds
Name, Address (1) Held with Officer Principal Occupation(s) and other Overseen by
And Age Fund since(2) Directorships During Past 5 Years Trustee
- --------------------------- -------------- ----------- ------------------------------------------------ -------------
Principal Officers who
are not Trustees
- --------------------------- -------------- ----------- ------------------------------------------------ -------------
William L. Braman Executive 2003 Executive Vice President and Chief Investment N/A
Born: 1953 Vice Officer, the Adviser and each of the John
President Hancock funds; Director, SAMCorp., Executive
and Chief Vice President and Chief Investment Officer,
Investment Baring Asset Management, London U.K. (until
Officer 2000).
- --------------------------- -------------- ----------- ------------------------------------------------ -------------
Richard A. Brown Senior Vice 2003 Senior Vice President, Chief Financial Officer N/A
Born: 1949 President and Treasurer, the Adviser, John Hancock
and Chief Funds, and The Berkeley Group; Second Vice
Financial President and Senior Associate Controller,
Officer Corporate Tax Department, John Hancock
Financial Services, Inc. (until 2001).
- --------------------------- -------------- ----------- ------------------------------------------------ -------------
Thomas H. Connors Vice 2003 Vice President and Compliance Officer, the N/A
Born: 1959 President Adviser and each of the John Hancock funds;
and Vice President, John Hancock Funds.
Compliance
Officer
- --------------------------- -------------- ----------- ------------------------------------------------ -------------
William H. King Vice 2003 Vice President and Assistant Treasurer, the N/A
Born: 1952 President Adviser; Vice President and Treasurer of each
and Treasurer of the John Hancock funds; Assistant Treasurer
of each of the John Hancock funds (until 2001).
- --------------------------- -------------- ----------- ------------------------------------------------ -------------
Susan S. Newton Senior Vice 2003 Senior Vice President, Secretary and Chief N/A
Born: 1950 President, Legal Officer, SAMCorp., the Adviser and each
Secretary of the John Hancock funds, John Hancock Funds
and Chief and The Berkeley Group; Vice President,
Legal Officer Signature Services (until 2000), Director,
Senior Vice President and Secretary, NM
Capital.
- --------------------------- -------------- ----------- ------------------------------------------------ -------------
(1) Business address for independent and interested Trustees and officers is
101 Huntington Avenue, Boston, Massachusetts 02199.
(2) Each Trustee serves until resignation, retirement age or until her or his
successor is elected.
(3) Interested Trustee: holds positions with the Fund's investment adviser,
underwriter, and or certain other affiliates.
19
The Fund's Board of Trustees currently has four standing Committees: the Audit
Committee, the Administration Committee, the Contracts/Operations Committee and
the Investment Performance Committee. Each Committee is comprised of Independent
Trustees. The Audit Committee members are Messrs. Glavin, Moore and Ms. McGill
Peterson. The Audit Committee recommends to the full board auditors for the
Fund, monitors and oversees the audits of the Fund, communicates with both
independent auditors and internal auditors on a regular basis and provides a
forum for the auditors to report and discuss any matters they deem appropriate
at any time.
The Administration Committee's members are all of the Independent Trustees of
the Fund. The Administration Committee reviews the activities of the other three
standing committees and makes the final selection and nomination of candidates
to serve as Independent Trustees. The Administration Committee will consider
nominees recommended by shareholders to serve as Independent Trustees, provided
that shareholders submit recommendations in compliance with all of the pertinent
provisions of Rule 14a-8 under the Securities Exchange Act of 1934. The
Administration Committee also works with all Trustees on the selection and
election of officers of the Fund and reviews Trustee compensation, evaluates
Trustee performance and considers committee membership rotations as well as
relevant corporate governance issues.
The Contracts/Operations Committee members are Messrs. Farrell and Pratt. The
Contracts/Operations Committee oversees the initiation, operation, and renewal
of contracts between the Fund and other entities. These contracts include
advisory and subadvisory agreements, custodial and transfer agency agreements
and arrangements with other service providers.
The Investment Performance Committee consists of Messrs. Aronowitz, Chapman and
Cosgove. The Investment Performance Committee monitors and analyzes the
performance of the Fund generally, consults with the adviser as necessary if the
Fund requires special attention, and reviews peer groups and other comparative
standards as necessary.
The following table provides a dollar range indicating each Trustee's ownership
of equity securities of the Fund, as well as aggregate holdings of shares of
equity securities of all John Hancock Funds overseen by the Trustee, as of
December 31, 2002.
20
- --------------------------------------------------------------------------------
Dollar Range Aggregate Dollar Range
of Fund Shares of holdings in John Hancock
Name of Trustee Owned by Trustee (1) funds overseen by Trustee (1)
- --------------------------------------------------------------------------------
Independent Trustees
- --------------------------------------------------------------------------------
Dennis S. Aronowitz None $50,001-$100,000
- --------------------------------------------------------------------------------
Richard P. Chapman, Jr. None Over $100,000
- --------------------------------------------------------------------------------
William J. Cosgrove None Over $100,000
- --------------------------------------------------------------------------------
Richard A. Farrell None Over $100,000
- --------------------------------------------------------------------------------
William F. Glavin None $10,001-$50,000
- --------------------------------------------------------------------------------
Dr. John A. Moore None Over $100,000
- --------------------------------------------------------------------------------
Patti McGill Peterson None Over $100,000
- --------------------------------------------------------------------------------
John W. Pratt None Over $100,000
- --------------------------------------------------------------------------------
Interested Trustees
- --------------------------------------------------------------------------------
John M. DeCiccio None Over $100,000
- --------------------------------------------------------------------------------
Maureen R. Ford None Over $100,000
- --------------------------------------------------------------------------------
(1) This Fund does not participate in the John Hancock Deferred Compensation
Plan for Independent Trustees (the "Plan"). Under the Plan, an Independent
Trustee may defer his fees by electing to have the Adviser invest his fees
in one of the funds in the John Hancock complex that participates in the
Plan. Under these circumstances, the Trustee is not the legal owner of the
underlying shares, but does participate in any positive or negative return
on those shares to the same extent as all other shareholders. With regard
to Trustees participating in the Plan, if a Trustee was deemed to own the
shares used in computing the value of his deferred compensation, as of
December 31, 2002, the respective "Dollar Range of Fund Shares Owned by
Trustee" and the "Aggregate Dollar Range of holdings in John Hancock funds
overseen by Trustee" would be none and over $100,000 for Mr. Chapman, none
and over $100,000 for Mr. Cosgrove, none and over $100,000 for Mr. Gavin
and none and over $100,000 for Dr. Moore.
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. DeCicco, 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.
Aggregate Total Compensation From the
Compensation Fund and John Hancock Fund
Independent Trustees From the Fund(1) Complex to Trustees(2)
- -------------------- ---------------- ----------------------
Dennis S. Aronowitz $ 25 $ 72,000
Richard P. Chapman, Jr+ 25 78,100
William J. Cosgrove+ 25 75,100
Richard A. Farrell 25 75,000
William F. Glavin+ 25 75,000
Dr. John A. Moore+ 25 72,000
Patti McGill Peterson 25 72,000
John W. Pratt 25 72,100
----- ----------
Total $ 200 $ 591,300
---------
(1) Compensation is estimated for the current fiscal year ending December 31,
2003.
(2) Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 2002. As of this date, there were sixty-one funds
in the John Hancock Fund Complex, with Mr. Moore and Ms. Peterson serving on
thirty-nine funds and each other Independent Trustees serving on thirty-one
funds.
21
(+) As of December 31, 2002, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $46,844, Mr. Cosgrove was $166,358, Mr. Glavin was $219,230 and for
Dr. Moore was $203,650 under the John Hancock Group of Funds 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 or
Trustees of one or more of the other funds for which the Adviser serves as
investment adviser.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has approximately $26 billion in assets under
management as of March 31, 2003 in its capacity as investment adviser to the
Fund and other funds in the John Hancock group of funds as well as retail and
institutional privately managed accounts. The Adviser is an affiliate of the
Life Company, one of the most recognized and respected financial institutions in
the nation. With total assets under management of approximately $130 billion, as
of March 31, 2003, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating with Standard & Poor's
and A. M. Best. Founded in 1862, the Life Company has been serving clients for
over 130 years.
The Sub-Adviser, Shay Assets Management, Inc. ("SAMI") is located at 230 West
Monroe Street, Chicago, Illinois 60606. The Sub-Adviser has been providing
investment advisory services since 1981 and is controlled by Rodger D. Shay,
Chairman. The Sub-Adviser, along with its predecessor, Shay Assets Management
Co., served as the investment adviser to the Fund's predecessor, M.S.B. Fund,
Inc., from May 19, 1995 until the Reorganization and managed approximately $4.8
billion as of December 31, 2002. SAMI is a wholly owned subsidiary of Shay
Investment Services Inc., a privately-held holding company. Rodger D. Shay is
the majority shareholder of Shay Investment Services, Inc.
Mr. John J. McCabe, Senior Vice President and Chief Investment Strategist of the
Sub-Adviser, provides macro-economic advice in connection with the management of
the Fund. Mr. McCabe has been a part of the portfolio management team for the
Fund and the Predecessor Fund since 1991. He joined the Sub-Adviser in May 1995
and prior thereto, he served as Senior Vice President and Chief Investment
Officer of Nationar, the Predecessor Fund's former investment adviser. Mr.
McCabe is a director and past President of the New York Society of Security
Analysts, a past director of the Financial Analysts Federation and a member and
founding Governor of the Association for Investment Management and Research.
Mr. Mark F. Trautman, Vice President of the Sub-Adviser, is primarily
responsible for the day-to-day management of the Fund's portfolio investments.
Mr. Trautman has been responsible for the management of the Fund's and the
Predecessor Fund's portfolio since 1993. He joined the Sub-Adviser in May 1995
and prior thereto, he served as Director of Mutual Fund Investments for the
Predecessor Fund's former investment adviser, Nationar. Mr. Trautman also has
served as the portfolio manager of the Institutional Investors Capital
Appreciation Fund, Inc. since 1993. From January 1992 through March 1993 he
served as Senior Equity Analyst for the Predecessor Fund and the Institutional
Investors Capital Appreciation Fund, Inc.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser, which was approved in connection with the
Reorganization by the sole initial shareholder of the Fund. Pursuant to the
Advisory Agreement, the Adviser, in conjunction with the Sub-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.
22
The Adviser and the Fund have entered into a Sub-Advisory Agreement with the
Sub-Adviser under which the Sub-Adviser, subject to the review of the Trustees
and the overall supervision of the Adviser, is responsible for managing the
investment operations of the Fund and the composition of the Fund's portfolio
and furnishing the Fund with advice with respect to investments, investment
policies and the purchase and sale of securities. The Sub-Advisory Agreement was
approved in connection with the Reorganization by the sole initial shareholder
of the Fund.
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.
As compensation for its services under the Advisory Agreement, the Fund pays the
Adviser a fee, paid daily, at an annual rate equal to 0.75% of the average daily
net asset value of the Fund.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's annual ordinary operating expenses to a specified percentage of
its 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 ordinary operating expenses fall below this limit.
The Adviser has agreed to limit the Fund's expenses (excluding transfer agent
and 12b-1 fees) to 0.90% of the Fund's average daily net assets. In addition,
the Adviser has agreed to limit transfer agent fees on Class A, B and C shares
to 0.23% of each class's average daily net assets and net operating expenses on
Class A shares to 1.38%. The Adviser has agreed with the Sub-Adviser not to
terminate this limitation at least until August 22, 2005.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Adviser, the Sub-Adviser 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 other funds or clients are selling the same security.
If opportunities for purchase or sale of securities by the Adviser or
Sub-Adviser for the Fund or for other funds or clients for which the Adviser or
Sub-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, the Sub-Adviser or its affiliates may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
Pursuant to its Advisory Agreement, the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which their respective Agreements 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 their reckless disregard of
the obligations and duties under the applicable Agreements.
23
The Sub-Advisory Agreement provides that the Sub-Adviser shall not be liable for
any losses, claims, damages, liabilities or litigation (including legal and
other expenses) incurred or suffered by the Adviser, the Trust, the Fund or any
of their affiliates as a result of any error of judgment or mistake of law by
the Sub-Adviser with respect to the Fund, except that the Sub-Adviser shall be
liable for and shall indemnify the Adviser and the Fund from any loss arising
out of or based on (i) the Sub-Adviser's causing the Fund to be in violation of
any applicable federal or state law, rule or regulation or any investment policy
or restriction set forth in the Fund's prospectus or this statement of
additional information or any written policies, procedures, guidelines or
instructions provided in writing to the Sub-Adviser by the Trustees of the Fund
or by the Adviser, (ii) the Sub-Adviser's causing the Fund to fail to satisfy
the requirements for qualification as a regulated investment company under the
Internal Revenue Code, excluding the provisions thereunder relating to the
declaration and payment of dividends or (iii) the Sub-Adviser's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties under the Sub-Advisory Agreement or its reckless disregard of its
obligations and duties under the Sub-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 Advisory Agreement, Sub-Advisory Agreement and the Distribution Agreement
(discussed below) were approved by all Trustees. The Advisory Agreement,
Sub-Advisory Agreement and the Distribution Agreement, will continue in effect
from year to year, provided that its continuance is approved annually both (i)
by the holders of a majority of the outstanding voting securities of the Trust
or by the Trustees, and (ii) by a majority of the Trustees who are not parties
to the Agreement or "interested persons" of any such parties. Each Agreement 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. The Sub-Advisory Agreement terminates automatically upon the
termination of the Advisory Agreement.
As provided in the Sub-Advisory Agreement, the Adviser (not the Fund) pays the
Sub-Adviser monthly, in arrears, within 5 business days after the end of each
month, a fee equal on an annual basis to the following percentages of the actual
management fee received by the Adviser from the Fund: (i) 45% of the investment
management fee with respect to the first $250,000,000 of the average daily net
asset value of the Fund; (ii) 40% of the investment management fee with respect
to the average daily net asset value of the Fund in excess of $250,000,000 up to
$500,000,000; (iii) 35 % of the investment management fee with respect to the
average daily net asset value of the Fund in excess of $500,000,000 up to
$750,000,000; (iv) 30% of the investment management fee with respect to the
average daily net asset value of the Fund in excess of $750,000,000 up to
$1,000,000,000; and (v) 25% of the investment management fee with respect to the
average daily net asset value of the Fund in excess of $1,000,000,000. During
the first year of the Sub-Advisory Agreement, the Adviser has agreed to pay the
Sub-Adviser a minimum fee of $375,000.
24
Under the investment management agreement between the Sub-Adviser and the Fund's
predecessor, M.S.B. Fund, Inc., the Predecessor Fund paid a management fee at an
annual rate equal to 0.75% of the first $100,000,000 of the Fund's average daily
net assets and 0.50% of average daily net assets in excess of $100,000,000. The
investment advisory fee paid to the Sub-Adviser by the Predecessor Fund was
reduced (but not below zero) to the extent expenses (exclusive of professional
fees, such as legal and audit fees and directors fees and expenses) exceeded
1.10% of the Fund's average daily net assets during a fiscal year. The total
investment advisory fees paid by the Predecessor Fund to the Sub-Adviser for the
fiscal years ended December 31 2002, 2001, and 2000, respectively, were
$389,566, $413,907, and $454,892 (after all fee reductions and expense
limitations.)
Factors considered by the Independent Trustees in approving the Advisory
Agreement and the Sub-Advisory Agreement. The 1940 Act requires that the fund's
Advisory Agreement and Sub-Advisory Agreement be initially and, after an initial
term of not more than two years, annually reapproved by both the Board of
Trustees and a majority of the Independent Trustees voting separately. The
Independent Trustees have determined that the terms of the Fund's Advisory
Agreement and Sub-Advisory Agreement are fair and reasonable and that the
contracts are in the Fund's best interest. The Independent Trustees believe that
the advisory contracts will enable the Fund to enjoy high quality investment
advisory services at a cost they deem appropriate, reasonable and in the best
interests of the Fund and its shareholders. In making such determinations, the
Independent Trustees met independently from the Interested Trustees of the Fund
and any officers of the Adviser or its affiliates. The Independent Trustees also
relied upon the assistance of counsel to the Independent Trustees and counsel to
the Fund.
In evaluating the Advisory Agreement and Sub-Advisory Agreement, the Independent
Trustees reviewed materials furnished by Adviser, including information
regarding the Adviser, the Sub-Adviser, their respective affiliates and their
personnel, operations and financial condition. The Independent Trustees also
reviewed, among other things:
o the investment performance of the Fund's predecessor, M.S.B. Fund, Inc.;
o the fee charged by Adviser for investment advisory and administrative
services, as well as other compensation received by affiliates of the
Adviser;
o the fee payable to the Subadviser by the Adviser;
o the Fund's projected total operating expenses and the expense limitation
provided by the Adviser; and
o the Sub-Adviser's experience in managing the Fund's predecessor, the
experience of the Adviser in supervising sub-advisers and the historical
quality of the services provided by the Adviser and the Sub-Adviser.
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.
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.
25
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 an 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.
The Fund's Trustees adopted Distribution Plans with respect to each class of
shares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of
1940. Under the Plans, the Fund will pay distribution and service fees at an
aggregate annual rate of up to 0.25% 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 fees 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 it incurs 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 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 Plans at any time with no additional liability for these
expenses to the shareholders and the Fund. The Plans and all amendments were
approved by the Trustees, including a majority of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plans (the "Independent Trustees"), by votes
cast in person at meetings called for the purpose of voting on these Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides the Fund
with a written report of the amounts expended under the Plans and the purpose
for which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as its
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty, (a) by a vote of a majority of the Independent Trustees and (b) by a
vote of a majority of the Fund's outstanding shares of the applicable class upon
60 days' written notice to John Hancock Funds. 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
26
shares of the class of the Fund which has voting rights with respect to that
Plan. Each plan provides, that no material amendment to the Plans will be
effective unless it is approved by a majority vote of the Trustees and the
Independent Trustees of the Fund. The holders of Class A, Class B and Class C
shares have exclusive voting rights with respect to the Plan applicable to their
respective class of shares. In adopting the Plans, the Trustees concluded that,
in their judgment, there is a reasonable likelihood that the Plans will benefit
the holders of the applicable class of shares of the Fund.
Amounts paid to the John Hancock Funds by any class of shares of the Fund will
not be used to pay the expenses incurred with respect to any other class of
shares of the Fund; provided, however, that expenses attributable to the Fund as
a whole will be allocated, to the extent permitted by law, according to the
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
Fund.
Shares of the Fund's predecessor were not subject to any Distribution Plan.
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) the 12 b-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 the "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 their promotion of the Fund and sale of shares of the Fund. Such
compensation provided by John Hancock Funds may include, for example, financial
assistance to financial services firms in connection with their marketing and
sales development programs for their registered representatives and other
employees, as well as payment for travel expenses, including lodging, incurred
by registered representatives and other employees for such marketing and sales
development programs, as well as assistance for seminars for the public,
advertising and sales campaigns regarding one or more Funds, and other financial
services firms-sponsored events or activities. From time to time, John Hancock
Funds may provide expense reimbursements for special training of a financial
services firm's registered representatives and other employees in group
meetings. Other compensation, such as asset retention fees, finder's fees and
reimbursement for wire transfer fees or other administrative fees and costs may
be offered to the extent not prohibited by law or any self-regulatory agency,
such as the NASD.
27
Broker receives
Sales charge paid Broker receives maximum 12b-1 service Total broker
by investors (% reallowance fee (% of net compensation (1)
Class A investments of offering price) (% of offering price) investment) (3) (% of offering price)
- ------------------- ------------------ ----------------------- --------------- ---------------------
Up to $49,999 5.00% 4.01% 0.25% 4.25%
$50,000 - $99,999 4.50% 3.51% 0.25% 3.75%
$100,000 - $249,999 3.50% 2.61% 0.25% 2.85%
$250,000 - $499,999 2.50% 1.86% 0.25% 2.10%
$500,000 - $999,999 2.00% 1.36% 0.25% 1.60%
Investments in Class A shares
of $1 million or more (4)
- -------------------------
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $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 Total broker
maximum reallowance fee (% of net compensation (1)
Class B investments (% of offering price) investment) (3) (% of offering price)
- ------------------- --------------------- --------------- ---------------------
All amounts -- 3.75% 0.25% 4.00%
Broker receives Broker receives 12
maximum b-1 service Total broker
reallowance fee (% of net compensation
Class C investments (% of offering price) investment) (% of offering price)
- ------------------- --------------------- ----------- ---------------------
Over $1,000,00 or amounts
purchased at NAV 0.75% 0.25% 1.00%
All other amounts 1.00% 1.75% 0.25% 2.00%
Broker receives Broker receives
maximum 12b-1 service Total broker
reallowance fee (% of net compensation (1)
Class I investments (% of offering price) Investment) (3) (% of offering price)
- ------------------- -------------------- --------------- ---------------------
All 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 Programs 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 fees quarterly in arrears.
(4) John Hancock Funds reduce aggregate investments by the amount of recent
redemptions.
(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 brokers
commissions when there is no initial sales charge.
28
NET ASSET VALUE
For purposes of calculating the net asset value (NAV) of the Fund's shares, the
following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market- maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
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 a determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by the
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 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 the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
INITIAL SALES CHARGE ON CLASS A 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 does not
issue 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
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.
29
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, subadviser 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, grandparents, 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 and Exchange Commission.
o Participant directed retirement plans with at least 100 eligible
employees at the inception of the Fund account. Each of these investors
may purchase Class A shares with no initial sales charge. However, if
the shares are redeemed within 12 months after the end of the calendar
year in which the purchase was made, a CDSC will be imposed at the
following rate:
Amount Invested CDSC Rate
--------------- ---------
$1 to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
o Any shareholder account of M.S.B. Fund, Inc. registered on M.S.B.
Fund's books in the shareholder's name (and not in the name of a broker
or other omnibus account) as of August 22, 2003.
30
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.
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.)
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 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 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
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
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
31
traditional, Roth IRAs and Coverdell ESAs, 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
retirement plan investments cannot be combined to satisfy LOI of 48 months. Such
an investment (including accumulations and combinations but not including
reinvested dividends) must aggregate $50,000 or more 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 escrowed Class A shares will be released. If the total investment specified
in the LOI is not completed, the Class A shares held in escrow may be redeemed
and the proceeds used as required to pay such sales charge as may be due. By
signing the LOI, the investor authorizes Signature Services to act as his
attorney-in-fact to redeem any escrowed Class A shares and adjust the sales
charge, if necessary. A LOI does not constitute a binding commitment by an
investor to purchase, or by the Fund to sell, any additional Class A shares and
may be terminated at any time.
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 that 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 price or on 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.
32
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period for Class B or one year CDSC
redemption period for Class C, or those you acquired through dividend and
capital gain reinvestment, and next from the shares you have held the longest
during the six-year period for Class B shares. For this purpose, the amount of
any increase in a share's value above its initial purchase price is not subject
to a 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 shares (50 x 12) $600.00
o*Minus Appreciation ($12 - $10) x 100 shares (200.00)
o Minus proceeds of 10 shares not subject to
CDSC (dividend reinvestment) (120.00)
--------
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 Fund 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 a CDSC, unless indicated otherwise, in the circumstances defined below:
For all account types:
* Redemptions made pursuant to the Fund's right to liquidate your account
if you own shares worth less than $1,000.
* Redemptions made under certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions due to death or disability. (Does not apply to trust
accounts unless trust is being dissolved.)
* Redemptions made under the Reinstatement Privilege, as described in
"Sales Charge Reductions and Waivers" of the Prospectus.
33
* Redemption 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.)
* 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 made after one year from the inception
date of a retirement plan at John Hancock.
* Redemption of Class A shares by retirement plans that invested through
the PruArray Program sponsored by Prudential Securities.
For Retirement Accounts (such as traditional, Roth IRAs and Coverdell ESAs,
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 sections
401(a) (such as Money Purchase Pension Plans and Profit Sharing
Plan/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.
34
Please see matrix for some examples.
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
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* payments
or 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 and Class C annuity annuity annuity annuity value annually
only) payments (72t) payments (72t) payments (72t) payments (72t) in periodic
or 12% of or 12% of or 12% of or 12% of payments
account value account value account value account value
annually in annually in annually in annually in
periodic periodic periodic periodic
payments. payments. payments. payments.
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Loans Waived Waived N/A N/A N/A
- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------
Termination 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.
35
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholders will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, the Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. The Fund permits exchanges of shares of any class of a fund
for shares of the same class in any other John Hancock fund offering that class.
Investors may exchange between institutional funds and Class I shares.
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 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 CDSC imposed on
36
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 in 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.
37
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, LLC (the Fund's principal distributor), share in the expense of these
fees.
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Fund. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Fund without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series and classes
without further action by shareholders. As of the date of this Statement of
Additional Information, the Trustees have authorized shares of the Fund and
three other series. Additional series may be added in the future. The Trustees
have also authorized the issuance of four classes of shares of the Fund,
designated as Class A, Class B, Class C and Class I.
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 will be borne exclusively
by that class, (ii) Class B and Class C shares will pay higher distribution and
service fees than Class A shares and (iii) each class of shares will bear any
class expenses properly allocable to that class of shares, subject to the
conditions the Internal Revenue Service imposes with respect to the
multiple-class structures. Similarly, the net asset value per share may vary
depending on which class of shares are purchased. No interest will be paid on
uncashed dividend or redemption checks.
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
38
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 Fund. However, the Fund's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable for 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 and elected to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to continue to qualify for each taxable year. As such and by complying
with the applicable provisions of the Code regarding the sources of its income,
the timing of its distributions and the diversification of its assets, the Fund
will not be subject to Federal income tax on its taxable income (including net
realized capital gains) which is distributed to shareholders in accordance with
the timing requirements of the Code.
The Fund will be subject to a 4% nondeductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to seek to avoid or minimize liability for
such tax by satisfying such distributions requirements.
39
Distribution 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 Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to their investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Because more than 50% of the Fund's assets at the close of any taxable
year will not consist of stocks or securities of foreign corporations, the Fund
will be unable to pass such taxes through to shareholders (as additional income)
along with a corresponding entitlement to a foreign tax credit or deduction. The
Fund will deduct the foreign taxes it pays in determining the amount it has
available for distribution to shareholders.
If the Fund invests 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 asset in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on "excess distributions" received from such
companies or gain from the sale of stock in such companies, even if all income
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. An election may be available to ameliorate these
adverse tax consequences, but could require the Fund to recognize taxable income
or gain without the concurrent receipt of cash. These investments could also
result in the treatment of associated capital gains as ordinary income. The Fund
may limit and/or manage its holdings in passive foreign investment companies or
make an available election to minimize its tax liability or maximize its return
for these investments.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency options, foreign currencies, or payables or receivables
denominated in foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and may affect the amount, timing and character of distributions to
shareholders. Transactions in foreign currencies that are not directly related
to the Fund's investment in stock or securities, including speculative currency
positions could under future Treasury regulations produce income not among the
types of "qualifying income" from which the Fund must derive at least 90% of its
gross income from each taxable year. If the net foreign exchange loss for a year
treated as ordinary loss under Section 988 were to exceed the Fund's investment
company taxable income computed without regard to such loss the resulting
overall ordinary loss for such year would not be deductible by the Fund or its
shareholders in future years.
40
Certain options, futures, and forward foreign currency contracts undertaken by
the Fund could cause the Fund to recognize gains or losses from marking to
market even though its positions have not been sold or terminated and affect the
character as long-term or short-term (or, in the case of foreign currency
contracts, as ordinary income or loss) and timing of some capital gains and
losses realized by the Fund. Additionally, the Fund may be required to recognize
gain, but not loss, if an option, short sales or other transaction is treated as
a constructive sale of an appreciated financial position in the Fund's
portfolio. Also, certain of the Fund's losses on its transactions involving
options, futures or forward contracts and/or offsetting or successor portfolio
positions may be deferred rather than being taken into account currently in
calculating the Fund's taxable income or gains. Certain of such transactions may
also cause the Fund to dispose of investments sooner than would otherwise have
occurred. These transactions may therefore affect the amount, timing and
character of the Fund's distributions to shareholders. The Fund will take into
account the special tax rules (including consideration of available elections)
applicable to options, futures and forward contracts in order to seek to
minimize any potential adverse tax consequences.
The amount of the Fund's net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities and/or engage in options transactions that will generate
capital gains. At the time of an investor's purchase of Fund shares, a portion
of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio or undistributed taxable income of the
Fund. Consequently, subsequent distributions on those shares from such
appreciation or income may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for such shares, and the distributions in reality
represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the Fund (including by
exercise of the exchange privilege) that in a transaction 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 90 days after their
purchase to the extent shares of the Fund or another John Hancock fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. This disregarded charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion.
Although 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 carry
41
forward of prior years' capital losses, it would be subject to Federal income
tax in the hands of the Fund. Upon proper designation of this amount by the
Fund, each shareholder would be treated for Federal income tax purposes as if
the Fund had distributed to him on the last day of its taxable year his pro rata
share of such excess, and he had paid his pro rata share of the taxes paid by
the Fund and reinvested the remainder in the Fund. Accordingly, each shareholder
would (a) include his pro rata share of such excess as long-term capital gain in
his return for his taxable year in which the last day of the Fund's taxable year
falls, (b) be entitled either to a tax credit on his return for, or to a refund
of, his pro rata share of the taxes paid by the Fund, and (c) be entitled to
increase the adjusted tax basis for his shares in the Fund by the difference
between his pro rata share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, the Fund is permitted to carry forward a net
realized capital loss in any year to offset net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in Federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders.
Investment 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 acquires or holds any such obligations,
in order to reduce the risk of distributing insufficient income to preserve its
status as a regulated investment company and seeks to avoid becoming subject to
Federal income or excise tax.
For purposes of the dividends-received deduction available to corporations,
dividends received by the Fund, if any, from U.S. domestic corporations in
respect of the stock of such corporations held by the Fund, for U.S. Federal
income tax purposes, for at least 46 days (91 days in the case of certain
preferred stock) during a prescribed period extending before and after each such
dividend and distributed and properly designated by the Fund may be treated as
qualifying dividends. Corporate shareholders must meet the holding period
requirements stated above with respect to their shares of the Fund for each
dividend in order to qualify for the deduction and, if they have any debt that
is deemed under the Code directly attributable to such shares, may be denied a
portion of the dividends received deduction. The entire qualifying dividend,
including the otherwise deductible amount, will be included in determining the
excess (if any) of a corporate shareholder's adjusted current earnings over its
alternative minimum taxable income, which may increase its alternative minimum
tax liability. Additionally, any corporate shareholder should consult its tax
adviser regarding the possibility that its basis in its shares may be reduced,
for Federal income tax purposes, by reason of "extraordinary dividends" received
with respect to the shares, and, to the extend such basis would be reduced below
zero, that current recognition of income would be required.
The Fund is required to accrue income on any debt securities that have more than
a de minimis amount of original issue discount (or debt securities acquired at a
market discount, if the Fund elects to include market discount in income
currently) prior to the receipt of the corresponding cash payments. The mark to
market or constructive sale rules applicable to certain options, futures,
forwards, short sales or other transactions may also require the Fund to
recognize income or gain without a concurrent receipt of cash. Additionally,
some countries restrict repatriation which may make it difficult or impossible
42
for the Fund to obtain cash corresponding to its earnings or assets in those
countries. However, the Fund must distribute to shareholders for each taxable
year substantially all of its net income and net capital gains, including such
income or gain, to qualify as a regulated investment company and avoid liability
for any federal income or excise tax. Therefore, the Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash,
or may borrow cash, to satisfy these distribution requirements.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) the Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although it 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 nor
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.
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 foregoing discussion relates solely to Federal income tax law as applicable
to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain types of
investors, such as tax-exempt entities, insurance companies and financial
institutions. Dividends, capital gain distributions and ownership of or gains
realized on the redemption (including an exchange) of shares of the Fund may
also be subject to state and local taxes. Shareholders should consult their own
tax advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to non-resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from the Fund and, unless an effective IRS Form W-8, W-8BEN
or other authorized withholding certificate is on file and to backup withholding
on certain other payments from the Fund. Non-U.S. investors should consult their
tax advisers regarding such treatment and the application of foreign taxes to an
investment in the Fund.
43
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
As of December 31, 2002 the average annual total returns before taxes of the
Class A shares of the Fund for the 1-year, 5-year and 10-year periods, restated
to reflect sales charges were -19.33%, 2.68%, and 10.21%, respectively.
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1-year, 5-year or 10-year periods (or
fractional portion).
The Fund discloses average annual total returns after taxes for Class A shares
for the one, five and 10 year periods, or the period since the commencement of
operations, ended December 31, 2002 in the prospectus. After tax returns are
computed using the historical highest individual federal marginal income-tax
rates and do not reflect the impact of state and local taxes. Actual after-tax
returns depend on the investor's tax situation and may differ from those shown.
The after-tax returns shown are not relevant to investors who hold their fund
shares through tax-deferred arrangements such as 401(k) plans or individual
retirement accounts.
The average annual total return (after taxes on distributions) is computed by
finding the average annual compounded rate of return over the 1-year, 5-year and
10-year periods, or the period since the commencement of operations, that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
P(1+T)n = ATVD
Where:
P= a hypothetical initial payment of $1,000.
T= average annual total return (after taxes on distributions)
n= number of years
ATVD= ending value of a hypothetical $1,000 payment made at
the beginning of the 1-year, 5-year, or 10-year periods
(or fractional portion) after taxes on fund
distributions but not after taxes on redemption.
The average annual total return (after taxes on distributions and redemption) is
computed by finding the average annual compounded rate of return over the
1-year, 5-year and 10-year periods, or the period since the commencement of
operations, that would equate the initial amount invested to the ending
redeemable value according to the following formula:
44
P(1+T)n = ATVDR
Where:
P= a hypothetical initial payment of $1,000.
T= average annual total return (after taxes on distributions
and redemption)
n= number of years
ATVDR= ending value of a hypothetical $1,000 payment made at
the beginning of the 1-year, 5-year or 10-year periods
(or fractional portion), after taxes on fund
distributions and redemption.
Because each class has its own sales charge and fee structure, the classes have
different performance results. In the case of each class, these calculations
assume the maximum sales charge is included in the initial investment or the
CDSC is applied at the end of the period. These calculations assume that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period. Excluding the Fund's sales charge from the distribution rate produces a
higher rate.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments and/or a series of redemptions over any time period. Total returns
may be quoted with or without taking the Fund's sales charge on Class A or Class
C shares or the CDSC on Class B or Class C shares into account. Excluding the
Fund's sales charge on Class A and Class C shares and the CDSC on Class B or
Class C shares from a total return calculation produces a higher total return
figure.
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) 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 where applicable).
From time to time, in reports and promotional literature, the Fund's total
return will be compared to indices of mutual funds such as Lipper Analytical
Services, Inc.'s "Lipper - Mutual Fund Performance Analysis," a monthly
publication which tracks net assets, total return and yield on 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.
45
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 may
also be utilized. The Fund's promotional and sales literature may make reference
to the Fund's "beta". Beta is a reflection of the market related risk of the
Fund by showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of the Fund for
any period in the future. The performance of the Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser's or Subadviser's
investment and/or trading personnel. Orders for purchases and sales of
securities are placed in a manner, which, in the opinion of such personnel, will
offer the best price and market for the execution of each such transaction. The
Fund's trading practices and investments are reviewed monthly by the Adviser's
Senior Investment Policy Committee which consists of officers of the Adviser and
quarterly by the Adviser's Investment Committee which consists of officers and
directors of the Adviser and Trustees of the Trust who are interested persons of
the Fund.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer and transactions with dealers serving as market
maker reflect a "spread." Investments in debt securities are generally traded on
a "net" basis through dealers acting for their own account as principals and not
as brokers; no brokerage commissions are payable on these transactions. In the
U.S. Government securities market, securities are generally traded on a net
basis with dealers acting as principal for their own account without a stated
commission, although the price of the security usually includes a profit to the
dealer. On occasion, certain money market instruments and agency securities may
be purchased directly from the issuer, in which case no commissions or premiums
are paid. Investments in equity securities are generally traded on exchanges or
on over-the-counter markets at fixed commission rates or on a net basis. 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.
The 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 such
other policies as the Trustees may determine, the Adviser and Subadviser 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 and Subadviser of the
Fund.
46
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.
Research services received from broker-dealers supplement the Adviser's or
Sub-adviser's own research (and the research of its affiliates), and may include
the following types of information: statistical and background information on
the U.S. and foreign economies, industry groups and individual companies;
forecasts and interpretations with respect to the U.S. and foreign economies,
securities, markets, specific industry groups and individual companies;
information on federal, state, local and foreign political developments;
portfolio management strategies; performance information on securities, indexes
and investment accounts; and information concerning prices and ratings of
securities. Broker-dealers may communicate such information electronically,
orally, in written form or on computer software. Research services may also
include the providing of electronic communication of trade information and the
providing of custody services, as well as the providing of equipment used to
communicate research information, the providing of specialized consultations
with the Adviser's or Subadviser's personnel with respect to computerized
systems and data furnished as a component of other research services, the
arranging of meetings with management of companies, and the providing of access
to consultants who supply research information.
The outside research assistance is useful to the Adviser or Subadviser since the
broker-dealers used by the Adviser or Subadviser tend to follow a broader
universe of securities and other matters than the Adviser's or Subadviser's
staff can follow. In addition, the research provides the Adviser or Subadviser
with a diverse perspective on financial markets. Research services provided to
the Adviser or Subadviser by broker-dealers are available for the benefit of all
accounts managed or advised by the Adviser or by its affiliates, or by the
Subadviser or by its affiliates. Some broker-dealers may indicate that the
provision of research services is dependent upon the generation of certain
specified levels of commissions and underwriting concessions by the Adviser's or
Subadviser's clients, including the Fund. However, the Fund is not under any
obligation to deal with any broker-dealer in the execution of transactions in
portfolio securities. In some cases, the research services are available only
from the broker-dealer providing them. In other cases, the research services may
be obtainable from alternative sources in return for cash payments.
The Adviser and Subadviser believe that the research services are beneficial in
supplementing the Adviser's research and analysis and that they improve the
quality of the Adviser's or Subadviser's investment advice. 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 or Subadviser. The advisory fee paid by the Fund is not reduced because
the Adviser receives such services. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser and Subadviser.
However, to the extent that the Adviser or Subadviser would have purchased
research services had they not been provided by broker-dealers, the expenses to
the Adviser or Subadviser could be considered to have been reduced accordingly.
The research information and statistical assistance furnished by brokers and
dealers may benefit the Life Company or other advisory clients of the Adviser or
Sub-adviser, and conversely, brokerage commissions and spreads paid by other
advisory clients of the Adviser or Subadviser 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.
47
While the Adviser and/or the Subadviser will be primarily responsible for its
allocation of the Fund's brokerage business, the policies and practices of the
Adviser or Subadviser in this regard must be consistent with the foregoing and
at all times be subject to review by the Trustees
The Adviser or Subadviser may determine target levels of commission business
with various brokers on behalf of its clients (including the Fund) over a
certain time period. The target levels will be based upon the following factors,
among others: (1) the execution services provided by the broker; (2) the
research services provided by the broker; and (3) the broker's interest in
mutual funds in general and in the Fund and other mutual funds advised by the
Adviser or Subadviser in particular, including sales of the Fund. In connection
with (3) above, the Fund's trades may be executed directly by dealers that sell
shares of the John Hancock funds or by other broker-dealers with which such
dealers have clearing arrangements, consistent with obtaining best execution and
the Conduct Rules of the National Association of Securities Dealers, Inc. The
Adviser or Subadviser will not use a specific formula in connection with any of
these considerations to determine the target levels.
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 brokers affiliated with the Adviser and/or the
Subadviser ("Affiliated Brokers"). Affiliated Brokers may act as broker for the
Fund on exchange transactions, subject, however, to the general policy of the
Fund set forth above and the procedures adopted by the Trustees pursuant to the
Investment Company Act. Commissions paid to an Affiliated Broker must be at
least as favorable as those which the Trustees believe to be contemporaneously
charged by other brokers in connection with comparable transactions involving
similar securities being purchased or sold. A transaction would not be placed
with an Affiliated Broker if the Fund would have to pay a commission rate less
favorable than the Affiliated Broker's contemporaneous charges for comparable
transactions for its other most favored, but unaffiliated, customers except for
accounts for which the Affiliated Broker acts as clearing broker for another
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, the
Subadviser or the Affiliated Broker. Because the Adviser or Subadviser that is
affiliated with the Affiliated Broker has, as an investment adviser to the Fund,
the obligation to provide investment management services, which includes
elements of research and related investment skills such research and related
skills will not be used by the Affiliated Broker as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria.
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 an "Affiliated Broker").
Other investment advisory clients advised by the Adviser or Subadviser 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 or Subadviser may
average the transactions as to price and allocate the amount of available
investments in a manner which the Adviser or Subadviser believes to be equitable
to each client, including the Fund. Because of this, client accounts in a
particular style may sometimes not sell or acquire securities as quickly or at
the same prices as they might if each were managed and traded individually.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each participating 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
48
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 or Subadviser may aggregate securities to be sold or purchased for
the Fund with those to be sold or purchased for other clients managed by it in
order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
MA 02217-1000, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Signature
Services monthly a fee which is based on an annual rate of $16.00 for each Class
A shareholder account and $18.50 for each Class B shareholder account and $17.50
for each Class C shareholder account. The Fund also pays Signature Services
monthly a fee which is based on an annual rate of 0.05% of average daily net
assets attributable to Class A, Class B and Class C shares. For Class A, B, and
C shares, the Fund also pays certain out-of pocket expenses. The Adviser has
agreed to limit transfer agent fees on Class A, B and C shares to 0.23% of each
class's average daily net assets at least until August 22, 2005. The Fund pays
Signature Services monthly a fee which is based on an annual rate 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
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02116, has
been selected as the independent auditors of the Fund. Ernst & Young LLP, 1100
Huntington Center, 41 South High Street, Columbus, Ohio 43215, served as
independent auditors to the Fund's predecessor, M.S.B. Fund, Inc. for the year
ended December 31, 2002.
49
APPENDIX A - MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's primary securities and
investment practices. You may find the most concise description of 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 Objective 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 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., short sales, financial futures and options;
securities and index options, currency contracts).
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. (e.g., borrowing; reverse repurchase agreements, repurchase
agreements, securities lending, non-investment-grade securities, financial
futures and options; securities and index options).
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. 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
equities, financial futures and options; securities and index options, currency
contracts).
Information risk The risk that key information about a security or market is
inaccurate or unavailable. (e.g., non-investment-grade securities, foreign
equities).
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 securities, financial futures and options; securities and
index options).
Leverage risk Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value. (e.g.,
borrowing; reverse repurchase agreements, when-issued securities and forward
commitments).
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. (e.g., short sales, financial futures and options
securities and index options; currency contracts).
A-1
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. (e.g., short sales, financial futures
and options securities and index options; currency contracts).
o 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-grand securities,
short sales, restricted and illiquid securities, financial futures and
options securities and index options; currency contracts).
Management risk The risk that a strategy used by a fund's management may fail to
produce the intended result. Common to all mutual funds.
Market risk The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. Common to all stocks and bonds and the
mutual funds that invest in them. (e.g., short sales, short-term trading,
when-issued securities and forward commitments, non-investment-grade securities,
foreign equities, financial futures and options; securities and index options
restricted and illiquid securities).
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events. (e.g., foreign equities).
Opportunity risk The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments. (e.g., short sales, when-issued securities and forward commitments;
financial futures and options; securities and index options, currency
contracts).
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and
war.(e.g., foreign equities).
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 securities,
restricted and illiquid securities).
A-2
APPENDIX B
Description of Bond Ratings
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
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 at some time 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 both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack the characteristics of 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.
B-1
STANDARD & POOR'S RATINGS GROUP
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 differs 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.
BB, B: Debt rated BB, and B 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 CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
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.
B-2
FINANCIAL STATEMENTS
M.S.B Fund, Inc.'s audited financial statements for the fiscal year ended
December 31, 2002 (filed electronically on March 3, 2003, accession number
0000950137-03-001244) are included in and incorporated by reference into Part B
of this Registration Statement. The December 31, 2002 financial statements,
including the financial highlights in the Fund's Class A, Class B, Class C and
Class I share prospectuses, have been audited by Ernst & Young LLP independent
auditors, as indicated in their report with respect to those financial
statements and are included in reliance upon the authority of Ernst & Young LLP
as experts in accounting and auditing.
F-1
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES AND HAS NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER AGENCY.
[M.S.B. FUND, INC. LOGO]
PROSPECTUS
------------------
May 1, 2003
------------------
A NO-LOAD FUND
------------------
Investment Objective:
LONG-TERM GROWTH OF CAPITAL
You should read this Prospectus
and retain it for future reference.
CONTENTS
<Table>
<Caption>
PAGE
Key Points............................ 2
Performance Summary................... 3
Fees and Expenses of the Fund......... 4
Investment Objective and Strategies... 5
Principal Risks....................... 5
Share Price -- Net Asset Value........ 6
Purchase of Fund Shares............... 6
Share Purchase Options................ 8
Redeeming Shares...................... 10
Understanding Performance............. 13
</Table>
<Table>
<Caption>
PAGE
Dividends, Distributions and Federal
Income Tax Status................... 13
Portfolio Management.................. 14
Administrator, Transfer Agent and
Custodian........................... 15
Distributor........................... 15
Financial Highlights.................. 15
Additional Information and Shareholder Back
Inquiries........................... Cover
</Table>
------------------------
KEY POINTS
OBJECTIVE: The Fund's investment objective is to achieve long-term growth of
capital for its shareholders.
PRINCIPAL STRATEGIES: The Fund seeks to achieve its objective by investing in a
diversified portfolio of equity securities, consisting primarily of securities
of U.S.-based companies whose growth, cash flow, earnings and dividend prospects
are promising and whose securities are reasonably priced and have the potential
for capital appreciation in the opinion of its Investment Adviser. The equity
securities in which the Fund invests consist primarily of dividend-paying common
stocks of large-capitalization companies, i.e., companies with a market
capitalization in excess of $5 billion. There is no assurance that the Fund in
fact will achieve this objective.
RISKS: All investments in equity mutual funds, like the Fund, involve some
level of risk. Simply defined, risk is the possibility that you will lose money
or not make money. Below is a summary of the principal risk factors for the
Fund.
- MARKET AND INVESTMENT RISKS. The value of the Fund's shares will
fluctuate in accordance with the value of the securities held in its
portfolio. Declines are possible in the overall stock market or in the
particular securities or types of securities held by the Fund, and it is
possible to lose money as a result of your investment.
- PORTFOLIO MANAGEMENT RISKS. The Investment Adviser's skill will affect
the ability of the Fund to achieve its investment objective. The
strategies employed by the Fund may not match the performance of other
strategies at different times or under different market or economic
conditions. Accordingly, the Fund's performance for any period may
differ from the performance of the overall market or from other
investments that may be available to you.
INVESTMENTS NOT INSURED OR GUARANTEED: An investment in the Fund is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
2
PERFORMANCE SUMMARY
The bar chart and table shown below provide an indication of the risks of
investing in the Fund by showing changes in the Fund's performance from
year-to-year over a 10-year period and by showing how the Fund's average annual
returns for one-, three-, five-, and ten-years compare to those of a broad-based
securities market index. All returns assume reinvestment of dividends. The
Fund's past performance (before and after taxes) is not necessarily an
indication of how the Fund will perform in the future.
YEAR-BY-YEAR TOTAL RETURNS (YEARS ENDED DECEMBER 31)
[PERFORMANCE GRAPH --NUMBERS ARE PERCENTAGES]
<Table>
1993 20.64
1994 -1.68
1995 24.97
1996 21.16
1997 28.88
1998 31.45
1999 5.79
2000 5.68
2001 -3.73
2002 -15.08
</Table>
<Table>
Best Quarter: 4th Quarter, 1998 +22.56%
Worst Quarter: 3rd Quarter, 2002 -12.82%
</Table>
AVERAGE ANNUAL TOTAL RETURNS (YEARS ENDED DECEMBER 31, 2002)
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
M.S.B. Fund, Inc.
Return before taxes...................................... -15.08% -4.76% 3.74% 10.77%
Return after taxes on distributions*..................... -16.47% -6.13% 2.17% 7.69%
Return after taxes on distributions and sale of Fund
shares*............................................... -9.26% -3.91% 2.94% 7.83%
S&P 500 Index (reflects no deduction for fees, expenses or
taxes)**................................................. -22.09% -14.54% -0.58% 9.34%
</Table>
- ---------------
* After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state and
local taxes. Actual after-tax returns depend on an investor's tax situation
and may differ from those shown, and after-tax returns shown are not relevant
to investors who hold their Fund shares through tax-deferred arrangements
such as 401(k) plans or individual retirement accounts.
** The S&P 500 Index is the Standard & Poor's Composite Index of 500 Stocks,
which is a commonly recognized unmanaged price index of 500 widely held
common stocks. Unlike the Fund's returns, index returns do not reflect any
fees, expenses or taxes.
3
FEES AND EXPENSES OF THE FUND
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.
<Table>
SHAREHOLDER FEES (fees paid directly from your investment).......... NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund
assets)
Management Fees................................................... 0.75%*
Distribution or Service (12b-1) Fees.............................. NONE
Other Expenses.................................................... 0.73%
Administration, Transfer Agent and Custodian Fees...... 0.26%*
Professional and Directors' Expenses................... 0.28%
Insurance, Printing, Registration and Miscellaneous
Expenses.............................................. 0.19%
Total Annual Fund Operating Expenses.............................. 1.48%*
</Table>
- ---------------
* The preceding table is based on expenses incurred during the fiscal year
ended December 31, 2002, without giving effect to fee waivers by the Fund's
Investment Adviser, Administrator and Transfer Agent. The operating expenses
are expressed as a percentage of the Fund's average net assets. If the
effect of the fee waivers were included, the Management Fees in the
preceding table would have been 0.70%, the Administration, Transfer Agent
and Custodian Fees in the preceding table would have been 0.21%, and Total
Annual Fund Operating Expenses would have been 1.38%. The Administrator and
Transfer Agent have contractually agreed to continue the fee waiver through
December 31, 2003. The fee payable to the Investment Adviser is reduced (but
not below zero) to the extent expenses (exclusive of professional fees, such
as legal and audit fees, directors' fees and expenses, and distribution
expenses, if any, payable under Rule 12b-1) exceed 1.10% of the Fund's
average daily net assets for any fiscal year during the term of the Fund's
agreement with the Investment Adviser.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. Because it uses
hypothetical conditions, your actual costs may be higher or lower.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year, all dividends and distributions are reinvested and the Fund's operating
expenses described in the preceding table remain the same as a percentage of net
assets.* Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- -------- -------- --------
$151 $468 $808 $1,768
</Table>
The Fund does not charge any deferred sales charge or other redemption fee,
and you would pay the same expenses shown in the example if you did not redeem
your shares.
- ---------------
* If the effect of expense limitations and fee waivers that were in effect
during the year were reflected in the Example, the expenses paid for the
one-, three-, five- and ten-year periods would have been $140, $437, $755
and $1,657, respectively.
4
INVESTMENT OBJECTIVE AND STRATEGIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve long-term growth of
capital for its shareholders. The Fund is designed as an investment vehicle for
investors who want to see their capital grow over the long term and who are
willing to take moderate risks to achieve that goal. There is no assurance that
the Fund will, in fact, achieve its objective.
The Board of Directors may change the Fund's investment objective without
shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in equity securities of U.S.-based companies
whose growth, cash flow, earnings and dividend prospects are promising and whose
securities are reasonably priced and have the potential for capital appreciation
in the opinion of the Investment Adviser. Specifically, the Investment Adviser
looks for companies with strong balance sheets and sustainable earnings growth.
In evaluating the prospects for a company's growth and earnings, the Investment
Adviser considers, among other things, the company's historical performance and
growth strategy, the growth rate of the industries in which it operates and the
markets into which it sells, the nature of its competitive environment,
technological developments and trends in market share. In attempting to
determine reasonable price levels for a company's securities, the Investment
Adviser utilizes a variety of measurement methods, including discounted cash
flow analysis of expected earnings streams and an evaluation of the company's
price-to-earnings ratio.
The equity securities in which the Fund invests consist primarily of
dividend-paying common stocks of large-capitalization companies, i.e., companies
with a market capitalization in excess of $5 billion. The Fund may invest up to
25% of its assets in equity securities of smaller companies. The equity
securities in which the Fund may invest also include common stocks that do not
pay dividends.
Under normal market conditions, it is the Fund's policy to invest
substantially all of its assets in equity securities. However, if the Fund's
Investment Adviser deems it beneficial for defensive purposes during adverse
market, economic or other conditions, the Fund may invest up to 100% of its
assets temporarily in non-equity securities, such as investment grade corporate
bonds, commercial paper and government securities. In taking this action, the
Fund would reduce its exposure to fluctuations and risks in the market for
equity securities and would increase its exposure to fluctuations and risks in
the market for debt securities. These defensive actions would reduce the benefit
from any upswing in the equity markets and, if the Investment Adviser does not
correctly anticipate fluctuations in the equity and debt securities markets, may
not contribute to the achievement of the Fund's investment objective.
To a limited extent, the Fund also may engage in other investment
practices.
More information about the Fund's investments and strategies is provided in
the Statement of Additional Information.
PRINCIPAL RISKS
All investments in equity mutual funds, like the Fund, involve some level
of risk. Simply defined, risk is the possibility that you will lose money or not
make money.
The principal risk factors for the Fund are discussed below. Before you
invest, please make sure you understand the risks that apply to your investment.
MARKET AND INVESTMENT RISKS
The value of the Fund's shares will fluctuate in accordance with the value
of the securities held in its portfolio so that your shares, when redeemed, may
be worth more or less than their original cost. Declines are possible in the
overall stock market or in the particular securities or types of securities held
by the Fund, and it is possible to lose money as a result of your investment.
The Fund may invest up to 25% of its assets in the securities of companies
with market capitalizations of less than $5 billion. These companies carry
additional risks because their earnings tend to be less predictable, their share
prices are more
5
volatile and their securities may be less liquid than the securities of larger
companies.
PORTFOLIO MANAGEMENT RISKS
The Investment Adviser's skill in choosing appropriate investments for the
Fund will affect the ability of the Fund to achieve its investment objective,
and the investment strategies employed by the Fund may not match the performance
of other strategies at different times or under different market or economic
conditions. Accordingly, the Fund's performance for any period may differ from
the performance of the overall market or from other investments that may be
available to you.
SHARE PRICE -- NET ASSET VALUE
The price of the Fund's shares is also referred to as its net asset value
or NAV per share. The net asset value per share of the Fund is determined by
computing the total value of all securities and other assets of the Fund,
subtracting all of its liabilities and then dividing by the total number of
shares of the Fund outstanding:
<Table>
Net Asset Value = Total Assets - Liabilities
--------------------------
Number of Shares
Outstanding
</Table>
The Fund determines net asset value per share of the Fund as of 4:00 P.M.,
New York time. Shares will not be priced on days on which the New York Stock
Exchange is closed for trading.
The Fund uses market prices in valuing portfolio securities, but may use
fair value estimates if reliable market prices are unavailable.
PURCHASE OF FUND SHARES
You purchase shares at the Fund's next-determined net asset value after the
Fund receives your order to purchase. Except for orders by investors who elect
next-day settlement, all orders must be accompanied by a check or other form of
payment. Orders to purchase shares are not binding on the Fund until accepted by
the Fund. The Fund reserves the right to reject any purchase order.
As an M.S.B. Fund shareholder, you pay no shareholder transaction fees,
such as sales loads, redemption fees or exchange fees, when purchasing or
redeeming shares.
INITIAL AND SUBSEQUENT PURCHASES
To make an investment in the Fund, follow the instructions provided on
pages 8 and 9 under the heading "Share Purchase Options." An Account Application
may be obtained separately from the Fund by calling 800-982-1846.
You will receive a Confirmation Notice from the Fund confirming each share
purchase. Each Confirmation Notice includes a detachable order form which you
may use to make additional purchases of shares.
Subsequent purchases also may be made by telephone.
AUTOMATIC INVESTMENT PLAN
You may make automatic periodic investments in the Fund by authorizing the
Fund's Transfer Agent to withdraw funds from your bank account. If you desire to
participate in the Automatic Investment Plan, complete the application, which
may be obtained separately from the Fund by calling 800-982-1846, and mail it to
the Fund. Allow up to one month for processing of the application.
TAX-SHELTERED RETIREMENT PLANS
The Fund offers certain tax-sheltered retirement plans through which you
may purchase shares, including traditional, SEP, Roth and Education IRAs. Call
the Fund at 800-982-1846 to obtain the appropriate forms.
PAYROLL DEDUCTION PLANS
A number of employers make purchases of M.S.B. Fund shares available to
their employees by means of payroll deductions. Contact your employer for
information about the availability of a payroll deduction plan.
NEXT-DAY SETTLEMENT OPTION
The Fund makes available a next-day settlement option for investors.
Next-day settlement permits an investor to place an order by telephone or fax to
purchase Fund shares at the net asset value per share next determined after
receipt of the order to purchase and to deliver payment for the order by wire
transfer the following business day.
6
To use the next-day settlement option, follow the instructions on page 9
under the heading "Next-Day Settlement Option." You may obtain telephone
transaction authorization forms needed to activate next-day settlement by
calling the Fund at 800-661-3938.
A purchase order is binding upon the investor. If the Fund must cancel your
order because payment was not timely received, you will be responsible for the
difference between the price of the shares when ordered and the price of the
shares when the order is canceled and for any fees or other losses and expenses
incurred by the Fund. The Fund may redeem shares from your account in an amount
equal to the amount of the difference in share price and the fees and other
losses and expenses incurred, if any, and may retain the proceeds of the
redemption in satisfaction of your liability to the Fund. You will continue to
be responsible for any deficiency. In addition, the Fund may prohibit or
restrict you from electing next-day settlement in the future or from making
future purchases of the Fund's shares.
Any funds received by the Fund in respect of a canceled purchase order will
be returned upon instructions from the sender without any liability to the Fund,
the Investment Adviser, the Distributor or the Custodian. If it is not possible
to return the funds the same day, you will not have use of the funds until the
next business day when it is possible to effect the return payment. The Fund
reserves the right to reject any purchase order.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
You may elect to have dividends and capital gains distributions of the
Fund, when paid, reinvested in shares of the Fund at the net asset value per
share determined at the close of business on the ex-dividend date. The Fund will
reinvest your dividends and capital gains distributions unless you state a
contrary intention in the space provided for that purpose in the Account
Application. You may change an election at any time prior to a record date for a
dividend or distribution by notifying the Fund in writing.
NECESSARY INFORMATION
In compliance with the USA Patriot Act of 2001, the Fund's Distributor or
Transfer Agent will verify certain information on your account application as
part of the Fund's anti-money laundering program. The Fund will not transact
business with any person or entity whose identity cannot be adequately verified
under the provisions of the USA Patriot Act. Account applications that are
incomplete or that contain essential identifying information which cannot be
verified will not be accepted.
7
SHARE PURCHASE OPTIONS
<Table>
<Caption>
INITIAL PURCHASE SUBSEQUENT INVESTMENT
---------------- ---------------------
MINIMUM $250 ($50 for investors enrolling in $50 ($25 for investments through the
INVESTMENT the Automatic Investment Plan) Automatic Investment Plan)
BY MAIL OR Complete and sign the application. Make your check payable to "M.S.B.
OVERNIGHT COURIER Make your check payable to "M.S.B. Fund, Inc." and send it to the address
Fund, Inc." and send the completed at the left. Put your name, address
application and check to: and M.S.B. Fund account number on your
check. Subsequent investment forms
By Mail: M.S.B. Fund, Inc. will be included with each shareholder
P.O. Box 182010 statement for your convenience.
Columbus, OH 43218-2010 Alternatively, include a note giving
your M.S.B. Fund account number, your
By Courier: M.S.B. Fund, Inc. name and your address.
c/o BISYS Fund Services
Attn: Shareholder Services
3435 Stelzer Road
Columbus, OH 43219
BY TELEPHONE Telephone transactions may not be used If you want to make telephone
for initial purchases, unless the transactions, call 800-661-3938 to set
investor is an institution. If you up your account for this feature. All
want to make telephone transactions, purchases made by telephone must be
call 800-661-3938 to set up your paid by wire transfer.
account for this feature. All
purchases made by telephone must be
paid by wire transfer.
WIRE INSTRUCTIONS Call 800-661-3938 to notify the Fund Carefully follow the instructions to
that you intend to purchase shares by the left and include the following
wire and to verify wire instructions. information:
Shareholder Account #
Shareholder Name/Registration
Taxpayer Identification Number.
</Table>
8
<Table>
<Caption>
INITIAL PURCHASE SUBSEQUENT INVESTMENT
---------------- ---------------------
NEXT-DAY 1. Open an account by submitting a Follow the directions to the left.
SETTLEMENT OPTION completed Account Application by mail
or overnight courier. Authorize
telephone transactions on an
authorization form available from the
Fund.
2. Notify the Fund by calling
800-661-3938 that you desire to
purchase shares with next-day
settlement.
3. Submit an order to purchase shares
either by fax or telephone, indicating
the amount of the investment or the
number of shares you desire to
purchase. Be sure to indicate on the
order that next-day settlement is
sought. If you are submitting the
purchase order by fax, please call
800-661-3938 to obtain a fax number.
4. Wire funds using the wire
instructions above. Immediately
available funds must be received by
4:00 P.M. New York City time on the
next business day after the order is
submitted or the order will be
canceled.
AUTOMATIC Complete the Account Application which Follow the directions to the left.
INVESTMENT PLAN may be obtained separately from the
Fund. Send the completed application
and a voided personal check to the
Fund at the address provided on page 8
for delivery by mail or overnight
courier. Allow up to one month for
processing of your application.
PAYROLL DEDUCTION See your employer for information. See your employer for information.
PLANS
TO OBTAIN ACCOUNT Call the Fund at 800-661-3938. Call the Fund at 800-982-1846.
APPLICATIONS AND
OTHER FORMS
</Table>
9
SHARE CERTIFICATES
The Fund will not issue certificates representing the Fund's shares unless
you make a request in writing directly to the Fund's Administrator or to an
account representative of an eligible broker-dealer, bank or other financial
intermediary. Wire and telephone redemptions of shares held in certificate form
are not permitted.
PURCHASES THROUGH FINANCIAL INTERMEDIARIES
You may also purchase shares of the Fund through authorized broker/dealers
or other financial intermediaries such as banks, 401(k) plans, financial
advisers and financial supermarkets. These parties may charge transaction fees
and may set different minimum investments or limitations on buying or selling
shares. The intermediaries are responsible for transmitting purchase orders and
funds and for crediting their customers' accounts following timely redemptions
made in accordance with their customer agreements and this Prospectus.
REDEEMING SHARES
You may withdraw any part of your account at any time by redeeming shares
(subject to the conditions and limited exceptions described below). You may make
redemption requests in writing or by telephone if you have elected the telephone
redemption option. If share certificates were issued to you for the shares to be
redeemed, the share certificates must accompany the redemption request.
Procedures for redeeming shares are described below.
Shares are redeemed at their net asset value per share next determined
after receipt by the Fund of the request for redemption and all other necessary
documentation in good order.
If the shares to be redeemed have been recently purchased by check, the
Fund may delay the payment of redemption proceeds until the check has cleared,
which may take up to 15 days.
WRITTEN REDEMPTION REQUESTS
To be in good order, written redemption requests must be signed exactly as
the account is registered by all persons in whose names the account is held and
must include the following information and documents:
- - the account number from which shares are to be redeemed,
- - the dollar value or number of shares to be redeemed,
- - the address the redemption proceeds should be mailed to,
- - the shareholder's daytime phone number,
- - the signatures of all account owners exactly as registered on the account,
- - signature guarantees (if required, as
described below under the heading "Signature Guarantees"),
- - any supporting legal documentation that may be required in the event of the
death or incapacity of a shareholder,
- - any certificates you are holding for the shares being redeemed.
You should direct redemption requests to M.S.B. Fund, Inc., P.O. Box
182010, Columbus, OH 43218-2010. Redemption requests sent by overnight courier
should be sent to M.S.B. Fund, Inc., c/o BISYS Fund Services, Attn: Shareholder
Services, 3435 Stelzer Road, Columbus, OH 43219.
SIGNATURE GUARANTEES
Except for redemption requests by 401(k) plan omnibus accounts and
redemptions by institutional investors, redemption requests that are greater
than $10,000 require signature guarantees. A signature guarantee is designed to
protect you and the Fund against fraudulent transactions by unauthorized
persons. The types of signature guarantees that are required are described
below.
10
<Table>
<Caption>
AMOUNT OF
REDEMPTION TYPE OF SIGNATURE GUARANTEE REQUIRED
- ---------- ------------------------------------
$10,000-$25,000 Signatures must be guaranteed by a
domestic bank or trust company,
broker-dealer, clearing agency,
credit union or savings association
(a "Qualified Guarantor").
OVER $25,000 Signatures must be guaranteed by a
Qualified Guarantor that is a
participant in a medallion program
(described below) recognized by the
Securities Transfer Association.
REDEMPTIONS BY
401(K) PLAN
OMNIBUS
ACCOUNTS OR BY
INSTITUTIONAL
INVESTORS Signature guarantee not required.
</Table>
The three recognized medallion programs are Securities Transfer Agents
Medallion (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock
Exchange, Inc. Medallion Signature Program (MSP).
Signature guarantees by a Qualified Guarantor also are required if:
- - the proceeds of the redemption are to be paid to a person other than the
record owner,
- - the proceeds are to be sent to an address other than the address on the
records of the Fund's Transfer Agent,
- - the redemption request is received within thirty (30) days after the Transfer
Agent has been notified of an address change.
The Transfer Agent reserves the right to request additional information
from, and make reasonable inquiries of, any eligible guarantor institution.
TELEPHONE REDEMPTIONS
The Fund permits individual shareholders (once within a thirty day period)
or a representative of record for an account to redeem shares by telephone in
amounts up to $10,000 by calling the Fund at 800-661-3938. In order to use this
service, you must elect to do so on your application or complete a separate
authorization form supplied by the Fund.
Telephone redemptions must be in amounts of $500 or more. Instructions must
include your M.S.B. Fund account number and the dollar amount or number of
shares to be redeemed. Checks issued must be made payable to the owner of record
and may be mailed only to the address of record.
Telephone redemption requests are not available:
- - for retirement account shares,
- - for shares purchased within 15 days prior to the telephone redemption
request,
- - for shares for which share certificates have been issued or
- - if an address change has been made for the account within 60 days prior to
the telephone redemption request.
The Fund does not restrict institutional investors as to the frequency or
the maximum dollar amount of redemptions that they can make by telephone.
If there are multiple account owners, the Fund may rely on the telephone
instructions of only one owner.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures may include, among other
things, requiring some form of personal identification prior to acting upon
telephone instructions. The Fund reserves the right to refuse a telephone
redemption if it believes it advisable to do so. Assuming the Fund's security
procedures are followed, neither the Fund nor the Fund's Administrator or
Transfer Agent will be responsible for the authenticity of redemption
instructions received by telephone and believed to be genuine, and the investor
will bear any loss. The Fund may record all calls.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Shares may be redeemed by
11
mail if you are unable to contact the Fund by telephone.
ADDITIONAL INFORMATION CONCERNING REDEMPTIONS
Wiring of Redemption Proceeds. An individual shareholder who holds Fund
shares in non-certificate form may elect to have redemption proceeds of $5,000
or more wired to the shareholder's brokerage account or a commercial bank
account designated by the shareholder. The Fund does not restrict institutional
buyers as to the minimum or maximum amount of redemption proceeds that may be
transmitted to them by wire transfer.
Redemption of IRA or Retirement Plan Accounts. If you desire to redeem
shares held in an IRA or other retirement plan account, you must indicate on
your redemption request whether or not to withhold federal income tax.
Redemption requests failing to indicate an election not to have federal tax
withheld will be subject to withholding.
Broker-Dealers. You also may redeem Fund shares through broker-dealers who
are holding shares on your behalf and have made arrangements with the Fund
permitting redemptions by telephone or fax transmission. These broker-dealers
may charge a fee for this service.
EXCEPTIONS TO OBLIGATION TO REDEEM
Redemptions may be suspended, and the date of payment postponed, if:
- - trading on the New York Stock Exchange is suspended or restricted,
- - an emergency makes determination of net asset value or disposition of
portfolio securities not reasonably practicable, or
- - the Securities and Exchange Commission by order permits suspension for the
protection of shareholders.
Requests for redemption received during a period when the right to redeem
is suspended may be withdrawn at any time until redemptions are recommenced.
REDEMPTION IN KIND
The Fund reserves the right to make a "redemption in kind" -- payment in
portfolio securities rather than cash -- if the amount you are redeeming in any
90-day period is large enough to effect Fund operations (i.e., if it represents
more than $250,000 or 1% of the Fund's assets). The Statement of Additional
Information contains supplementary details concerning redemption in kind.
AUTOMATIC WITHDRAWAL PLAN
You may elect to participate in an Automatic Withdrawal Plan which will
enable you to withdraw cash systematically from your investment in the Fund
without the necessity of submitting a redemption order each time a redemption of
shares is to be made. The redemption of shares under the Automatic Withdrawal
Plan will reduce and may eventually eliminate all shares held in your account.
Under the Automatic Withdrawal Plan, you may have payments made to you
either monthly or quarterly. In addition, you may request either payment of a
fixed dollar amount (through the redemption of sufficient shares on the
redemption date) or the redemption of a specified number of shares. If you
designate the redemption of a specified number of shares and not a fixed dollar
amount, the actual cash payments received will vary according to the net asset
value of your shares on the redemption date.
Under the Automatic Withdrawal Plan, you may not redeem shares for which
share certificates have been issued. If you elect to participate in the
Automatic Withdrawal Plan, all income dividends and capital gain distributions
payable to you will be reinvested in Fund shares regardless of previous
instructions which you may have given to the Fund.
Either you or the Fund may terminate the Automatic Withdrawal Plan by
giving at least 30 days' written notice at any time.
Additional information regarding the Automatic Withdrawal Plan and
applications are available from the Fund upon request.
REDEMPTION AT THE OPTION OF THE FUND
If the value of the shares in your account is less than $250, and you are
not enrolled in the Automatic Investment Plan, the Fund may notify you that,
unless you bring the account up to $250 in value, the Fund will redeem all
shares and close
12
your account. The Fund will give you forty-five days after it sends the notice
to bring your account up to $250 before it takes any action. This minimum
balance requirement does not apply to IRAs and other tax-sheltered investment
accounts. This right of redemption will not apply if the value of your account
drops below $250 solely as the result of market action.
The Fund reserves the right to do this because of the expense to the Fund,
in relation to the size of the investment, of maintaining small accounts.
UNDERSTANDING PERFORMANCE
From time to time the Fund reports performance information in the form of
total return and average annual total return before taxes. See, for example,
"Performance Summary" at page 3 of this Prospectus. Total return shows the
change in the value of an investment in the Fund over a specified period of time
(such as one, three, five or ten years), assuming reinvestment of all dividends
and distributions and after deduction of all applicable charges and expenses
without taking into account any federal, state or local income taxes that you
may pay. The Fund's average annual total return represents the annual compounded
growth rate that would produce the total return achieved over the period. The
Fund also may report after-tax returns which reflect federal income taxes on
dividends and distributions and taxes on capital gains upon redemption of
shares. The after-tax performance information reported by the Fund does not take
into account any state or local income taxes that you may pay.
DIVIDENDS, DISTRIBUTIONS AND
FEDERAL INCOME TAX STATUS
DIVIDEND POLICY
The Fund pays dividends of net investment income (generally, income from
dividends and interest, less expenses), if any, annually. The Fund usually makes
distributions of net long-term capital gains, if any, realized during a fiscal
year in December of that fiscal year.
The Fund's dividend distributions from net investment income will vary with
the amount of dividend and other investment income received, and the expenses
incurred, by the Fund. In periods of relatively low dividends and interest
rates, the Fund's dividend and interest income may not exceed the Fund's
expenses, so that dividend distributions may not occur or may be low.
TAX STATUS; TREATMENT OF DIVIDENDS, DISTRIBUTIONS, GAINS AND LOSSES
Tax Status of the Fund. The Fund has elected to qualify, and intends to
remain qualified, as a regulated investment company under Subchapter M of the
Internal Revenue Code. The Fund intends to distribute all of its net investment
income and capital gains to shareholders. Assuming that it is so qualified and
makes such distributions, the Fund will not be subject to federal income tax on
the net investment income and capital gains distributed. If the Fund failed to
qualify as a regulated investment company or failed to meet certain 90%
distribution requirements, it would be taxed as an ordinary corporation. Even if
it meets these qualifications, if the Fund did not distribute 98% of its
ordinary income and 98% of its capital gain net income, it would be subject to a
non-deductible 4% excise tax on the amount required to be but not distributed.
Taxation of Dividends and Distributions. In general, distributions
received by a shareholder will be taxable to the shareholder, either as ordinary
income or capital gains, whether or not the distributions are reinvested in
additional shares of the Fund and regardless of the length of time the
shareholder has owned his shares. Shareholders that are tax-exempt entities will
not be subject to tax on distributions by the Fund. In addition, shareholders
who hold their shares through tax-advantaged retirement accounts generally will
not be subject to taxation until distributions are made to them from their
accounts. Such shareholders should consult their retirement plan documents. The
Fund expects that its distributions will consist primarily of long-term capital
gains. However, increases in the Fund's portfolio turnover rate may cause the
Fund to realize an increased level of short-term gains.
The net long-term capital gains of the Fund will be distributed as capital
gain distributions and will be taxable as long-term capital gains to
13
shareholders, regardless of the length of time a shareholder has owned his
shares. Long-term capital gain distributions received by shareholders that are
individuals generally are taxed at a maximum tax rate of 20%. Net long-term
capital gains received by corporate shareholders are taxed at the same rates as
ordinary income.
The net investment income and short-term capital gains of the Fund will be
distributed as dividends and will be taxable as ordinary income to shareholders.
A portion of dividends paid from net investment income attributable to dividends
from domestic corporations may qualify for the dividends-received deduction for
corporate shareholders.
Dividends or capital gains distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be taxable as if received by shareholders on December 31 of the
calendar year in which the dividends or capital gains distributions are
declared.
The Fund will notify shareholders after the close of its fiscal year of the
dollar amount and the tax status of that year's distributions.
Shareholders buying shares just prior to a dividend or capital gain
distribution should note that the distribution will be taxable to them even
though the price of the shares will have included the amount of the forthcoming
distribution.
Taxation of Gains and Losses upon Sale or Redemption. Any gain (or loss)
realized by a shareholder that is an individual upon a sale, exchange or
redemption of Fund shares (other than an individual who holds his shares through
a tax-advantaged retirement account) generally will be subject to tax as
long-term capital gain (or loss) at a maximum tax rate of 20% if the shares have
been held for more than one year. If the shares have been held for one year or
less the shareholder will realize short-term capital gain or loss, except that
any loss realized on Fund shares that the shareholder has held for six months or
less will be treated as long-term capital loss to the extent of any capital
gains dividend received by the shareholder with respect to such shares. Gain
realized by a corporate shareholder will be taxed at the same rates as ordinary
income.
To avoid backup withholding tax on any dividends, capital gain
distributions and redemption proceeds, a shareholder must certify that the
social security number or taxpayer identification number provided to the Fund is
correct and that the shareholder is not currently subject to backup withholding
or is exempt from backup withholding.
Other. The foregoing discussion relates only to shareholders who are U.S.
persons (citizens, residents and domestic entities). Shareholders that are not
U.S. persons should consider that different tax consequences, including the
imposition of a 30% withholding tax, may apply.
You should consult your own tax advisers for specific questions about the
federal, state or local income tax implications of an investment in the Fund.
PORTFOLIO MANAGEMENT
INVESTMENT ADVISER
Shay Assets Management, Inc. (the "Investment Adviser") makes the
investment decisions for the Fund, subject to policies established by the Fund's
Board of Directors, and is responsible for placing purchase and sale orders for
portfolio securities and other investments.
Shay Assets Management, Inc. is a registered investment adviser under the
Investment Advisers Act of 1940 and serves as investment adviser to Asset
Management Fund, a registered investment company comprising six fixed-income
portfolios with aggregate net assets of approximately $4.7 billion at December
31, 2002, and as investment adviser to Asset Management Fund Large Cap Equity
Institutional Fund, Inc. (formerly Institutional Investors Capital Appreciation
Fund, Inc.), a registered investment company which had net assets at December
31, 2002, of approximately $91 million.
The Investment Adviser's principal office is located at 230 West Monroe
Street, Chicago, Illinois 60606. The Investment Adviser is controlled by Rodger
D. Shay, who is a director and a Vice President of the Fund. Shay Assets
Management,
14
Inc., together with its predecessor, Shay Assets Management Co., has served as
the Fund's investment adviser since May 19, 1995.
INVESTMENT ADVISER'S FEE
The Fund pays the Investment Adviser a graduated investment management fee.
The fee is computed at the annual rate of 0.75% of the first $100,000,000 of the
Fund's average daily net assets and 0.50% of the Fund's average daily net assets
in excess of $100,000,000. The fee payable to the Investment Adviser is reduced
to the extent the expenses of the Fund (exclusive of legal, audit and directors'
fees and expenses) exceed 1.10% of the Fund's average daily net assets during
any fiscal year. This limitation resulted in a waiver of the Investment
Adviser's fees totaling $26,674 for the year ended December 31, 2002. In 2002
the Fund's total payment for investment advisory services was 0.70% of the
Fund's average net assets after giving effect to the expense limitation
described above.
PORTFOLIO MANAGEMENT
Mr. John J. McCabe, Senior Vice President and Chief Investment Strategist
of the Investment Adviser, provides macro-economic advice in connection with the
management of the Fund. Mr. McCabe has been a part of the portfolio management
team for the Fund since 1991. He joined the Investment Adviser in May 1995 and
prior thereto, he served as Senior Vice President and Chief Investment Officer
of Nationar, the Fund's former investment adviser. Mr. McCabe is a director and
past President of the New York Society of Security Analysts, a past director of
the Financial Analysts Federation and a member and founding Governor of the
Association for Investment Management and Research.
Mr. Mark F. Trautman, Vice President of the Investment Adviser, is
primarily responsible for the day-to-day management of the Fund's portfolio
investments. Mr. Trautman has been responsible for the management of the
portfolio since 1993. He joined the Investment Adviser in May 1995 and prior
thereto, he served as Director of Mutual Fund Investments for the Fund's former
investment adviser, Nationar. Mr. Trautman also has served as the portfolio
manager of Asset Management Fund Large Cap Equity Institutional Fund, Inc.
(formerly Institutional Investors Capital Appreciation Fund, Inc.) since 1993.
>From January 1992 through March 1993 he served as Senior Equity Analyst for the
two funds.
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN
Administrator and Transfer Agent. BISYS Fund Services Ohio, Inc. ("BISYS"
or the "Administrator"), 3435 Stelzer Road, Columbus, OH 43219, acts as
administrator of the Fund. BISYS also serves as the transfer agent and registrar
for the Fund's shares.
Custodian. The Bank of New York (the "Custodian"), New York, New York, is
the custodian of the Fund's investments.
DISTRIBUTOR
Shay Financial Services, Inc. (the "Distributor") acts as the distributor
of the Fund. The Distributor's principal office is located at 230 West Monroe
Street, Chicago, IL 60606. The Distributor is controlled by Rodger D. Shay, who
is a director and a Vice President of the Fund. The Fund has authorized the
Distributor to undertake certain activities in connection with the sale of
shares of the Fund, including informing potential investors about the Fund
through written materials, seminars and personal contacts. The Distributor does
not receive any compensation from the Fund for these activities.
FINANCIAL HIGHLIGHTS
The financial highlights information, including the financial highlights
table, contained in the Fund's Annual Report to shareholders for the year ended
December 31, 2002 (the "Annual Report") is incorporated herein by reference to
the Annual Report.
15
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
information included in the financial highlights table for the fiscal year ended
December 31, 2002 was audited by Ernst & Young LLP, whose report, together with
the Fund's financial statements, is included in the Annual Report, which is
available upon request. Financial information for the three years ended December
31, 1999, 2000 and 2001 was audited by Arthur Andersen LLP. The financial
highlights for prior periods were audited by other independent accountants.
16
NOTES
17
NOTES
18
[M.S.B. FUND, INC. LOGO]
M.S.B. FUND, INC.
C/O SHAY FINANCIAL SERVICES, INC.
230 WEST MONROE STREET
CHICAGO, ILLINOIS 60606
TELEPHONE 800-661-3938
INVESTMENT ADVISER
Shay Assets Management, Inc.
230 West Monroe Street
Chicago, Illinois 60606
DISTRIBUTOR
Shay Financial Services, Inc.
230 West Monroe Street
Chicago, Illinois 60606
ADMINISTRATOR AND TRANSFER AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
CUSTODIAN
The Bank of New York
One Wall Street
New York, New York 10005
LEGAL COUNSEL
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
19
ADDITIONAL INFORMATION AND SHAREHOLDER INQUIRIES
A current Statement of Additional Information ("SAI") which provides more
information about the Fund is on file with the Securities and Exchange
Commission. The SAI and the Financial Highlights contained in the Fund's annual
report to shareholders for the year ended December 31, 2002 are incorporated
herein by reference, which means that they are legally considered part of this
Prospectus.
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
The SAI, annual report and semi-annual report are available without charge upon
request. To obtain a copy of the current SAI, annual or semi-annual report or
other information about the Fund or to make shareholder inquiries:
<Table>
Call: 800-661-3938
Write to: M.S.B. Fund, Inc.
c/o Shay Financial Services, Inc.
230 West Monroe Street
Chicago, Illinois 60606
E-mail: Send your request to
msbfund@aol.com
</Table>
You may view and copy the SAI and other information about the Fund by visiting
the Securities and Exchange Commission's Public Reference Room in Washington,
DC, or by visiting the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. Copies of this information may also be obtained, upon
payment of a duplicating fee, by electronic request at the following E-mail
address: publicinfo@sec.gov, or by writing to the Commission's Public Reference
Section, Washington, DC 20549-0102. You may call the Commission at 202-942-8090
for information about the operation of the Public Reference Room.
[M.S.B. FUND, INC. LOGO]
PROSPECTUS
------------------
May 1, 2003
------------------
A No-Load Fund
------------------
Investment Objective:
LONG-TERM GROWTH OF CAPITAL
Investment Company Act File No. 811-1273
M.S.B.
FUND, INC.
INVESTMENT OBJECTIVE:
LONG-TERM GROWTH OF CAPITAL
M.S.B. Fund, Inc.
c/o Shay Financial Services, Inc.
230 West Monroe Street
Chicago, Illinois 60606
800-661-3938
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2003
This Statement of Additional Information is not a prospectus. You should read
this document in conjunction with the Prospectus of the Fund, dated May 1, 2003.
This document incorporates by reference the Prospectus and the financial
statements, accompanying notes and report of independent auditors appearing in
the Annual Report of the Fund for the year ended December 31, 2002. You may
obtain a copy of the Prospectus and the Annual Report from the Fund without
charge at the above address or by calling 800-661-3938.
CONTENTS
PAGE
The Fund.................................................................................................. 1
Investment Objective, Policies, and Risks................................................................. 1
Investment Objective................................................................................. 1
Risks................................................................................................ 1
Additional Investment Strategies..................................................................... 2
Investments under Abnormal Market Conditions......................................................... 2
Fundamental Investment Policies -- Investment Restrictions Regarding Portfolio Securities............ 3
Issuance of Senior Securities........................................................................ 4
Writing Covered Call Options......................................................................... 4
Portfolio Turnover................................................................................... 5
Purchase and Redemption of Shares......................................................................... 6
Performance Information................................................................................... 7
Income Tax Status, Dividends and Distributions............................................................ 8
Officers and Directors of the Fund........................................................................ 9
Certain Other Affiliations and Business Relationships................................................ 13
Directors' and Officers' Investment in the Fund...................................................... 15
Compensation of Directors and Officers............................................................... 15
Anti-Money Laundering Procedures.......................................................................... 17
Code of Ethics............................................................................................ 17
Investment Advisory and Other Services.................................................................... 17
Investment Adviser................................................................................... 17
Administrator, Transfer Agent and Custodian.......................................................... 20
Distributor.......................................................................................... 20
Independent Auditors...................................................................................... 21
Purchase and Sale of Portfolio Securities................................................................. 21
Expenses of the Fund...................................................................................... 22
Description of Capital Stock.............................................................................. 22
General Information....................................................................................... 23
Financial Statements...................................................................................... 23
THE FUND
M.S.B. Fund, Inc. (the "Fund") is a diversified, open-end
management investment company organized as a New York corporation. The Fund was
incorporated under the laws of the State of New York on June 8, 1964.
INVESTMENT OBJECTIVE, POLICIES, AND RISKS
INVESTMENT OBJECTIVE
The investment objective of the Fund is to achieve long-term
growth of capital for its shareholders. The Fund is designed as an investment
vehicle for investors who want to see their capital grow over the longer term
and who are willing to take moderate risks to achieve that goal. There is no
assurance that the Fund will, in fact, achieve its objective.
The Board of Directors may change the Fund's investment
objective without shareholder approval.
RISKS
All investments in equity mutual funds, like the Fund, involve
some level of risk.
Market and Investment Risks. The value of the Fund's shares
will fluctuate in accordance with the value of the securities held in its
portfolio so that your shares, when redeemed, may be worth more or less than
their original cost. Declines are possible in the overall stock market or in the
particular securities or types of securities held by the Fund.
The Fund may invest up to 25% of its assets in the securities
of companies with market capitalizations of less than $5 billion. These
companies carry additional risks because their earnings tend to be less
predictable, their share prices more volatile and their securities less liquid
than the securities of larger companies.
Investments in mutual funds are not bank deposits and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
The Fund may invest from time to time in convertible debt
securities and may, under abnormal market conditions, invest up to 100% of its
assets in fixed income securities. See "--Investments under Abnormal Market
Conditions" in this Statement of Additional Information. Investments in fixed
income securities expose the Fund to the risk that interest or principal may not
be paid in a timely manner. In addition, prices of fixed income securities tend
to move inversely with changes in interest rates. An increase in interest rates
will result in a drop in the prices of fixed income securities, which could
adversely affect the Fund's share price.
Portfolio Management Risks. The Investment Adviser's skill in
choosing appropriate investments for the Fund will affect the ability of the
Fund to achieve its investment objective, and the investment strategies employed
by the Fund may not match the performance of other strategies at different times
or under different market or economic conditions.
1
Accordingly, the Fund's performance for any period may differ from the
performance of the overall market or from other investments that may be
available to you.
ADDITIONAL INVESTMENT STRATEGIES
In addition to the principal investments and investment
strategies described in the Prospectus (see "Investment Objective and
Strategies" in the Prospectus), the Fund may also invest in preferred stocks and
corporate debt securities convertible into common stock. It is not expected that
the Fund's holdings of convertible debt securities would ordinarily exceed 5% of
the Fund's assets. Additionally, the Fund invests its non-committed cash
primarily in commercial paper or the shares of money market mutual funds
registered as investment companies under the Investment Company Act and
maintaining a stable net asset value per share. The Fund's investments in
commercial paper ordinarily consist of commercial paper rated "Prime-2" or
better by Moody's Investors Services, Inc. or rated "A-2" or better by Standard
& Poor's Corporation. The Fund's investments in commercial paper typically
mature overnight. The Fund may also write covered options. See "--Writing
Covered Call Options."
The amount that the Fund may invest in any one money market
mutual fund may not exceed 3% of the total outstanding voting stock of the money
market fund or 5% of the total value of the assets of the Fund, and all such
investments may not exceed 10% of the total value of the assets of the Fund. Any
money market mutual fund in which the Fund may invest will incur certain
expenses, which may include investment advisory fees, administration, custody,
audit and legal fees, among others. The return on an investment in a money
market mutual fund will be net of any such expenses incurred by the money market
fund, and, accordingly, the return on an investment in a money market mutual
fund may be less than the return that could be achieved by investing in money
market instruments directly.
The Fund may not invest more than 5% of its total assets in
the securities of issuers that, together with any predecessors, have a record of
less than three years of continuous operation. The Fund may not purchase
securities that the Fund is restricted from selling to the public without
registration under the Securities Act of 1933, as amended, and may not invest
more than 10% of its total assets in securities that are otherwise restricted as
to disposition. The Fund may not purchase or retain the securities of any issuer
if the officers or directors of the Fund, and any of the advisers or managers of
the Fund who individually beneficially own more than one half of one percent of
the securities of that issuer, together beneficially own more than five percent
of the securities of the issuer.
INVESTMENTS UNDER ABNORMAL MARKET CONDITIONS
Under normal market conditions, it is the Fund's policy to
invest substantially all of its assets in equity securities. However, if the
Fund's Investment Adviser deems it beneficial for defensive purposes during
adverse market, economic or other conditions, the Fund may invest up to 100% of
its assets temporarily in non-equity securities, such as investment grade
corporate bonds, commercial paper and government securities. In taking this
action, the Fund would reduce its exposure to fluctuations and risks in the
market for equity securities and would increase its exposure to fluctuations and
risks of the market for debt securities. These defensive actions would reduce
the benefit from any upswing in the equity markets and, if the Investment
2
Adviser does not correctly anticipate fluctuations in the equity and debt
securities markets, may not contribute to the achievement of the Fund's
investment objective.
FUNDAMENTAL INVESTMENT POLICIES -- INVESTMENT RESTRICTIONS REGARDING PORTFOLIO
SECURITIES
As a matter of fundamental policy, the Fund may not:
- Purchase securities of an issuer (other than obligations of the United
States and its instrumentalities) if 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;
- Purchase securities of an issuer if such purchase would cause more
than 10% of any class of securities of such issuer to be held by the
Fund;
- Purchase or retain securities of an issuer if, to the knowledge of the
Fund, the officers and directors of the Fund together own more than 5%
of any class of securities of such issuer or an officer, director or
employee of, or counsel for, the Fund is an officer or employee of the
issuer;
- Invest more than 25% of its assets in any one industry;
- Invest in securities whose sale by the Fund would be restricted under
the Securities Act of 1933 (letter stock);
- Invest in companies for the purpose of exercising control or
management;
- Purchase securities issued by another registered investment company,
except that the Fund may invest in investment companies that operate
as money market funds maintaining a stable net asset value per share
pursuant to the rules of the Securities and Exchange Commission;
- Buy or sell real estate, commodities or commodity contracts, unless
acquired as a result of ownership of securities;
- Make loans other than by the purchase of a portion of publicly
distributed debt securities;
- Underwrite securities issued by others;
- Make short sales of securities;
- Buy securities on margin;
- Buy or sell put options;
- Borrow money except for temporary administrative or liquidity (but not
leveraging) purposes, and then only from banks up to an amount not in
excess of 5% of the value of total assets at the time of the loan,
repayable in not more than 60 days; or
3
- Pledge, mortgage or hypothecate its assets except as may be necessary
to enable it to borrow funds temporarily for administrative or
liquidity (but not leveraging) purposes or to engage in writing
covered call options.
The Fund's fundamental investment policies may be changed only upon affirmative
vote of a majority of the voting securities of the Fund. Other investment
policies and restrictions may be changed without a vote of the shareholders.
ISSUANCE OF SENIOR SECURITIES
The Fund does not issue senior securities, except that it may
borrow money for temporary administrative or liquidity (but not leveraging)
purposes, as described above under "Fundamental Investment Policies --
Investment Restrictions Regarding Portfolio Securities." The Fund may borrow
only from banks up to an amount not in excess of 5% of the value of the Fund's
total assets at the time of the loan, repayable in not more than 60 days. This
policy is a fundamental investment policy of the Fund and may not be altered,
amended, or repealed except as authorized by the vote of a majority of the
outstanding shares of the Fund.
WRITING COVERED CALL OPTIONS
Covered Call Options. The Fund may engage in writing (i.e.,
selling) call options listed on organized securities exchanges with respect to
securities owned by the Fund (called "covered" options). Except in the
circumstances described below, the Fund will not sell any security subject to a
call option written by the Fund so long as that option is outstanding. Call
options are currently listed on the Chicago Board Options Exchange and the New
York, American, Midwest and Pacific Stock Exchanges.
A call option gives the purchaser the right to buy a security
from the Fund at a fixed price (the "exercise price") at any time prior to the
expiration of the option contract regardless of the market price of the security
at that time. In return for such right, the purchaser pays the Fund a premium,
which the Fund retains whether or not the purchaser exercises the option. The
premium represents consideration to the Fund for undertaking the option
obligation and thereby foregoing (during the period of the option) the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price. For example, assume the Fund owns 100 shares
of XYZ and, at a time when the market price of XYZ was $50 per share, the Fund
wrote a six month call option on those shares at an exercise price of $50 for a
premium of $500 (less transaction costs). If the price of XYZ declined to $40
per share the call would likely not be exercised. The 100 XYZ shares would have
declined $1,000 in value and the Fund would have received income in the amount
of $500. On the other hand, should the price of XYZ rise to $60 per share the
call would likely be exercised with the result that, in exchange for the $500
premium, the Fund would have foregone the $1,000 appreciation on the underlying
shares.
When the Fund writes an option the securities subject to the
option will be segregated or otherwise held for delivery in accordance with the
requirements of any applicable securities exchange. The Fund may purchase call
options only for the purpose of closing out a previous option commitment (called
a "closing purchase transaction"). A closing purchase transaction is made by
buying an option with identical terms as an option previously written, resulting
in the cancellation of the Fund's previous option obligation. If the Fund wishes
to sell
4
securities on which it has options outstanding it would execute a closing
purchase transaction prior to selling the securities. A profit or loss may be
realized on a closing purchase transaction if the amount paid to purchase a call
option previously written is less or more than the amount received from its
sale.
The writing of covered call options involves certain risks. An
option position may be closed out only on an exchange that provides a market for
an option of the same series. Although the Fund will generally write only those
call options for which there appears to be an active market, there is no
assurance that an active market on an exchange will exist for any particular
option at any particular time. If the Fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it would,
as a result, be subject to any price decline in the underlying security. If such
a situation were to arise, the Fund's Investment Adviser would determine whether
to hold the underlying securities and risk depreciation in their market value or
to sell the securities and substitute cash or other securities as collateral for
the option obligation.
In general, premiums received on options that are not
exercised and gains or losses realized on closing purchase transactions are
treated as short-term capital gains or losses. When an option is exercised the
premium is added to the exercise price and the resulting gain or loss is
characterized as a short- or long-term capital gain or loss depending on the
holding period of the underlying securities. In general, brokerage commissions
associated with buying and selling call options are higher than those associated
with other securities transactions.
The Board of Directors has directed the Fund's Investment
Adviser to write options only in situations where the exercise price plus the
premium (less transaction costs) would, at the time the option is written, equal
a price at which the Investment Adviser would recommend selling the underlying
securities because of fundamental investment considerations. Consequently, the
Fund does not believe that option writing has a material effect on the Fund's
portfolio turnover rate and the Fund believes that option writing may contribute
to the objective of the Fund of achieving long-term growth of capital. In
addition, the Board of Directors has directed the Investment Adviser to restrict
option writing so that no more than 5% of the Fund's total assets may be subject
to outstanding options at any time. The Board of Directors may change these
restrictions whenever such changes appear to be in the best interest of the
Fund.
PORTFOLIO TURNOVER
Although the Fund does not intend to engage in substantial
short-term trading, it may, in order to take advantage of new investment
opportunities or to preserve gains or limit losses, sell portfolio securities
without regard to the length of time that they have been held. The Fund's annual
portfolio turnover rate was 15%, 13% and 18% in 2000, 2001 and 2002,
respectively. The portfolio turnover rate is determined by dividing the amount
of the lesser of the purchases or sales during the year by the average value of
the Fund's portfolio securities during such year. The portfolio turnover rate of
the Fund is not normally expected to exceed 75% but may do so if the Fund's
investment objective and policies in the light of market conditions require more
frequent trades.
5
PURCHASE AND REDEMPTION OF SHARES
Purchase and Redemption at Net Asset Value. Investors may
purchase or redeem shares of the Fund at the Fund's net asset value per share
next determined after receipt of an order for purchase or redemption as
described in the Prospectus.
Determination of Net Asset Value. Net asset value per share of
the Fund is determined as of 4:00 P.M., New York time. The Fund computes its net
asset value once daily on days the New York Stock Exchange is open for trading.
Purchase orders received prior to 4:00 P.M., New York time, on a trading day are
executed at the net asset value per share computed as of 4:00 P.M., New York
time, on such day. Orders received after 4:00 P.M., New York time, on a trading
day or on a day that is not a trading day are executed at the net asset value
per share computed as of 4:00 P.M., New York time, on the next trading day.
The net asset value per share of the Fund is determined by
computing the total value of all securities and other assets of the Fund,
subtracting all of its liabilities and then dividing by the total number of
shares of the Fund outstanding. For purposes of such computation, a security
listed on a national securities exchange is valued at the last reported sale
price thereof on the exchange where the security is principally traded. A
security traded on the NASDAQ National Market System is valued at the "Official
Closing Price" as reported by NASDAQ. If no trade occurs on such exchange or
system on the date of computation, such security will be valued at the mean of
the last bid and asked prices on such day on such exchange or system.
Securities not listed on a national securities exchange or on
the NASDAQ National Market System but traded in an over-the-counter market are
valued at the average of the last bid and asked prices prior to the computation.
Short-term interest-bearing investments for which market quotations are not
available are valued at cost plus discount earned, which the Board of Directors
has determined to be fair value. Other securities are valued at their fair
value, as determined in good faith by the Board of Directors of the Fund.
Securities underlying outstanding call options written by the
Fund are valued at their market price as determined above. Premiums received on
the sale of call options are included in net asset value; however, the current
market value of outstanding options written by the Fund is deducted in computing
net asset value. The current market value of an option listed on an organized
securities exchange is based on the last sale price on such exchange prior to
4:00 P.M., New York time, or, if none, the mean of the last bid and asked prices
as of 4:00 P.M., New York time.
Procedure for Purchasing and Redeeming Shares. Shares are
purchased through the Fund's Distributor, Shay Financial Services, Inc., or by
sending money directly to the Fund. Procedures for purchasing and selling shares
are described in the Prospectus.
Investors may also purchase shares of the Fund through
authorized broker/dealers or other financial intermediaries such as banks,
401(k) plans, financial advisers and financial supermarkets. These parties may
charge transaction fees and may set different minimum investments or limitations
on buying or selling shares. The intermediaries are responsible for
6
transmitting purchase orders and funds and for crediting their customers'
accounts following redemptions made in accordance with their customer agreements
and the Prospectus.
Redemption in Kind. The Fund has filed a Notification under
Rule 18f-1 under the Investment Company Act, pursuant to which it has undertaken
to pay in cash all requests for redemption by any shareholder of record, limited
in amount with respect to each shareholder during any 90-day period to the
lesser of (i) $250,000, or (ii) 1% of the net asset value of the Fund at the
beginning of the 90-day period. The Fund reserves the right to pay redemption
proceeds in excess of this amount in kind if it is deemed to be in the best
interest of the Fund to do so.
In making a redemption in kind, the Fund reserves the right to
select from each portfolio holding a number of shares that will reflect the
portfolio make-up and the value of which (determined on the same basis used to
compute the net asset value of the shares being redeemed) will approximate the
value of the Fund shares being redeemed or to select from one or more portfolio
investments shares approximately equal in value to the total value of the Fund
shares being redeemed. Any shortfall will be made up in cash.
Investors receiving an in-kind redemption payment will incur a
brokerage charge on the disposition of the securities through a broker.
PERFORMANCE INFORMATION
The following table sets forth the total return on an
investment in the Fund for the one-, three-, five- and ten-year periods ended
December 31, 2002, and the average annual total return (before and after federal
income taxes) for such periods:
M.S.B. FUND, INC. TOTAL RETURN DATA
PERIODS ENDED DECEMBER 31, 2002
----------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ----------- ----------- ------------
Total Return before Taxes................. -15.08% -13.60% 20.15% 178.08%
Average Annual Return before Taxes........ -15.08% -4.76% 3.74% 10.77%
Average Annual Return after Taxes on
Distributions............................. -16.47% -6.13% 2.17% 7.69%
Average Annual Return after Taxes on
Distributions and Sale of Fund Shares..... -9.26% -3.91% 2.94% 7.83%
The foregoing information is a statement of the past record of
the Fund and should not be construed as a representation or prediction of future
results. The investment return and principal value of an investment in the Fund
will fluctuate with changing market conditions so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Comparisons
of total returns on a year-to-year basis may facilitate an understanding of how
7
changing market conditions affect the Fund. The average annual total return
permits an investor to identify the overall rate of return achieved by the Fund
during a multi-year period without regard to year-to-year variations.
Total Return before Taxes shows the percentage change in the
value of an investment in the Fund over the specified periods, assuming (i) a
hypothetical investment of $1,000 at the beginning of the period, (ii)
reinvestment of all dividends and distributions, (iii) deduction of all
applicable charges and expenses and (iv) a complete redemption at the end of the
period, without taking into account any federal, state or local income taxes
that may be payable by an investor. The Fund's Average Annual Total Return
before Taxes represents the annual compounded growth rate that would produce the
Total Return before Taxes achieved over the applicable period. For example, as
indicated in the table above, an average annual rate of return of 3.74% before
taxes would produce a total return of 20.15% over a five-year period.
The Average Annual Return after Taxes on Distributions assumes
the reinvestment of all dividends and distributions after payment of federal
income taxes on the dividends and distributions. The Average Annual Return after
Taxes on Distributions and Sale of Fund Shares reflects both the effect of
federal income taxes on dividends and distributions and any federal income tax
on capital gains realized upon sale of the shares. After-tax returns are
calculated using the historical highest individual federal marginal income tax
rates and do not reflect the impact of state and local taxes. Actual after-tax
returns depend on an investor's tax situation and may differ from those shown,
and after-tax returns shown are not relevant to investors who hold their Fund
shares through tax-deferred arrangements such as 401(k) plans or individual
retirement accounts. The return after taxes on distributions and sale of Fund
shares for certain periods is higher than the return before taxes and the return
after taxes on distributions because the method of calculation assumes generally
that you can use the capital loss realized upon the sale of Fund shares to
offset income of the same tax character from other sources, thereby reducing the
amount of tax you otherwise might owe.
INCOME TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
The following is a summary of certain additional federal
income tax considerations generally affecting the Fund and its shareholders that
are not described in the Prospectus. It does not purport to deal with all
aspects of U.S. federal income taxation that may be relevant to the Fund or the
Fund's shareholders. Because everyone's tax situation is unique, you are urged
to consult your tax professional regarding the federal, state and local tax
consequences that may be applicable to you.
The Fund has elected to qualify, and intends to remain
qualified, as a regulated investment company under Subchapter M of the Internal
Revenue Code. As a regulated investment company, the Fund is not subject to
federal income tax on the portion of its net investment income (i.e., its
investment company taxable income, as that term is defined in the Internal
Revenue Code, without regard to the deduction for dividends paid) and net
capital gain (i.e., the excess of net long-term capital gain over net short-term
capital loss) that it distributes to shareholders, provided that it distributes
at least 90% of its net investment income for the taxable year and satisfies
certain other requirements of the Internal Revenue Code relating principally to
the nature of its income and assets.
8
It is the Fund's policy to distribute all of its net
investment income (income from dividends and interest, less expenses) and net
short-term capital gain, if any, as ordinary income dividends and to distribute
substantially all net long-term capital gain (net of short-term capital loss) on
sales of portfolio securities as capital gain distributions. Any net capital
loss realized by the Fund for a tax year may be carried over by the Fund to
offset capital gain realized by the Fund for eight years following the year of
the loss. If the Fund should fail to qualify for Subchapter M status, it would
be subject to federal corporate income tax on its net investment income and
capital gains. In addition, distributions to shareholders generally would be
taxed as corporate dividends at ordinary income rates, and no portion of the
dividends would be afforded capital gains treatment. In the event the Fund fails
to distribute to shareholders in a calendar year an amount equal to the sum of
(i) 98% of its ordinary income (excluding capital gain), (ii) 98% of its capital
gain net income (determined as of the twelve-month period ending October 31),
and (iii) the amount, if any, of ordinary income and capital gain not
distributed in the preceding calendar year, it would be subject to a
non-deductible 4% excise tax on the amount required to be but not distributed.
Because the Fund expects to distribute all of its net investment income and net
capital gain, it does not expect to incur a liability for this tax.
OFFICERS AND DIRECTORS OF THE FUND
The directors of the Fund, in addition to reviewing the
actions of the Fund's Investment Adviser, decide upon matters of general policy
at their regular meetings. The Fund's officers supervise the business operations
of the Fund.
The Fund has nine directors who are elected for staggered
terms of three years each. All directors must be shareholders. The President and
First Vice President must be directors.
The directors and officers of the Fund, together with their
addresses and ages, their positions with the Fund, their length of service, the
years of expiration of their terms as directors and officers and their principal
occupations for the last five years and other directorships are set forth in the
following table. The Fund Complex that includes the Fund consists of (1) the
Fund, (2) Asset Management Fund and (3) Asset Management Fund Large Cap Equity
Institutional Fund, Inc., each of which is a registered investment company for
which Shay Assets Management, Inc. acts as investment adviser.
9
POSITION(S) HELD
WITH THE FUND AND EXPIRATION
NAME, ADDRESS AND AGE LENGTH OF SERVICE OF TERM PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- --------------------- ----------------- ------------- ----------------------------------------------------
INTERESTED DIRECTORS
JOSEPH R. FICALORA* President since 2003 President and Chief Executive Officer and a director
615 Merrick Avenue 1997 of New York Community Bancorp Inc. and President of
Westbury, NY 11590 Director since 1995 2005 Queens County Savings Bank, one of its operating
Age: 56 divisions.
MICHAEL J. GAGLIARDI* First Vice President 2003 Executive Vice President of Richmond County Savings
913 Cranford Avenue since 1997 Bank (1999-2001); President, Chief Executive
Westfield, NJ 07090 Director since 1991 2005 Officer and a director of Ironbound Bank located in
Age: 62 Newark, NJ, and its holding company, Ironbound
Bankcorp, NJ (1993-1999).
RODGER D. SHAY+ Vice President and 2003 Chairman and sole director of the Fund's Investment
1000 Brickell Avenue Assistant Secretary Adviser, Shay Assets Management, Inc.; Chairman and
Miami, FL 33131 since 1995 sole director of the Fund's distributor, Shay
Age: 66 Director since 2001 2003 Financial Services, Inc.; Chairman, sole director
and President of Shay Investment Services, Inc., an
enterprise which owns 100% of Shay Assets
Management, Inc., and Shay Financial Services, Inc.
NON-INTERESTED
DIRECTORS
TIMOTHY A. DEMPSEY Director since 1997 2003 Formerly Chairman of the Board and Chief Executive
36 Waterbury Road Officer of Warwick Community Bancorp, Inc. and
P.O. Box 13 Chairman of the Board of its principal subsidiary,
Warwick, NY 10990-0591 The Warwick Savings Bank.
Age: 69
DAVID FREER, JR. Director since 1983 2004 Executive Vice President and Director of Atlantic
13 Greatview Lane States Mortgage Corporation.
P.O. Box 732
Highland, NY 12528
Age: 63
NUMBER OF
PORTFOLIOS IN
FUND
COMPLEX OTHER DIRECTORSHIPS
NAME, ADDRESS AND AGE OVERSEEN HELD +
- --------------------- ------------- --------------------
INTERESTED DIRECTORS
JOSEPH R. FICALORA* 2 Asset Management Fund
615 Merrick Avenue Large Cap Equity
Westbury, NY 11590 Institutional Fund,
Age: 56 Inc.; RSI Retirement
Trust
MICHAEL J. GAGLIARDI* 1 None
913 Cranford Avenue
Westfield, NJ 07090
Age: 62
RODGER D. SHAY+ 7 Asset Management Fund;
1000 Brickell Avenue Horizon Bank
Miami, FL 33131
Age: 66
NON-INTERESTED
DIRECTORS
TIMOTHY A. DEMPSEY 1 None
36 Waterbury Road
P.O. Box 13
Warwick, NY 10990-0591
Age: 69
DAVID FREER, JR. 1 None
13 Greatview Lane
P.O. Box 732
Highland, NY 12528
Age: 63
10
POSITION(S) HELD
WITH THE FUND AND EXPIRATION
NAME, ADDRESS AND AGE LENGTH OF SERVICE OF TERM PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- --------------------- ----------------- ------------ ---------------------------------------------------
DAVID F. HOLLAND Director since 1997 2003 Chief Executive Officer (since 1986) and Chairman
17 New England Executive of the Board (since 1989) of Boston Federal Savings
Park Bank and Chairman and Chief Executive Officer of
Burlington, MA 01803 its holding company, BostonFed Bancorp Inc. (since
Age: 61 its inception in 1995).
JOSEPH L. MANCINO Director since 2001 2004 Chairman of the Board and Chief Executive Officer
1 Jericho Plaza of The Roslyn Savings Bank and Vice Chairman of the
Jericho, NY 11753-8905 Board, President and Chief Executive Officer of Roslyn
Age: 65 Bancorp, Inc., the holding company for the Bank.
WILLIAM A. McKENNA, JR. Director since 1988 2004 Chairman of the Board and Chief Executive Officer
71-02 Forest Avenue of Ridgewood Savings Bank.
Ridgewood, NY 11385
Age: 66
OTHER OFFICERS
EDWARD E. SAMMONS, JR. Vice President and 2003 President of the Fund's investment adviser, Shay
230 West Monroe Street Secretary since Assets Management, Inc.; Executive Vice President
Chicago, IL 60606 1995 of the Fund's distributor, Shay Financial Services,
Age: 63 Inc.; Executive Vice President of Shay Investment
Services, Inc.
JOHN J. McCABE Vice President 2003 Senior Vice President of Shay Assets Management,
200 Park Avenue, 45th Floor since 1995 Inc.
New York, NY 10166
Age: 59
NUMBER OF
PORTFOLIOS IN
FUND
COMPLEX OTHER DIRECTORSHIPS
NAME, ADDRESS AND AGE OVERSEEN HELD +
- --------------------- ------------- -------------------
DAVID F. HOLLAND 7 Asset Management Fund
17 New England Executive
Park
Burlington, MA 01803
Age: 61
JOSEPH L. MANCINO 2 Asset Management Fund
1 Jericho Plaza Large Cap Equity
Jericho, NY 11753-8905 Institutional Fund,
Age: 65 Inc.; RSI Retirement
Trust
WILLIAM A. McKENNA, JR. 8 Asset Management Fund;
71-02 Forest Avenue Asset Management Fund
Ridgewood, NY 11385 Large Cap Equity
Age: 66 Institutional Fund,
Inc.; RSI Retirement
Trust
OTHER OFFICERS
EDWARD E. SAMMONS, JR. N/A None
230 West Monroe Street
Chicago, IL 60606
Age: 63
JOHN J. McCABE N/A None
200 Park Avenue, 45th Floor
New York, NY 10166
Age: 59
11
POSITION(S) HELD
WITH THE FUND AND EXPIRATION
NAME, ADDRESS AND AGE LENGTH OF SERVICE OF TERM PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- --------------------- ----------------- ------------ ---------------------------------------------------
MARK F. TRAUTMAN Vice President 2003 Vice President of Shay Assets Management, Inc.;
200 Park Avenue, 45th Floor since 1995 Portfolio Manager of the Fund and Asset Management
New York, NY 10166 Fund Large Cap Equity Institutional Fund, Inc.
Age: 37
TRENT M. STATCZAR Treasurer since 2003 Financial Services Director of BISYS Fund Services
3435 Stelzer Road 2002 Ohio, Inc. since September 2000; Financial Services
Suite 1000 Manager of BISYS Fund Services Ohio, Inc. (January
Columbus, OH 43219 1998 to September 2000); Financial Services
Age: 31 Associate Manager of BISYS Fund Services Ohio, Inc.
(November 1997 to January 1998).
ALAINA V. METZ Assistant Secretary 2003 Vice President of BISYS Fund Services Ohio, Inc.
3435 Stelzer Road since 1999 since 2002; Chief Administrative Officer of BISYS
Columbus, OH 43219 Assistant Treasurer 2003 Fund Services Ohio, Inc. (1995-2002).
Age: 36 since 2002.
NUMBER OF
PORTFOLIOS IN
FUND
COMPLEX OTHER DIRECTORSHIPS
NAME, ADDRESS AND AGE OVERSEEN HELD +
- --------------------- ------------- -------------------
MARK F. TRAUTMAN N/A None
200 Park Avenue, 45th Floor
New York, NY 10166
Age: 37
TRENT M. STATCZAR N/A None
3435 Stelzer Road
Suite 1000
Columbus, OH 43219
Age: 31
ALAINA V. METZ N/A None
3435 Stelzer Road
Columbus, OH 43219
Age: 36
- ----------------------------
+ Directorships held in (1) any other investment companies registered under
the Investment Company Act of 1940, (2) any company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") or (3) any company subject to the
requirements of Section 15(d) of the Exchange Act.
* These directors are regarded as interested persons under the Investment
Company Act by virtue of their positions as officers of the Fund.
o This director is an "interested person" of the Fund as defined in the
Investment Company Act because he is officer of the Fund and holds certain
positions with the Fund's Investment Adviser and Distributor.
12
The Fund has a standing Executive Committee, composed of
Messrs. Joseph R. Ficalora* (Chairman), David Freer, Jr., Michael J. Gagliardi*
and Rodger D. Shay+. Subject to limitations provided by law or the Fund's
by-laws, the Executive Committee is authorized to exercise the power and
authority of the Board of Directors as may be necessary during the intervals
between meetings of the Board of Directors. The Executive Committee did not meet
during 2002.
The Fund has a standing Nominating Committee, composed of
Messrs. William A. McKenna, Jr. (Chairman), Joseph L. Mancino and David Freer,
Jr., whose function is to recommend nominees for election as directors and
officers of the Fund. The Committee holds informal discussions as necessary
concerning its activities and met twice during 2002. The Nominating Committee
will consider nominees proposed by stockholders. Stockholders who desire to
propose a nominee should write to the Secretary of the Fund and furnish adequate
biographical data, including information concerning the qualifications of the
proposed nominee.
The Fund has a standing Audit Committee composed of Messrs.
Timothy A. Dempsey (Chairman), David F. Holland and Joseph L. Mancino. The Audit
Committee has responsibility for the selection and termination of the Fund's
independent auditors. The Audit Committee also reviews with the Fund's
independent auditors the scope and results of the annual audit and matters
having a material effect upon the Fund's financial statements. The Audit
Committee met twice during 2002.
CERTAIN OTHER AFFILIATIONS AND BUSINESS RELATIONSHIPS
Certain directors and officers of the Fund also are (or in the
two most recently completed calendar years have been) directors, trustees,
officers or employees of Fund's Investment Adviser or Distributor (or their
affiliates) or of Asset Management Fund or Asset Management Fund Large Cap
Equity Institutional Fund, Inc., which are registered investment companies
having the same investment adviser as the Fund, as indicated in the following
table.
- --------------------------
* This director is an "interested person of the Fund as defined in the
Investment Company Act of 1940 because he is an officer of the Fund.
+ This Investor is an "interested person" under the Investment Company Act of
1940 because he is an officer of the Fund and holds certain positions with
the Fund's Investment Adviser and Distributor and their affiliates.
13
POSITION(S) HELD WITH POSITION(S) HELD WITH THE
POSITION(S) HELD WITH ASSET MANAGEMENT FUND INVESTMENT ADVISER AND
NAME OF DIRECTOR OR ASSET MANAGEMENT LARGE CAP EQUITY DISTRIBUTOR AND THEIR
OFFICER OF THE FUND FUND INSTITUTIONAL FUND, INC. AFFILIATES
- ------------------- --------------------- ------------------------ ----------------------------
Joseph R. Ficalora None Director None
David F. Holland Trustee None None
Joseph L. Mancino None Director and President None
John J. McCabe None Vice President Senior Vice President of the
Investment Adviser
William A. McKenna, Jr. Trustee Director None
Edward E. Sammons, Jr. President Vice President and President of the Investment
Secretary Adviser; Executive Vice
President of the Distributor
Rodger D. Shay Chairman of the Board Vice President and Chairman and director of the
and Trustee Assistant Secretary Investment Adviser and the
Distributor; director and
majority stockholder of Shay
Investment Services, Inc.,
which controls the Fund's
Investment Adviser and
Distributor
Mark F. Trautman None Vice President Vice President of the
Investment Adviser
Trent M. Statczar Treasurer Treasurer None
Alaina V. Metz Assistant Secretary Assistant Secretary None
14
DIRECTORS' AND OFFICERS' INVESTMENT IN THE FUND
The following table sets forth the dollar range of shares of
the Fund beneficially owned by each director as of December 31, 2002.
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL FUNDS OVERSEEN
DOLLAR RANGE OF EQUITY BY DIRECTOR IN FAMILY OF
NAME OF DIRECTOR SECURITIES IN THE FUND INVESTMENT COMPANIES
- ----------------------------------------- -------------------------- ---------------------------------
Timothy A. Dempsey....................... $50,001 - $100,000 $50,001 - $100,000
Harry P. Doherty*........................ Over $100,000 Over $100,000
Joseph R. Ficalora....................... Over $100,000 Over $100,000
David Freer, Jr. ........................ Over $100,000 Over $100,000
Michael J. Gagliardi..................... Over $100,000 Over $100,000
David F. Holland......................... $10,001 - $50,000 $10,001 - $50,000
Joseph L. Mancino........................ $10,001 - $50,000 $10,001 - $50,000
William A. McKenna, Jr. ................. Over $100,000 Over $100,000
Rodger D. Shay........................... Over $100,000 Over $100,000
As of April 4, 2003, all officers and directors of the Fund,
as a group, owned of record or beneficially approximately 5.9% of the
outstanding shares of the Fund.
COMPENSATION OF DIRECTORS AND OFFICERS
Directors of the Fund receive compensation for their services
as directors of the Fund consisting of:
- a $6,000 annual retainer per director, payable in four quarterly
installments
- a per-meeting fee of $1,000 for each meeting of the Board of Directors
attended in person
- a per-meeting fee of $250 for each meeting of a Board committee
attended in person on a date on which a meeting of the Board of
Directors is not held.
The Board of Directors holds its regular meetings quarterly.
Directors do not receive any additional fee for telephonic meetings. Directors
also are reimbursed for reasonable expenses incurred in attending meetings or
otherwise incurred in connection with their attention to the affairs of the
Fund.
In recognition of the additional responsibilities and duties
performed by the President of the Fund, the President receives an additional
annual retainer of $2,000, payable in
- ---------------------------
* Mr. Doherty resigned as a director in January, 2003
15
four quarterly installments, which is in addition to the compensation the
President receives as a director.
The other officers of the Fund do not receive any compensation
from the Fund other than the compensation they may receive as directors of the
Fund. No fee is payable for telephonic meetings of the Board of Directors or any
committee. No pension or retirement benefits are paid to directors or executive
officers.
The total compensation paid to the directors and officers of
the Fund for service during 2002 was $69,250. The total amount of expenses
incurred during 2002 for which the directors were reimbursed was $6,225. The
Fund does not provide officers or directors, directly or indirectly, with any
pension or retirement benefits.
The following table sets forth the aggregate compensation
received by each director of the Fund from the Fund and any other investment
company having the same investment adviser for services as a director or officer
during 2002. Such compensation does not include reimbursements to the directors
for their expenses incurred in connection with their activities as directors.
COMPENSATION TABLE
TOTAL COMPENSATION
AGGREGATE FROM THE FUND
POSITIONS WITH COMPENSATION FROM AND FUND COMPLEX
NAME OF DIRECTOR THE FUND THE FUND (3 FUNDS)
- ---------------- ----------------------- --------------------- --------------------------
Timothy A. Dempsey................. Director $ 8,750 $ 8,750
Harry P. Doherty................... Director+ $ 8,500 $ 24,500*
Joseph R. Ficalora................. Director and President $ 10,000 $ 24,000*
David Freer, Jr. .................. Director $ 8,500 $ 8,500
Michael J. Gagliardi............... Director and First Vice $ 8,500 $ 8,500
President
David F. Holland................... Director $ 8,750 $ 29,625**
Joseph L. Mancino ................. Director $ 7,750 $ 20,750*
William A. McKenna, Jr. ........... Director $ 8,500 $ 26,500***
Rodger D. Shay..................... Director, Vice President $ 0 $ 0
and Assistant Secretary
- -----------------------------
* Includes compensation of $14,000 and $13,000 received by Messrs. Ficalora
and Mancino as directors and $16,000 received by Mr. Doherty as a director
and officer of Asset Management Fund Large Cap Equity Institutional Fund,
Inc. (formerly Institutional Investors Capital Appreciation Fund, Inc.).
** Includes compensation of $20,875 received by Mr. Holland as a director of
Asset Management Fund.
*** Includes compensation of $14,000 received by Mr. McKenna as a director of
Asset Management Fund Large Cap Equity Institutional Fund, Inc. and $4,000
received by Mr. McKenna as a director of Asset Management Fund.
+ Retired as a director, effective January, 2003.
16
ANTI-MONEY LAUNDERING PROCEDURES
The Fund has established an anti-money laundering compliance
program (the "AML Program") as required by the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001 (the "USA Patriot Act"). In order to ensure compliance with this law,
the AML Program provides for the development of internal practices, procedures
and controls, designation of an anti-money laundering compliance officer, an
ongoing training program and an independent audit function to determine the
effectiveness of the AML Program. Procedures to implement the AML Program
include, but are not limited to, determining that the Fund's Distributor and
transfer agent have established proper anti-money laundering procedures,
reporting suspicious or fraudulent activity and a review of all new account
applications. In compliance with the AML Program, the Fund's Distributor or
transfer agent will verify certain information on your account application. The
Fund will not transact business with any person or entity whose identity cannot
be adequately verified under the provisions of the USA Patriot Act. Account
applications that are incomplete or that contain essential identifying
information which cannot be verified will not be accepted.
CODE OF ETHICS
The Fund, the Investment Adviser and the Distributor have
adopted a joint Code of Ethics that governs the conduct of employees of the
Fund, the Investment Adviser and the Distributor who may have access to
information about the Fund's securities transactions. The Code permits personnel
subject to the Code to purchase securities that may also be purchased by the
Fund but recognizes that such persons owe a fiduciary duty to the Fund's
shareholders and requires that they place the interests of shareholders ahead of
their own interests. Among other things, the Code requires pre-clearance of
trading of initial public offerings and limited offerings by investment
personnel and requires reporting of personal securities transactions. Violations
of the Code are subject to review by the directors and could result in
penalties.
INVESTMENT ADVISORY AND OTHER SERVICES
Shay Assets Management, Inc. serves as the Investment Adviser
of the Fund; BISYS Fund Services Ohio, Inc. serves as its administrator and
transfer agent; and The Bank of New York is the custodian for the Fund.
INVESTMENT ADVISER
Shay Assets Management, Inc. (the "Investment Adviser") makes
investment decisions for the Fund and is responsible for placing purchase and
sale orders for portfolio securities and other investments. Under the investment
advisory agreement between the Investment Adviser and the Fund (the "Investment
Advisory Agreement"), the Investment Adviser receives a fee from the Fund
computed at the annual rate of 0.75% of the first $100,000,000 of the Fund's
average daily net assets and 0.50% of the Fund's average daily net assets in
excess of $100,000,000. The fee payable to the Investment Adviser is reduced
(but not below zero) to the extent the expenses of the Fund (exclusive of
professional fees, such as legal and audit fees, directors' fees and expenses
and distribution expenses, if any, payable under Rule 12b-1) exceed 1.10% of the
Fund's average daily net assets during any fiscal year during the
17
term of the Fund's agreement with the Investment Adviser. This limitation
resulted in a waiver of the Investment Adviser's fees totaling $26,674 for the
year ended December 31, 2002. The Investment Advisory Agreement also provides
for a reduction in the fee payable to the Investment Adviser to the extent the
expenses of the Fund would exceed any applicable limit established pursuant to
the statutes or regulations of any jurisdictions in which the Fund's shares are
qualified for offer and sale. The total amounts paid by the Fund to the
Investment Adviser for the years ended December 31, 2000, 2001 and 2002 in
respect of investment advisory services were $454,892, $413,907 and $416,240,
respectively, representing 0.66%, 0.71% and 0.70% of the Fund's average daily
net assets (after all fee reductions and expense limitations). The Investment
Adviser pays for the Fund's legal counsel to prepare the minutes of meetings of
the Board of Directors and its committees to the extent not prepared by the
Fund's administrator.
In determining whether to renew the Investment Advisory
Agreement each year, the Board of Directors evaluates information provided by
the Investment Adviser in accordance with Section 15(c) of the Investment
Company Act of 1940. The Investment Advisory Agreement was most recently renewed
by the Board of Directors at its meeting held in April 2003. The Board of
Directors considered a number of factors in deciding to renew the agreement,
including the nature and quality of services provided to the Fund, fees and
expenses borne by the Fund, the investment performance of the Fund, the amount
and structure of the investment advisory fee paid by the Fund and the financial
results and financial condition of the Investment Adviser.
In reviewing the quality of services provided to the Fund, the
Board of Directors noted the nature and quality of the investment analysis and
the discipline of the investment style used by the Investment Adviser in
managing the Fund's portfolio. The directors also considered the quality and
experience of the Investment Adviser's organization in general and the
investment professionals having principal responsibility for the Fund's
investments. In evaluating the investment performance of the Fund, the Board of
Directors noted the importance of evaluating the performance of the Fund over an
entire market cycle, including both periods of market appreciation and periods
of market declines and that in particular short-term periods the Fund's
performance might deviate significantly from its peer group or market averages.
The directors also noted that over the most recent calendar year prior to their
consideration of the renewal of the Investment Advisory Agreement the Fund
performed significantly better than its mutual fund peer group and the market
averages represented by the Standard & Poor's 500 Index and performed
competitively with the Dow Jones Industrial Average and that over longer periods
of three, five and ten years, the Fund significantly outperformed or was
competitive with its peer group or the market averages.
In reviewing the fees and expenses borne by the Fund, the
Board of Directors noted, among other things, that the investment advisory fee
paid by the Fund and the Fund's overall expense ratio were competitive with
those of other similar funds of similar size. The Board of Directors also
considered the expense limitation contained in the Investment Advisory Agreement
and steps taken by the Investment Adviser to help control the Fund's
administration and transfer agency expenses.
Based on their review, the Board of Directors (including a
majority of the non-interested directors of the Fund) concluded, among other
things, that the investment advisory fee,
18
when evaluated in light of soft-dollar brokerage arrangements that benefited the
Investment Adviser and other relevant circumstances, did not result in an
excessive profit to the Investment Adviser, that the investment advisory fees
and other expenses of the Fund were fair and reasonable, both absolutely and in
comparison with those of other funds in the industry, and that the Fund had
received reasonable value in return for paying the investment advisory fee under
the Investment Advisory Agreement.
The Investment Adviser is a registered investment adviser
under the Investment Advisers Act of 1940 and serves as investment adviser to
Asset Management Fund, a registered investment company comprising six
fixed-income portfolios with aggregate net assets of approximately $4.7 billion
at December 31, 2002, and to Asset Management Fund Large Cap Equity
Institutional Fund, Inc. (formerly known as Institutional Investors Capital
Appreciation Fund, Inc.), a registered investment company with net assets of
approximately $91 million as of December 31, 2002.
The Investment Adviser, Shay Assets Management, Inc., is a
Florida corporation that is controlled by Rodger D. Shay, who is a director and
a Vice President of the Fund. The Investment Adviser is a wholly-owned
subsidiary of Shay Investment Services, Inc., which is the holding company for
the Fund's Investment Adviser and Distributor and certain other related
companies engaged primarily in securities-related businesses. Rodger D. Shay is
the majority stockholder of Shay Investment Services, Inc. The Investment
Adviser's principal office is located at 230 West Monroe Street, Chicago,
Illinois 60606. Shay Assets Management, Inc. (together with its predecessor,
Shay Assets Management Co.) has served as the Fund's Investment Adviser since
May 19, 1995. The Fund's current Investment Advisory Agreement with Shay Assets
Management, Inc. was approved by the shareholders of the Fund on November 13,
1997.
Under the Investment Advisory Agreement, the Investment
Adviser is not liable to the Fund for any error of judgment or mistake of law or
for any loss suffered by the Fund, except a loss resulting from (i) a breach of
fiduciary duty with respect to the receipt of compensation for services, (ii) a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or (iii) reckless disregard by it of its
obligations and duties under the agreement.
The Investment Advisory Agreement will continue in effect from
year to year, subject to termination by the Fund or the Investment Adviser as
described below, if such continuance is approved at least annually by the vote
of the Fund's Board of Directors and a majority of the directors of the Fund who
are not "interested persons" of the Fund or of the Investment Adviser.
The Investment Adviser may terminate the Investment Advisory
Agreement upon 90 days' written notice to the Fund. The Investment Advisory
Agreement can be terminated at any time without penalty by the Fund upon 30
days' written notice to the Investment Adviser. The Investment Advisory
Agreement will terminate automatically in the event of its assignment.
19
Certain directors and officers of the Fund also are directors,
officers or employees of the Investment Adviser and its affiliates. See "Certain
Other Affiliations and Business Relationships."
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN
Administrator and Transfer Agent. BISYS Fund Services Ohio,
Inc. ("BISYS"), 3435 Stelzer Road, Columbus, Ohio 43219, is the Fund's
administrator and transfer agent. Pursuant to the terms of the Administration
and Fund Accounting Agreements between the Fund and BISYS, BISYS performs
various administrative services for the Fund, including: (i) maintenance of the
Fund's books and records; (ii) preparation of various filings, reports,
statements and returns filed with governmental authorities or distributed to
shareholders of the Fund and (iii) computation of the Fund's net asset value for
purposes of sales and redemptions of shares.
The Fund pays BISYS for its services a fee computed at the
annual rate of 0.10% of the first $200 million of the Fund's average net assets,
0.075% of the next $200 million of average net assets, with further reductions
in the applicable rate for net assets in excess of $400 million, subject to a
minimum annual charge of $80,400. BISYS has served as the Fund's administrator
and fund accountant since August 1, 1999. The amounts paid to BISYS for such
services for the years 2000, 2001 and 2002 were $60,651, $58,053 and $55,498,
respectively, after the fee waivers described below.
Certain employees of BISYS also are officers of the Fund. See
"Officers and Directors of the Fund."
Custodian. The Bank of New York, One Wall Street, New York,
New York, is the custodian of the Fund's investments.
Fee Waiver. BISYS, which acts as the Fund's transfer agent and
administrator, agreed to waive a portion (25%) of its transfer agent fees (other
than transaction charges and certain miscellaneous fees and out-of-pocket
expenses) and a portion (25%) of its minimum administration fee during 2002 and
has agreed to continue this waiver through the end of 2003. The greater of the
adjusted minimum administration fee (giving effect to the waiver) or the
calculated asset based administration fee will be charged to the Fund on a
monthly basis. Transaction charges, miscellaneous fees and out-of-pocket
expenses are billed as they are incurred. This arrangement resulted in the
waiver of $24,902 in fees by the administrator during 2002. The waiver is
reviewed by the Fund and BISYS at the end of each calendar year.
DISTRIBUTOR
Shay Financial Services, Inc. (the "Distributor") is the
distributor of the Fund. The Distributor is a Florida corporation that is
controlled by Rodger D. Shay, who is a director and an officer of the Fund. The
principal business address of the Distributor is 230 West Monroe Street,
Chicago, Illinois 60606.
The Fund has authorized the Distributor to undertake certain
activities in connection with the continuous offer and sale of shares of the
Fund, including informing
20
potential investors about the Fund through written materials, seminars and
personal contacts. The Distributor is obligated to use its best efforts to
effect sales of shares of the Fund, but has no obligation to sell any particular
number of shares. The Distributor does not receive any compensation from the
Fund in connection with such activities.
Certain directors and officers of the Fund also are directors,
officers or employees of the Distributor and its affiliates. See "Officers and
Directors of the Fund."
INDEPENDENT AUDITORS
Ernst & Young LLP, 1100 Huntington Center, 41 South High
Street, Columbus, Ohio 43215, independent auditors for the Fund, audit and
report on the Fund's financial statements and review the Fund's tax returns.
PURCHASE AND SALE OF PORTFOLIO SECURITIES
The primary aim of the Fund in the allocation of portfolio
transactions to various brokers is the attainment of best price and execution
consistent with obtaining investment research services and statistical
information at reasonable cost. The Investment Adviser is thus authorized to pay
a brokerage commission in excess of the commission that another broker might
have charged for effecting the same transaction in recognition of the value of
efficient execution and research and statistical information provided by the
selected broker. Transactions in portfolio securities were effected during the
calendar year 2002 through a total of 2 brokers, drawn from a list of brokers
selected by the Investment Adviser on the basis of their ability to provide
efficient execution of portfolio transactions and investment research and
statistical information. A large majority of the Fund's portfolio transactions
are executed on national securities exchanges through member firms. However,
when the Investment Adviser believes that a better price can be obtained for the
Fund, portfolio transactions may be executed in the third market. Portfolio
transactions in unlisted securities are executed in the over-the-counter market.
The brokerage list is reviewed continually in an effort to obtain maximum
advantage from investment research and statistical information made available by
brokers, and allocation among the brokers is made on the basis of best price and
execution consistent with obtaining research and statistical information at
reasonable cost. The total amounts of brokerage commissions paid in 2000, 2001
and 2002 were $22,925, $14,112 and $18,723, respectively. The Investment Adviser
monitors the reasonableness of commissions paid by the Fund based on its
experience in the market, and the Board of Directors periodically reviews the
reasonableness of such commissions as well.
In 2002, approximately 48% of the Fund's total brokerage
commissions were paid to brokers that provided investment research and
statistical information to the Investment Adviser. The research and statistical
information provided to the Investment Adviser consist primarily of written and
electronic reports and presentations analyzing specific companies, industry
sectors, the stock market and the economy. To the extent that the Investment
Adviser uses such research and information in rendering investment advice to the
Fund, the research and information tend to reduce the Investment Adviser's
expenses. The Investment Adviser may use research services and statistical
information furnished by brokers through which the Fund effects
21
securities transactions in servicing all of its accounts, and the Investment
Adviser may not use all such services in connection with the Fund.
Neither the Fund nor any of its officers or directors, nor its
Investment Adviser, is affiliated with any broker employed by the Fund in
connection with the purchase or sale of portfolio securities or other
investments.
EXPENSES OF THE FUND
The Fund is responsible for the payment of its expenses. Such
expenses include, without limitation, the fees payable to the Fund's Investment
Adviser, administrator, transfer agent and custodian; brokerage fees and
expenses; filing fees for the registration or qualification of the Fund's shares
under federal or state securities laws; taxes; interest; the cost of liability
insurance, fidelity bonds, indemnification expenses; legal and auditing fees and
expenses; any costs, expenses or losses arising out of any liability of, or
claim for damages or other relief asserted against, the Fund for violation of
any law; expenses of preparing and printing prospectuses, proxy materials,
reports and notices and of mailing the same to shareholders and regulatory
authorities; the compensation and expenses of the Fund's directors and officers
who are not affiliated with the Fund's Investment Adviser or administrator; and
any extraordinary expenses incurred by the Fund. Annual and semi-annual reports
to shareholders include a statement of operational expenses.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue five classes of shares, par
value $.001 each. At present, shares of only one class are outstanding ("Class
A"), and each Class A share represents a proportionate interest in the Fund's
existing investment portfolio. Shares of other classes, if and when issued,
would represent interests in other portfolios of investments which would be
invested in accordance with the separate investment objectives, policies and
restrictions that the Board of Directors may establish for such other
portfolios. The investment return and net asset value of shares of each class
would be determined separately from all other classes of shares and would be
based upon the investment results of that class's separate portfolio. The Board
of Directors may establish additional portfolios at any time. Each share has one
vote on all matters submitted to a vote of the shareholders, except that
shareholders of a particular portfolio would not be entitled to vote on matters
that affect only the interests of other portfolios. Shareholders of each
portfolio would vote separately as a class on all matters that affect their
portfolio, unless the interests of each portfolio are substantially identical,
in which case shareholders of all portfolios would vote in the aggregate. In the
event of the liquidation or dissolution of the Fund, the shareholders of each
portfolio would have priority over shareholders of all other portfolios with
respect to the assets of their respective portfolios. They also would be
entitled to receive a pro rata portion of the assets of that portfolio after
provision for the debts and expenses relating to that portfolio. All shares of
each class are entitled to share pro rata in all dividends and distributions
paid on shares of that class, including liquidating dividends. Shareholders do
not have any conversion or pre-emptive rights.
22
GENERAL INFORMATION
Statements contained in the Prospectus and this Statement of
Additional Information as to the contents of any contract or agreement or other
document referred to are not necessarily complete. In each instance, reference
is made to the copy of such contract, agreement or other document filed as an
exhibit to the Registration Statement of which the Prospectus and this Statement
of Additional Information form a part, each such statement being qualified in
all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the fiscal
year ended December 31, 2002, including the notes thereto and the report of
Ernst & Young LLP, contained in the Fund's Annual Report to shareholders for the
year ended December 31, 2002 (the "Annual Report") are incorporated herein by
reference. Ernst & Young LLP has audited such financial statements, and the
financial statements are incorporated by reference in reliance on the report of
Ernst & Young LLP and the authority of such firm as experts in accounting and
auditing. The financial highlights for the years prior to 2002 were audited by
other independent accountants. Except as set forth above, this Statement of
Additional Information does not incorporate any other portion of the Annual
Report.
The Fund will provide a copy of the Annual Report without
charge to each person to whom this Statement of Additional Information is
delivered. Investors should direct requests to the Fund in writing c/o the
Fund's Distributor, Shay Financial Services, Inc., 230 West Monroe Street,
Chicago, Illinois 60606, or by telephone at 800-982-1846.
23
M.S.B.
FUND, INC.
M.S.B. FUND, INC.
c/o Shay Financial Services, Inc.
230 West Monroe Street
Chicago, Illinois 60606
Telephone 800-661-3938
INVESTMENT ADVISER
Shay Assets Management, Inc.
200 Park Avenue
45th Floor
New York, New York 10166
DISTRIBUTOR
Shay Financial Services, Inc.
230 West Monroe Street
Chicago, Illinois 60606
ADMINISTRATOR, TRANSFER AGENT,
REGISTRAR AND DIVIDEND PAYING AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
CUSTODIAN
The Bank of New York
1 Wall Street
New York, New York 10286
LEGAL COUNSEL
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
INDEPENDENT AUDITORS
Ernst & Young LLP
1100 Huntington Center
41 South High Street
Columbus, Ohio 43215
This report is submitted for the general information of
shareholders of the M.S.B. Fund, but it may also be used as
sales literature when preceded or accompanied by the current
prospectus, which gives details about charges, expenses,
investment objectives, and operating policies of the Fund.
Read the prospectus carefully before investing or sending money.
[M.S.B. FUND, INC. LOGO]
ANNUAL REPORT
.............................
December 31, 2002
MESSAGE FROM THE PRESIDENT
Dear Shareholder:
Mark Twain once mused that October was a rough month for the stock market and
then went on to proclaim that the other rough months were November through
September. Unfortunately, after enduring three turbulent bear market years that
have resulted in a $7 trillion wealth implosion, his musing has lost some of its
luster.
Psychologists, sociologists, cultural anthropologists, economists and savvy
investors frequently observe that many of the wounds suffered in equity
investing are self-inflicted. It is no secret, for example, that far too many
investors allow intuition and emotion to displace sound logic and solid security
analysis when buying or selling stocks. Others permit their cognitive defenses
to falter and become easily duped by "talking heads" on financial news networks,
silver-tongued Wall Street "experts" and "quick buck" artists. Others place too
much emphasis on the short term and insufficient emphasis on past performance
and history.
These shortcomings became ever more apparent during the runaway bubble years of
1995 through 1999. Despite mounting losses, increased competition and sky high
equity valuations, legions of investors concluded that we were in a "new
economy," one that was information-driven and one in which investors could not
lose money by investing in technology, telecommunication, and Internet related
companies.
Given all the disturbing headlines focusing on geopolitical uncertainty, weapons
of mass destruction, a sputtering global economy, a soft domestic economy and
the ethical violations impacting Wall Street and the corporate suite, it is no
mystery why investors remain fearful and apprehensive. History, however,
repeatedly documents that both our capitalist economy and the stock market are
prone to periods of extreme optimism and pessimism. History also records the
following:
1. Since World War II, the U.S.A. has endured ten recessions. The typical
post-war recession has lasted about one year and the average recovery has run
on for about four and one-half years.
2. For every one year that the market has declined since the Standard and Poor's
Stock Index was first introduced in 1926, it has risen three years.
3. The longer investors hold stocks similar to those in the S&P 500 Stock Index
the probability of enjoying a profit rises and the chances of suffering a
loss are reduced. Ibbotson Associates, the well-known financial statistical
firm, has calculated that if an investor had held stocks for any period of
five consecutive years during the period from 1926 through 2001, there was a
90% probability of enjoying a gain and only a 10% probability of suffering a
loss.
4. The S&P 500 is down 42.4% after reaching its all time high in the first
quarter of 2000. Prior bear markets have been excellent buying opportunities
for sophisticated investors.
Although the S&P 500 and the Nasdaq Composite Index declined 22.09% and 31.53%,
respectively, for the year ended December 31, 2002, the M.S.B. Fund faired
better. It declined only 15.08%. The Fund's average annual returns for the five-
and ten-year periods ending December 31, 2002 were +3.74% and +10.77%
respectively. For the same time periods, the S&P 500 results were -0.58% and
+9.34%, respectively, and the Nasdaq results were -3.19% and +7.03%,
respectively. If a shareholder had invested $10,000 in the Fund at its inception
in 1964 and reinvested all capital gains and distributions in the Fund, the
investment would have grown to $502,536 by December 31, 2002.
Prudent investors recognize, especially during economic reversals and dramatic
equity downdrafts, that the price of a share of stock does not always reflect
the "intrinsic" or true "business value" of a company. During these emotional
times, attractive long-term buying opportunities can arise for investors that
incorporate solid investment principles in their security selection process.
Finally, I would like to take this opportunity to acknowledge the fine record
our portfolio management team of John McCabe, Mark Trautman and Chris Remo has
delivered over the last decade. As of June 30, 2002, the M.S.B. Fund, Inc. has
been awarded the coveted Five Stars from Morningstar, Inc., the leading mutual
fund performance rating corporation, for its over all track record, and has
earned five stars for its three-, five- and ten-year performance results as
well.
Sincerely,
/s/ Joseph R. Ficalora
Joseph R. Ficalora
President
1
M.S.B. FUND, INC.
INVESTMENT ACHIEVEMENT
The following information is a statement of the past record of the Fund and
should not be construed as a representation or prediction of future results. The
investment return and principal value of an investment in the Fund will
fluctuate with changing market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
The total return of the Fund for various periods is compared with the
Standard & Poor's 500 Composite Stock Price Index (S&P 500) and the Dow Jones
Industrial Average (DJIA), which are groups of unmanaged securities, and with
the Lipper Large Capitalization Core Funds Average, which is a broad equity fund
measurement. The S&P 500 and DJIA do not include a reduction of total return for
expenses. These results should be considered in light of the makeup of each
index, the investment objectives and portfolio composition of the Fund and the
periods indicated.
<Table>
<Caption>
AVERAGE ANNUAL
TOTAL RETURN
-----------------------------
PERIODS ENDING 12/31/02
-----------------------------
1 Year 5 Years 10 Years
------ ------- --------
M.S.B. FUND, INC. ..... (15.08%) 3.74% 10.77%
Lipper Large
Capitalization Core
Funds Average........ (23.49%) (1.90%) 7.55%
Dow Jones Industrial
Average(1)........... (15.04%) 2.87% 12.05%
Standard & Poor's 500
Composite Stock Price
Index(2)............. (22.09%) (0.58%) 9.34%
</Table>
* Assumes reinvestment of all dividends and distributions and the deduction of
all applicable fees and expenses. Data for the Lipper Large Capitalization
Core Funds Average, the S&P 500 and DJIA are from Lipper, Inc. The S&P 500
and DJIA do not include a reduction in total return for expenses.
The following graph shows that an investment of $10,000 in the Fund on
December 31, 1992 would have been worth $27,806 on December 31, 2002, assuming
all dividends and distributions have been reinvested. A similar investment in
the S&P 500, over the same period, would have grown to $24,415.
M.S.B. FUND, INC.
CUMULATIVE TOTAL RETURN
[LINE GRAPH]
<Table>
<Caption>
MSB FUND S&P
-------- ---
1992 10000 10000
1993 12064 10999
1994 11861 11143
1995 14822 15314
1996 17959 18847
1997 23144 25135
1998 30424 32319
1999 32002 39121
2000 34013 35558
2001 32744 31338
2002 27806 24415
</Table>
M.S.B. FUND, INC.
ANNUAL TOTAL RETURN COMPARISON
[BAR GRAPH]
<Table>
<Caption>
MSB FUND S&P
-------- ---
1993 20.64 9.99
1994 -1.68 1.31
1995 24.97 37.43
1996 21.16 23.08
1997 28.88 33.36
1998 31.45 28.58
1999 5.19 21.04
2000 6.28 -9.11
2001 -3.73 -11.87
2002 -15.08 -22.09
</Table>
The investment performance information presented above does not reflect the
deduction of any taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares.
- --------------------------------------------------------------------------------
(1) The Dow Jones Industrial Average represents the average of 30 actively
traded blue chip stocks on the New York Stock Exchange (NYSE).
(2) The Standard & Poor's 500 Index is an unmanaged index, generally
representative of the U.S. stock market as a whole.
2
INVESTMENT RESULTS, OUTLOOK AND STRATEGIES
M.S.B. FUND, INC.
The M.S.B. Fund's net asset value per share on December 31, 2002 was $15.27
versus $18.78 on December 31, 2001. Shareholders received per share
distributions from short-term capital gains of $0.0389 and long-term capital
gains of $0.6337 during the year. The Fund's total return for the one-year
period ending December 31, 2002 was -15.08%. This compares favorably to the
one-year total return of -23.49% for the Lipper Large Capitalization Core Funds
Average for the same period. Total return assumes the reinvestment of all
dividends and capital gains and the deduction of all applicable fees and
expenses.
The M.S.B. Fund was ranked in the top 2% out of 933 funds in the Lipper Large
Capitalization Core Funds Average for the one-year period ending December 31,
2002. It was also ranked in the top 1%, 4% and 4% for the 3-, 5- and 10-year
periods ending December 31, 2002 out of 727, 489 and 154 funds, respectively.
The Fund's relative performance in the past year continued to benefit from its
large overweighting in the consumer staples sector which was the best performing
sector in the S&P 500 Index. The Fund also benefited from its significant
underweighting in the technology, telecommunications and utilities sectors which
were the worst performing sectors in the S&P 500 Index during 2002. Our
investment philosophy of owning established companies with sustainable long-term
cash flow and earnings growth prospects at favorable valuations leads us toward
those sectors that are generally less volatile in difficult market environments.
As we move into the new year, the domestic and global economic environments
remain tough. With the terrorist attacks of last Fall still fresh in everyone's
mind and the possibility of a war with Iraq a distinct possibility, consumer and
business spending remains tepid. The risk of a double dip recession has not been
eliminated, and the prospects for a strong economic recovery continue to remain
elusive. The possibility of further declines in the equity market can not be
ruled out. However, valuations continue to look more favorable than in the
recent past.
The truly long-term investor should view these periods as potential
opportunities to accumulate ownership positions in established businesses at
favorable valuations. It is also a good time to revisit one's investment
philosophy to ensure that it is capable of withstanding the test of time through
various economic and market environments. The portfolio management team at the
M.S.B. Fund firmly believes that the investment approach adhered to over the
past decade with the Fund has proven to be capable of delivering good returns
with below-average risk. During the past three years of market declines our
shareholders have benefited from this investment style in the form of principal
conservation. The S&P 500 has declined 38% and the NASDAQ has dropped 67% during
the three year period ending December 31, 2002, while the M.S.B. Fund has fallen
just under 14% during the same period.
During the past year, we continued our focus on large capitalization issues with
attractive fundamentals that are available at reasonable prices. We added
holdings in Electronic Data Systems, General Electric, Omnicom Group and Pfizer.
We eliminated a number of securities whose market prices reflected their full
potential, in our opinion, or whose fundamentals changed so that continued
ownership by the Fund was not warranted. These companies included Gap, M&T Bank
and Sherwin Williams. Our focus will remain on business fundamentals with an
understanding that over the long-term appropriate valuations will likely follow.
3
M.S.B. FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS (95.7%)
<Table>
<Caption>
SHARES VALUE
------ -----
ADVERTISING (3.9%)
45,000 Interpublic Group of Cos.,
Inc. .......................... $ 633,600
20,000 Omnicom Group, Inc. ............. 1,292,000
-----------
1,925,600
-----------
BEVERAGES NON-ALCOHOLIC (4.8%)
55,000 Coca-Cola Co. ................... 2,410,100
-----------
BUILDING PRODUCTS--RETAIL/
WHOLESALE (2.4%)
50,000 Home Depot, Inc. ................ 1,198,000
-----------
COMMERCIAL SERVICES (3.7%)
40,000 Cintas Corp. .................... 1,830,000
-----------
COMPUTER SOFTWARE & SERVICES
(9.0%)
50,000 Automatic Data Processing,
Inc. .......................... 1,962,500
45,000 Electronic Data Systems Corp. ... 829,350
33,000 Microsoft Corp.(*)............... 1,706,100
-----------
4,497,950
-----------
CONSUMER NON-DURABLE (4.3%)
25,000 Procter & Gamble Co. ............ 2,148,500
-----------
DISTRIBUTOR-CONSUMER PRODUCTS
(4.8%)
80,000 Sysco Corp. ..................... 2,383,200
-----------
ELECTRICAL EQUIPMENT (5.0%)
20,000 Emerson Electric Co. ............ 1,017,000
60,000 General Electric Co. ............ 1,461,000
-----------
2,478,000
-----------
ELECTRONICS/ SEMICONDUCTORS
(1.6%)
50,000 Intel Corp. ..................... 778,500
-----------
</Table>
COMMON STOCKS, CONTINUED
<Table>
<Caption>
SHARES VALUE
------ -----
FINANCIAL SERVICES (10.5%)
50,000 American Express Co. ............ $ 1,767,500
30,000 Freddie Mac...................... 1,771,500
45,000 State Street Corp. .............. 1,755,000
-----------
5,294,000
-----------
FOOD PROCESSING (3.9%)
35,000 Wm. Wrigley Jr., Co. ............ 1,920,800
-----------
HEALTH CARE DIVERSIFIED (5.4%)
50,000 Johnson & Johnson................ 2,685,500
-----------
HEALTH CARE-DRUGS (10.6%)
40,000 Abbott Laboratories.............. 1,600,000
35,000 Merck & Co., Inc. ............... 1,981,350
55,000 Pfizer, Inc. .................... 1,681,350
-----------
5,262,700
-----------
INSURANCE (6.6%)
45 Berkshire Hathaway, Inc.(*)...... 3,273,750
-----------
MANUFACTURING/ DIVERSIFIED (3.3%)
25,000 Illinois Tool Works, Inc. ....... 1,621,500
-----------
OFFICE EQUIPMENT & SUPPLIES
(2.6%)
40,000 Pitney Bowes, Inc. .............. 1,306,400
-----------
PERSONAL CARE (3.0%)
50,000 Gillette Co. .................... 1,518,000
-----------
PUBLISHING--NEWSPAPERS (4.3%)
30,000 Gannett Co., Inc. ............... 2,154,000
-----------
RESTAURANTS (1.9%)
60,000 McDonald's Corp. ................ 964,800
-----------
</Table>
- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
4
M.S.B. FUND, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS, CONTINUED
<Table>
<Caption>
SHARES VALUE
------ -----
RETAILERS, GENERAL (4.1%)
40,000 Wal-Mart Stores, Inc. ........... $ 2,020,400
-----------
Total Common Stocks
(Cost $40,187,688)............. 47,671,700
-----------
<Caption>
CASH EQUIVALENTS (4.1%)
MONEY MARKET MUTUAL FUND (4.1%)
2,050,020 Vanguard Admiral Money Market
Fund........................... 2,050,020
-----------
Total Cash Equivalents
(Cost $2,050,020).............. 2,050,020
-----------
</Table>
<Table>
<Caption>
VALUE
-----
Total Investments
(Cost $42,237,713) (a)... 99.8% $49,721,720
Other assets in excess of
liabilities.............. 0.2% 81,723
----- -----------
Net Assets................. 100.0% $49,803,443
===== ===========
</Table>
* Non-income producing security
(a) Cost for federal income tax purposes is the same as for financial reporting
purposes.
- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
5
M.S.B. FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
DECEMBER 31, 2002
-----------------
ASSETS:
Investment in securities, at value (Cost $42,237,713)....... $49,721,720
Cash........................................................ 45,946
Dividends and interest receivable........................... 70,307
Prepaid expenses............................................ 45,446
-----------
Total assets.............................................. 49,883,419
LIABILITIES:
Investment Adviser fee payable.............................. 27,921
Administration fee payable.................................. 665
Transfer agent fee payable.................................. 6,831
Accrued expenses payable.................................... 44,559
-----------
Total liabilities......................................... 79,976
-----------
NET ASSETS, applicable to 3,262,505 shares of Class A
$.001 par value stock, 5,000,000 shares authorized........ $49,803,443
===========
NET ASSETS:
Capital..................................................... 42,353,018
Distributions in excess of net realized gains............... (33,582)
Unrealized appreciation from investments.................... 7,484,007
-----------
NET ASSETS.................................................. $49,803,443
===========
NET ASSET VALUE, offering and redemption price
per share ($49,803,443/3,262,505 shares).................. $ 15.27
===========
</Table>
- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
6
M.S.B. FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
-----------------
INVESTMENT INCOME:
Dividends................................................. $ 722,840
Interest.................................................. 39,266
------------
Total investment income................................ 762,106
------------
EXPENSES:
Investment Adviser........................................ 416,240
Administration............................................ 80,400
Directors................................................. 90,921
Transfer agent............................................ 44,426
Legal..................................................... 48,334
Printing.................................................. 47,420
Insurance................................................. 26,481
Audit..................................................... 17,900
Custodian................................................. 19,844
Registration.............................................. 24,255
Miscellaneous............................................. 7,497
------------
Total expenses before voluntary fee reductions......... 823,718
Expenses voluntarily reduced by Administrator.......... (24,902)
Expenses voluntarily reduced by Transfer Agent......... (4,500)
Expenses waived by Investment Adviser.................. (26,674)
------------
Net expenses........................................... 767,642
------------
Net investment loss.................................... (5,536)
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains from investment transactions............. 2,087,730
Change in unrealized appreciation/depreciation from
investments............................................... (10,995,372)
------------
Net realized/unrealized losses from investments............. (8,907,642)
------------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS.............. $ (8,913,178)
============
</Table>
- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
7
M.S.B. FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
DECREASE IN NET ASSETS:
Operations:
Net investment loss....................................... $ (5,536) $ (80,751)
Net realized gains from investments....................... 2,087,730 3,593,692
Change in unrealized appreciation/depreciation from
investments............................................ (10,995,372) (6,011,720)
------------ -----------
Change in net assets resulting from operations.............. (8,913,178) (2,498,779)
------------ -----------
Distributions to shareholders:
Net realized gains from investment transactions........... (2,115,533) (3,512,941)
Return of capital......................................... -- (3,028)
------------ -----------
Total distributions to shareholders......................... (2,115,533) (3,515,969)
------------ -----------
Capital Transactions:
Change in net assets from capital share transactions (See
Note 3)................................................ 2,198,244 854,316
------------ -----------
Change in net assets........................................ (8,830,467) (5,160,432)
NET ASSETS:
Beginning of year......................................... 58,633,910 63,794,342
------------ -----------
End of year............................................... $ 49,803,443 $58,633,910
============ ===========
</Table>
- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
8
M.S.B. FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Selected data for each share of capital stock
Outstanding throughout each year
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- ------- -------
NET ASSET VALUE, beginning of year............ $ 18.78 $ 20.74 $ 21.09 $ 21.49 $ 17.73
INCOME (LOSS) FROM OPERATIONS:
Net investment income (loss)................ --(2) (0.03) --(2) 0.01 0.01
Net realized and unrealized gains (losses)
from investments......................... (2.83) (0.74) 1.18 1.20 5.55
-------- ------- ------- ------- -------
Total from operations.................... (2.83) (0.77) 1.18 1.21 5.56
-------- ------- ------- ------- -------
DISTRIBUTIONS:
From net investment income.................. -- -- -- (0.01) (0.01)
From net realized gains on investments...... (0.68) (1.19) (1.53) (1.60) (1.79)
-------- ------- ------- ------- -------
Total distributions...................... (0.68) (1.19) (1.53) (1.61) (1.80)
-------- ------- ------- ------- -------
NET CHANGE IN NET ASSET VALUE PER SHARE....... (3.51) (1.96) (0.35) (0.40) 3.76
-------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR.................. $ 15.27 $ 18.78 $ 20.74 $ 21.09 $ 21.49
======== ======= ======= ======= =======
Total return.................................. (15.08)% (3.73)% 5.68% 5.79% 31.45%
Ratio of net expenses to average net assets... 1.38% 1.44% 1.31% 1.24% 1.32%
Ratio of net investment income (loss) to
average net assets.......................... (0.01)% (0.14)% (0.01)% 0.03% 0.02%
Ratio of expenses to average net assets(1).... 1.48% 1.52% 1.43% 1.26% 1.39%
Portfolio turnover rate....................... 18% 13% 15% 22% 32%
NET ASSETS, end of year (000's)............... $ 49,803 $58,634 $63,794 $67,655 $65,824
</Table>
- --------------------------------------------------------------------------------
(1) During the period, certain fees were waived. If such fee waivers had not
occurred, the ratio would have been as indicated.
(2) Net loss per share was less than $0.005.
See Accompanying Notes to Financial Statements.
9
M.S.B. FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
The M.S.B. Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a diversified open-end management investment company
organized as a New York corporation. The Fund was incorporated under the laws of
the State of New York on June 8, 1964. The investment objective of the Fund is
to achieve long-term growth of capital for its shareholders.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A--Security Valuation--Securities traded on national exchanges are valued at the
closing prices or, in the case of over-the-counter securities, at the mean
between closing bid and asked prices as of 4:00 pm Eastern time. Short-term
instruments maturing within 60 days of the valuation date are valued at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued at the discretion of the Fund's
Board of Directors.
B--Security Transactions and Related Investment Income--Security transactions
are accounted for on the trade date, dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. The
specific identification method is used in the determination of realized gains
and losses on the sale of securities.
C--Dividends to Shareholders--Dividends from net investment income, if any, are
declared and paid annually. Net short-term and long-term capital gains, if any,
are declared and paid annually.
Distributions from net investment income and from net realized capital gains are
determined in accordance with Federal income tax regulations, which may differ
from accounting principles generally accepted in the United States of America.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature such amounts are
reclassified within the composition of net assets based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Distributions to shareholders which exceed net investment income and net
realized capital gains for tax purposes are reported as distributions of
capital.
D--Management Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2--FEES
Shay Assets Management, Inc. (the "Investment Adviser") is the investment
adviser to the Fund. The Investment Adviser is a wholly-owned subsidiary of Shay
Investment Services, Inc. ("SISI"), which is controlled by Rodger D. Shay, a
Vice President and Director of the Fund.
The Investment Adviser receives fees from the Fund, computed at an annual rate
of 0.75% of the first $100,000,000 of the Fund's average daily net assets and
0.50% of average daily net assets in excess of $100,000,000. The fee payable to
the Investment Adviser is reduced (but not below zero) to the extent expenses
(exclusive of professional fees, such as legal and audit fees, directors' fees
and expenses, and distribution expenses, if any, payable under Rule 12b-1)
exceed 1.10% of the Fund's average daily net assets for any fiscal year during
the term of the Fund's agreement with the Investment Adviser. This limitation
resulted in a waiver of the Investment Adviser's fees totaling $26,674 for the
year ended December 31, 2002.
10
M.S.B. FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
Shay Financial Services, Inc. (the "Distributor") is the distributor for the
Fund. The Distributor is also a wholly-owned subsidiary of SISI. The Distributor
receives no compensation for its distribution services.
BISYS Fund Services, Ohio, a subsidiary of The BISYS Group, Inc., serves the
Fund as Administrator and Transfer Agent (the "Administrator", the "Transfer
Agent"). As compensation for its administrative services, the Fund pays the
Administrator a minimum monthly fee plus out-of-pocket expenses. As compensation
for its services as transfer agent, the Fund pays the Transfer Agent a minimum
monthly fee plus out-of-pocket expenses. For the year ended December 31, 2002,
the Administrator voluntarily reduced its fee by $24,902. For the year ended
December 31, 2002, the Transfer Agent voluntarily reduced its fee by $4,500.
NOTE 3--CAPITAL STOCK
At December 31, 2002, there were 5,000,000 shares of $.001 par value capital
stock authorized. Transactions in capital stock for the years ended December 31,
2002 and 2001, respectively, were as follows:
<Table>
<Caption>
SHARES AMOUNT
-------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Shares sold....................................... 192,726 86,979 $ 3,434,372 $ 1,666,731
Shares issued in reinvestment of dividends........ 118,137 158,043 1,787,420 2,990,818
-------- -------- ----------- -----------
310,863 245,022 5,221,792 4,657,549
Shares redeemed................................... (170,899) (199,073) (3,023,548) (3,803,232)
-------- -------- ----------- -----------
Net increase/(decrease)........................... 139,964 45,949 $ 2,198,244 $ 854,317
======== ======== =========== ===========
</Table>
NOTE 4--PURCHASES AND SALES OF SECURITIES
The cost of purchases and the proceeds from sales of investments, exclusive of
short-term investments, for the year ended December 31, 2002, were $9,963,481
and $9,608,239 respectively.
NOTE 5--FEDERAL INCOME TAX INFORMATION
It is the policy of the Fund to continue to qualify as a regulated investment
company by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Internal Revenue Code, and
to make distributions of net investment income and net realized capital gains
sufficient to relieve it from all, or substantially all, federal income taxes.
The tax character of distributions paid to shareholders during the fiscal years
ended December 31, 2002 and 2001 were as follows:
<Table>
<Caption>
DISTRIBUTIONS PAID FROM
------------------------ TOTAL
ORDINARY NET LONG TOTAL TAXABLE TAX RETURN DISTRIBUTIONS
INCOME TERM GAINS DISTRIBUTIONS OF CAPITAL PAID*
-------- ---------- ------------- ---------- -------------
2002.................................... $122,211 $1,993,322 $2,115,533 -- $2,115,533
2001.................................... $296,707 $3,216,234 $3,512,941 $3,028 $3,515,969
</Table>
* Total distributions paid may differ from the Statements of Changes in Net
Assets because dividends are recognized when actually paid for tax purposes.
11
M.S.B. FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002
As of December 31, 2002 the components of accumulated earnings/(deficit) on a
tax basis were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED UNREALIZED TOTAL
UNDISTRIBUTED LONG TERM CAPITAL ACCUMULATED DISTRIBUTIONS CAPITAL AND APPRECIATION/ ACCUMULATED
ORDINARY INCOME GAINS/(LOSSES) EARNINGS PAYABLE OTHER LOSSES (DEPRECIATION) EARNINGS/(DEFICIT)
- --------------- ----------------- ----------- ------------- ------------ -------------- ------------------
-- -- -- -- $(33,582) $7,484,007 $7,450,425
</Table>
For the taxable year ended December 31, 2002, 100% of income dividends paid by
the Fund qualify for the dividends received deduction available to corporations.
Net capital losses incurred after October 31, within a fund's fiscal year are
deemed to arise on the first business day of the fund's following fiscal year
for tax purposes. For the year ended December 31, 2002, the Fund deferred post
October capital losses of $33,582.
12
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of M.S.B. Fund, Inc.
We have audited the accompanying statement of assets and liabilities of M.S.B.
Fund, Inc. (the "Fund"), including the schedule of portfolio investments, as of
December 31, 2002, and the related statements of operations and changes in net
assets, and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets and the financial highlights presented herein for each of the
respective years or periods ended December 31, 2001 were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on the statement of changes in net assets and financial highlights in
their report dated February 4, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 2002, by correspondence with
the custodian. 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 audit provides 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 M.S.B.
Fund, Inc. as of December 31, 2002, the results of its operations, the changes
in its net assets, and the financial highlights for the year then ended in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Columbus, Ohio,
January 31, 2003
13
M.S.B. FUND, INC.
DIRECTORS AND OFFICERS OF M.S.B. FUND, INC.
The table below sets forth certain information about each of the Fund's
Directors and officers.
INTERESTED DIRECTORS
<Table>
<Caption>
NUMBER OF
POSITION(S) PORTFOLIOS
HELD WITH FUND IN FUND OTHER
AND LENGTH OF EXPIRATION PRINCIPAL OCCUPATION(S) DURING PAST COMPLEX DIRECTORSHIPS(1)
NAME, ADDRESS AND AGE SERVICE OF TERM 5 YEARS OVERSEEN HELD
--------------------- -------------- ---------- ----------------------------------- ---------- ----------------
JOSEPH R. FICALORA* President since 2003 Chairman, President and Chief 2 Institutional
615 Merrick Avenue 1997, Executive Officer of New York Investors
Westbury, NY 11590 Director since 2005 Community Bancorp Inc., and Capital
Age: 56 1995 President of Queens County Savings Appreciation
Bank, one of its operating Fund, Inc., RSI
divisions. Retirement
Trust
MICHAEL J. GAGLIARDI* First Vice 2003 Executive Vice President of 1 None
913 Cranford Avenue President since Richmond County Savings Bank
Westfield, NJ 07090 1997, (1999-2001) and President, Chief
Age: 62 Director since 2005 Executive Officer and a director of
1991 Ironbound Bank located in Newark,
NJ, and its holding company,
Ironbound Bankcorp, NJ (1993-
1999).
RODGER D. SHAY*+ Vice President 2003 Chairman and the sole director of 7 Asset Management
1000 Brickell Avenue and Assistant the Fund's investment adviser. Shay Fund, Horizon
Miami, FL 33131 Secretary since Assets Management, Inc., Chairman Bank
Age: 66 1995, and the sole director of the Fund's
Director since 2003 distributor, Shay Financial
2001 Services, Inc., Chairman, sole
director and President of Shay
Investment Services, Inc., an
enterprise which owns 100% of Shay
Assets Management, Inc., and Shay
Financial Services, Inc.
NON-INTERESTED DIRECTORS
TIMOTHY A. DEMPSEY Director since 2003 Formerly Chairman of the Board and 1 None
18 Oakland Avenue 1997 Chief Executive Officer of Warwick
Warwick, NY 10990-0591 Community Bancorp, Inc., and
Age: 68 Chairman of the Board of its
principal subsidiary, The Warwick
Savings Bank.
</Table>
<Table>
- ------------------------------------------------------------------------------------------------------------------------------
* This director is an "interested person" under the Investment Company Act of 1940 because he is an officer of the Fund.
(1) Directorships held in (1) any other investment companies registered under the 1940 Act, (2) any company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or
(3) any company subject to the requirements of Section 15(d) of the Exchange Act.
(+) This director is an "interested person" under the Investment Company Act of 1940 because he is an officer of the Fund and
holds certain positions with the Fund's Investment Adviser and Distributor.
</Table>
14
<Table>
<Caption>
NUMBER OF
POSITION(S) PORTFOLIOS
HELD WITH FUND IN FUND OTHER
AND LENGTH OF EXPIRATION PRINCIPAL OCCUPATION(S) DURING PAST COMPLEX DIRECTORSHIPS(1)
NAME, ADDRESS AND AGE SERVICE OF TERM 5 YEARS OVERSEEN HELD
--------------------- -------------- ---------- ----------------------------------- ---------- ----------------
DAVID FREER, Jr. Director since 2004 Executive Vice President and 1 None
13 Greatview Lane 1983 Director of Atlantic States
P.O. Box 732 Mortgage Corporation.
Highland, NY 12528
Age: 63
DAVID F. HOLLAND Director since 2003 Chief Executive Officer (since 7 Asset Management
17 New England 1997 1986) and Chairman of the Board Fund
Executive Park (since 1989) of Boston Federal
Burlington, MA 01803 Savings Bank, and Chairman and
Age: 61 Chief Executive Officer of its
holding company, BostonFed Bancorp
Inc. (since its inception in 1995).
JOSEPH L. MANCINO Director since 2004 President and Chief Executive 2 Institutional
1 Jericho Plaza 2001 Officer and Chairman of the Board Investors
Jericho, NY 11753-8905 of The Roslyn Savings Bank and Vice Capital
Age: 65 Chairman, President and CEO of Appreciation
Rosyln Bancorp, Inc., the holding Fund, Inc., RSI
company for the Bank. Retirement
Trust
WILLIAM A. McKENNA, Jr. Director since 2004 Chairman of the Board and Chief 8 Asset Management
71-02 Forest Avenue 1988 Executive Officer of Ridgewood Fund,
Ridgewood, NY 11385 Savings Bank. Institutional
Age: 66 Investors
Capital
Appreciation
Fund, Inc., RSI
Retirement
Trust
OTHER OFFICERS
EDWARD E. SAMMONS, Jr. Vice President 2003 President of the Fund's investment N/A None
230 West Monroe Street and Secretary adviser, Shay Assets Management,
Chicago, IL 60606 since 1995 Inc., Executive Vice President of
Age: 63 the Fund's distributor, Shay
Financial Services, Inc., Executive
Vice President of Shay Investment
Services, Inc.
JOHN J. McCABE Vice President 2003 Senior Vice President of Shay N/A None
200 Park Avenue, 45th Floor since 1995 Assets Management, Inc.
New York, NY 10166
Age: 59
MARK F. TRAUTMAN Vice President 2003 Vice President of Shay Assets N/A None
200 Park Avenue, 45th Floor since 1995 Management, Inc., Portfolio Manager
New York, NY 10166 of the Fund.
Age: 37
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Directorships held in (1) any other investment companies registered under the 1940 Act, (2) any company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or (3)
any company subject to the requirements of Section 15(d) of the Exchange Act.
</Table>
15
<Table>
<Caption>
NUMBER OF
POSITION(S) PORTFOLIOS
HELD WITH FUND IN FUND OTHER
AND LENGTH OF EXPIRATION PRINCIPAL OCCUPATION(S) DURING PAST COMPLEX DIRECTORSHIPS(1)
NAME, ADDRESS AND AGE SERVICE OF TERM 5 YEARS OVERSEEN HELD
--------------------- -------------- ---------- ----------------------------------- ---------- ----------------
TRENT STATCZAR Treasurer since 2003 Financial Services Director, BISYS N/A None
3435 Stelzer Road 2002 since September 2000; Financial
Suite 1000 Services Manager, January 1998 to
Columbus, OH 43219 September 2000; Financial Services
Age: 31 Assoc. Manager, November 1997 to
January 1998.
ALAINA V. METZ Assistant 2003 Vice President of the Blue Sky N/A None
3435 Stelzer Road Secretary since Compliance Department at BISYS Fund
Suite 1000 1999, Services, Inc.
Columbus, OH 43219 Assistant 2003
Age: 36 Treasurer since
2002
</Table>
<Table>
- ------------------------------------------------------------------------------------------------------------------------------
(1) Directorships held in (1) any other investment companies registered under the 1940 Act, (2) any company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or
(3) any company subject to the requirements of Section 15(d) of the Exchange Act.
</Table>
16
M.S.B. FUND, INC.
DECEMBER 31, 2002
SHAREHOLDERS VOTING RESULTS (UNAUDITED):
The annual Meeting of Shareholders of the M.S.B. Fund, Inc., was held on April
18, 2002, and adjourned until April 29, 2002, at which the shareholders voted on
two proposals. Each proposal and the results of the voting are set forth below.
A--Election of Directors--The first proposal concerned the election of three
directors to serve a term of office of three years each.
<Table>
<Caption>
EXPIRATION OF TERM FOR
------------------ ---------
Harry P. Doherty*........................................... 2005 1,581,138
Joseph R. Ficalora.......................................... 2005 1,581,146
Michael J. Gagliardi........................................ 2005 1,581,076
</Table>
- ---------------
* Mr. Doherty resigned from the Board effective January 16, 2003.
In addition, Messrs. Timothy A. Dempsey, David Freer, Jr., David F. Holland,
Joseph L. Mancino, William A. McKenna, Jr. and Rodger D. Shay, Jr. continue as
members of the Board of Directors.
B--Amendment to Fundamental Investment Policies--The second proposal concerned
the amendment to the fundamental investment policies of the Fund to permit the
Fund to invest in money market mutual funds. The results of the voting for the
proposal were 1,523,251 for, 37,758 against, and 34,719 abstaining.
17
Notes
M.S.B.
FUND, INC.
OFFICERS
Joseph R. Ficalora
President
Michael J. Gagliardi
First Vice President
Edward E. Sammons, Jr.
Vice President and Secretary
Rodger D. Shay
Vice President and Assistant
Secretary
Mark F. Trautman
Vice President
John J. McCabe
Vice President
Trent Statczar
Treasurer
Alaina V. Metz
Assistant Secretary and
Assistant Treasurer
BOARD OF DIRECTORS
Timothy A. Dempsey
Joseph R. Ficalora
David Freer, Jr.
Michael J. Gagliardi
David F. Holland
Joseph L. Mancino
William A. McKenna, Jr.
Rodger D. Shay
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Capital Series (the "Registrant") on Form N-1A under
the Securities Act of 1933 and the Investment company Act of 1940 (File Nos.
2-29502 and 811-1677), 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. 54 (file
nos. 811-1677 and 2-29502 on February 29,
2000; accession no. 0001010521-00-000204)
("PEA 54 ")
1.1 Amendment to Declaration of Trust Filed as Exhibit 99.a.1 to PEA 54 and
incorporated herein by reference
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. 58 (file
nos. 811-1677 and 2-29502 on December 27,
2001; accession no. 0001010521-01-500304)
("PEA 58")
1.3 Amendment to Declaration of Trust Filed as Exhibit 99.a.3 to Registrant's
Registration Statement on Form N-1A and
incorporated herein by reference to post-
effective amendment no. 61 (file no.
811-1677 and 2-29502 on April 3, 2002;
accession no. 0001010521-02-000150.
1.4 Amendment to Declaration of Trust Filed as Exhibit 99.a.4 to Registrant's
Registration Statement on Form N-1A and
incorporated herein by reference to post-
effective amendment no. 63 (file no.
811-1677 and 2-29502 on August 27, 2002;
accession no. 0001010521-02-000293.
1.5 Amendment to Declaration of Trust Filed as Exhibit 99.a.5 to Registrant's
Registration Statement on Form N-1A and
incorporated herein by reference to post-
effective amendment no. 66 (file no.
811-1677 and 2-29502 on May 21, 2003;
accession no. 0001010521-03-148).
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. 48 (file
nos. 811-1677 and 2-29502 on February 27,
1997; accession no. 0001010521-97-000229)
("PEA 48 ")
2.1 Amendment to Amended and Restated Filed as Exhibit 99.(b).1 to PEA 61 and
By-Laws of Registrant incorporated by reference
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 Core Equity Fund and John Registration Statement on Form N-1A and
Hancock Advisers, LLC incorporated herein by reference to
post-effective amendment no. 52 (file
nos. 811-1677 and 2-29502 on February
22,1999; accession no.
0001010521-99-000135) ("PEA 52")
6.1 Sub-Investment Advisory Contract Filed as Exhibit 99.d.1 to PEA 48 and
between Core Equity Fund, incorporated herein by reference
Independence Investment LLC and John
Hancock Advisers, LLC
6.2 Investment Management Filed as Exhibit 99.(d).2 to PEA
Contract between John Hancock U.S. 61 and incorporated herein by
Global Leaders Growth Fund and John reference
Hancock Advisers, LLC
6.3 Sub-Investment Advisory Filed as Exhibit 99.d.4 to PEA 63 and
Contract between U.S. Global Leaders incorporated herein by reference
Growth Fund, Yeager, Wood & Marshall,
Inc. and John Hancock Advisers, LLC
6.4 Amendment to Sub-Investment Management Filed as exhibit 99.(d).3 to Registrant's
Contract on behalf of John Hancock Registration Statement on Form N-1A and
Core Equity Fund, John Hanccok incorporated herein by reference to post-
Advisers, LLC and Independence effective amendment no 64 (file nos. 811-1677
Investment LLC. and 2-29502 on February 28, 2003;
accession no. 0001010521-03-000101)("PEA 64")
6.5 Investment Management Contract Filed as Exhibit 99.d.3 to PEA 64 and
between John Hancock Classic Value incorporated herein by reference
Fund and John Hancock Advisers, LLC
6.6 Sub-Investment Management Filed as Exhibit 99.(d).6 to PEA 64 and
Contract between John Hancock Classic incorporated herein by reference.
Value Fund, John Hancock Advisers, LLC
and Pzena Investment Management, LLC.
6.7 Investment Management Contract Filed as Exhibit 99.d.7 to PEA 66 and
between John Hancock Large Cap Select incorporated herein by reference
Fund and John Hancock Advisers, LLC
6.8 Sub-Investment Management Filed as Exhibit 99.(d).8 to PEA 66 and
Contract between John Hancock Large incorporated herein by reference.
Cap Select Fund, John Hancock Advisers,
LLC and Shay Assets Management, Inc.
7 Distribution Agreement between the Filed as Exhibit 99.e to Registrant's
Registrant and John Hancock Funds, Registration Statement on Form N-1A and
LLC. (formerly named John Hancock incorporated herein by reference to
Broker Distribution Services, Inc) post-effective amendment no. 44 (file
nos. 811-1677 and 2-29502 on April 26,
1995; accession
no.0000950146-95-000180)
("PEA 44 ")
7.1 Amendment to Distribution Agreement Filed as Exhibit 99.e.1 to PEA 44 and
between the Registrant and John incorporated herein by reference
Hancock Funds, LLC
7.2 Form of Soliciting Dealer Agreement Filed as Exhibit 99.e.2 to PEA 52 and
between John Hancock Funds, LLC and incorporated herein by reference
Selected Dealers
7.3 Form of Financial Institution Sales Filed as Exhibit 99.e.3 to PEA 44 and
and Services Agreement incorporated herein by reference
7.4 Amendment to Distribution Agreement Filed as Exhibit 99.e.4 to PEA 48 and
between the Registrant and John incorporated herein by reference
Hancock Funds, LLC
7.5 Amendment to Distribution Agreement Filed as Exhibit 99.e.5 to PEA 64 and
between the Registrant and John incorporated herein by reference
Hancock Funds, LLC
7.6 Amendment to Distribution Agreement Filed as Exhibit 99.e.6 to PEA 64 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 PEA 58 and
John Hancock Mutual Funds (including incorporated herein by reference
Registrant) and The Bank of New York
9.1 Amendment to Custodian Agreement Filed as Exhibit 99.g.1 to PEA 64
and incorporated herein by reference
10 Amended & Restate Master Transfer Filed as Exhibit 99.h to PEA 52 and
Agent Service Agreement between John incorporated herein by reference
Hancock Mutual Funds (including
Registrant) and John Hancock Funds,
LLC
10.1 Form of Accounting and Legal Services Filed as Exhibit 99.h.1 to Registrant's
Agreement Statement on Form N-1A and incorporated
herein by reference to post-effective
amendment no. 46 (file nos. 811-1677
and 2-29502 on June 14, 1996, accession
number 0001010521-96-000095.
10.2 Amendment to Master Transfer Agent Filed as Exhibit 99.h.2 to PEA 61
Service Agreement and incorporated herein by reference
10.3 Amendment to Master Transfer Agent Filed as Exhibit 99.h.3 to PEA 52
Service Agreement and incorporated herein by reference
11 Class A and Class B Distribution Filed as Exhibit 99.m to PEA 48 and
Plans between Registrant, John incorporated herein by reference
Hancock Core Equity Fund, and John
Hancock Funds, LLC
11.1 Class C Distribution Plans between Filed as Exhibit 99.m.1 to PEA 52 and
Registrant and John Hancock Funds, LLC incorporated herein by reference
11.2 Class A, Class B and Class C Filed as Exhibit 99.m.2 to PEA 61 and
Distribution Plan between Registrant, incorporated herein by reference
John Hancock U.S. Global Leaders Growth
Fund and John Hancock Funds, LLC dated
May 13, 2002
11.3 Class A, Class B and Class C Filed as Exhibit 99.m.3 to PEA 64 and
Distribution Plan between Registrant, incorporated herein by reference
John Hancock Classic Value Fund
and John Hancock Funds, LLC dated
November 8, 2002
11.4 Class A, Class B and Class C Filed as Exhibit 99.m.4 to PEA 66 and
Distribution Plan between Registrant, incorporated herein by reference
John Hancock Large Cap Select Fund
and John Hancock Funds, LLC dated
August 25, 2003
12 John Hancock Funds Class A, Class B, Filed as Exhibit 99.o to PEA 59 and
Class C and Class I Amended and incorporated herein by reference
restated Multiple Class Plan pursuant
to Rule 18f-3
13 Opinion as to legality of shares and Filed herewith as Exhibit 14
consent
14 Form of opinion as to tax matters and Filed herewith as Exhibit 15
consent
15 Consents of Ernst & Young LLP Filed herewith as Exhibit 17
regarding the audited financial
statements of M.S.B. Fund, Inc.
16 Not applicable
17 Powers of Attorney Filed as addendum to signature pages and
incorporated herein by reference
18 Code of Ethics- John Hancock Funds, Filed as Exhibit 99.p to Registrant's
LLC and Independence Investment LLC Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 55 (file
nos. 811-1677 and 2-29502 on June 14,
1996; accession no. 0001010521-00-000251)
("PEA 55")
18.1 Code of Ethics-John Hancock Funds, LLC Filed as Exhibit 99(p).1 to PEA 61 and
incorporated herein by reference
18.2 Code of Ethics-Yeager, Woods and Filed as Exhibit 99.(p).2 to PEA 61 and
Marshall, Inc. incorporated herein by reference
18.3 Amended and Restated Code of Ethics Filed as Exhibit 99.p.3 to Registrant's
of Pzena Investment Management, LLC Registration Statement on Form N-1A and
incorporated herein by reference to
post-effective amendment no. 64 (file
nos. 811-1677 and 2-29502 on February 28,
2003; accession no. 0001010521-03-000101)
("PEA 64")
18.4 Addendum to Amended and Restated Code Filed as Exhibit 99.p.4 to PEA 66 and
of Ethics of Pzena Investment incorporated herein by reference
Management, LLC
18.5 Code of Ethics-Shay Assets Management, Filed as Exhibit 99.p.5 to PEA 66 and
Inc. incorporated herein by reference
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.
(3) The undersigned Registrant agrees to file, by post-effective amendment, an
opinion of counsel supporting the tax consequence of the proposed reorganization
within a reasonable time after receipt of such opinion.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly 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 Commonwealth of Massachusetts on the 21st day of May, 2003.
JOHN HANCOCK CAPITAL SERIES
By: *
--------------------------------------------
Maureen R. Ford
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
* Trustee, Chairman and Chief
- ---------------------------
Maureen R. Ford Executive Officer
* Senior Vice President and
- ---------------------------
Richard A. Brown Chief Financial Officer
/s/William H. King Vice President, Treasurer May 21, 2003
- ---------------------------
William H. King (Chief Accounting Officer)
* Trustee
- ---------------------------
Dennis S. Aronowitz
* Trustee
- ---------------------------
Richard P. Chapman, Jr.
* Trustee
- ---------------------------
William J. Cosgrove
* Trustee
- ---------------------------
John M. DeCiccio
* Trustee
- ---------------------------
Richard A. Farrell
* Trustee
- ---------------------------
William F. Glavin
* Trustee
- ---------------------------
John A. Moore
* Trustee
- ---------------------------
Patti McGill Peterson
* Trustee
- ---------------------------
John W. Pratt
* By: /s/Susan S. Newton May 21, 2003
---------------------------
Susan S. Newton, Attorney-in-Fact,
under Powers 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
4 Agreement and Plan of Reorganization between the John Hancock Large Cap
Select Fund (the "Acquiring Fund") and M.S.B. Fund, Inc. (the
"Acquired Fund") (filed as EXHIBIT A to Part A of this Registration
Statement).
14 Opinion as to legality of shares and consent.
15 Form of opinion as to tax matters and consent.
17 Consent of Ernst & Young LLP regarding the audited financial
statements and highlights of the M.S.B. Fund, Inc.