As filed with the Securities and Exchange Commission on September 15, 2004
Securities Act File No.811-4079
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 EQUITY TRUST
---------------------------
(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 Equity Trust.
Approximate Date of Proposed Public Offering: As soon as practicable after the
effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares has previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. This Registration Statement relates to shares previously registered
on Form N-1A (File Nos. 2-92548 and 811-4079).
It is proposed that this filing will become effective on October 15, 2004.
[LOGO] Independence
INVESTMENTS
October 20, 2004
Dear Shareholder,
I am writing to ask for your vote on an important matter affecting your
investment in Independence Small Cap Portfolio ("your fund").
The trustees of your fund are recommending a reorganization to merge your fund
into the John Hancock Small Cap Fund, a newly created fund with investment
objectives and policies substantially similar to your fund. Let me reassure you
that the current portfolio manager and investment approach will stay the same
after the transition. If shareholders approve this reorganization, Independence
Investment LLC will be retained as a subadviser to manage the new fund. Your
current team of portfolio managers, led by Charles S. Glovsky, CFA, will
continue to manage your fund. We will manage the John Hancock Small Cap Fund in
the same manner as we manage your fund today, selectively seeking small cap
companies with improving fundamentals that are statistically undervalued and
have an identifiable catalyst for change.
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 the more than 30 other John
Hancock funds without a sales charge and, in a broader context, having access
to all of 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 that would lower expenses for all
shareholders.
It is important to note that this transaction will result in an immediate
decrease in the Fund's contractual expense limitation. John Hancock Funds has
agreed to cap total expenses at 1.65% until at least December 3, 2005 inclusive
of a 0.30% charge to pay for the cost of distribution (commonly referred to as
a 12b-1fee). The newly reorganized fund's expense limitation is both lower, and
in place for a longer period of time, than your fund's current expense
limitation of 1.85% that is set to expire on March 1, 2005. Also, current
shareholders of the Independence Small Cap Portfolio will be able to purchase
additional shares of the new John Hancock Small Cap Fund without incurring any
sales charges.
After careful consideration, your fund's Board of Trustees has unanimously
agreed to the reorganization of the Independence Small Cap Portfolio into the
John Hancock Small Cap Fund. The enclosed proxy statement contains further
explanation and important details of the reorganization that 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 December
3, 2004.
Your vote makes a difference. Please review the enclosed proxy materials and
complete, sign and return the 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 return envelope.
If you have any questions or need additional information, please contact a John
Hancock Funds Customer Service Representative at 1-800-225-5291 between 8:00
A.M. and 7:00 P.M. Eastern Time. I thank you for your prompt vote on this
matter.
Sincerely,
Mark C. Lapman, Ph.D., CFA
President and CEO
Independence Investment LLC
[LOGO] Independence
INVESTMENTS
INDEPENDENCE SMALL CAP PORTFOLIO
A Series of The Advisors' Inner Circle Fund
PO Box 219009
Kansas City, MO 64121
NOTICE OF MEETING OF SHAREHOLDERS SCHEDULED FOR DECEMBER 1, 2004
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 Independence Small Cap Portfolio ("Independence Fund" or
"your fund"):
A shareholder Meeting for your fund will be held at the offices of Wilmer
Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, on
Wednesday, December 1, 2004 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 Small Cap Fund (the "John
Hancock Fund"). Under this Agreement, 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. 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. The John Hancock Fund also will assume
your fund's liabilities. Your fund's current investment adviser will act as
subadviser to the John Hancock Fund. Your board of trustees recommends that
you vote FOR this proposal.
2. Any other business that may properly come before the Meeting.
Shareholders of record as of the close of business on October 5, 2004 are
entitled to vote at the Meeting and any related follow-up meetings.
Whether or not you expect to attend the Meeting, please complete and return the
enclosed proxy card. If shareholders do not return their proxies in sufficient
numbers, the fund may be required to make additional solicitations.
By order of the board of trustees,
James Ndiaye
Secretary
October 20, 2004
PROXY STATEMENT OF
INDEPENDENCE SMALL CAP PORTFOLIO
(a series of The Advisors' Inner Circle Fund)
PO Box 219009
Kansas City, MO 64121
1-866-777-8227
PROSPECTUS FOR CLASS A SHARES OF
JOHN HANCOCK SMALL CAP FUND
(a series of John Hancock Equity Trust)
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 Independence Small Cap
Portfolio ("Independence Fund" or "your fund") into John Hancock Small Cap Fund
(the "John Hancock Fund"), an open-end management investment company. Please
read it carefully and retain it for future reference.
How the Reorganization Will Work
o Your fund will transfer all of its assets to the John Hancock Fund. The
John Hancock Fund will assume your fund's liabilities.
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, Independence
Investment LLC ("Independence"), will act as subadviser to the John Hancock
Fund.
o The reorganization is not intended to result in income, gain or loss for
federal income tax purposes.
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.
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 Trustees are Recommending the Reorganization
The trustees of The Advisors' Inner Circle Fund, a Massachusetts business trust
of which your fund is a series, 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 Independence 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 Independence will be subadviser
to the John Hancock Fund;
o JHA's experience and resources in managing mutual funds;
o JHA's commitment for at least one year 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 trustees recommend that you vote FOR the reorganization.
2
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Where to Get More Information
- ---------------------------------------------------------------------------------------------------------------------------
Your fund's prospectus dated March 1, 2004. Available to you free of charge by calling 1-866-777-8227.
This prospectus, which is also on file with the Securities and
Exchange Commission ("SEC"), is incorporated by reference
into this proxy statement and prospectus.
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The John Hancock Fund's prospectus dated October 15, In the same envelope as this proxy statement and prospectus.
2004. This prospectus, which is also on file with the SEC, is
incorporated by reference into this proxy statement and
prospectus.
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Your fund's annual and semiannual reports to Available to you free of charge by calling 1-866-777-8227.
shareholders. Also on 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 1-800-225-5291.
October 15, 2004. It contains additional information Also on file with the SEC. This statement of additional
about your fund and the John Hancock Fund. information is 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: 1-866-777-8227.
prospectus.
- ---------------------------------------------------------------------------------------------------------------------------
The date of this proxy statement and prospectus is October 20, 2004.
3
TABLE OF CONTENTS
Page
----
INTRODUCTION ........................................................ 4
SUMMARY ............................................................. 4
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION ............ 10
CAPITALIZATION ...................................................... 13
BOARDS' EVALUATION AND RECOMMENDATION ............................... 13
VOTING RIGHTS AND REQUIRED VOTE ..................................... 14
ADDITIONAL INFORMATION ABOUT JOHN HANCOCK SMALL CAP FUND ............ 14
MATERIAL PROVISIONS OF THE MANAGEMENT CONTRACT AND THE SUB-INVESTMENT
MANAGEMENT CONTRACT ................................................ 15
JOHN HANCOCK SMALL CAP FUND CLASS A RULE 12B-1 PLAN ................. 17
FINANCIAL HIGHLIGHTS ................................................ 19
INFORMATION CONCERNING THE MEETING .................................. 20
OWNERSHIP OF SHARES OF THE FUNDS .................................... 21
EXPERTS ............................................................. 21
AVAILABLE INFORMATION ............................................... 21
EXHIBIT A--AGREEMENT AND PLAN OF REORGANIZATION ..................... A-1
INTRODUCTION
This proxy statement and prospectus is being used by your fund's board of
trustees 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 Wilmer
Cutler Pickering Hale and Dorr LLP, on Wednesday, December 1, 2004 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 providing for the
reorganization of your fund into the John Hancock Fund, a newly created mutual
fund that is not yet operational. You should understand that if you vote in
favor of the reorganization of your fund, you are approving a reorganization
into a class of shares subject to Rule 12b-1 fees.
This proxy statement and prospectus is being mailed to your fund's shareholders
on or about October 20, 2004.
Who is Eligible to Vote?
Shareholders of record as of the close of business on October 5, 2004 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 Agreement and Plan of Reorganization. If any
other business comes before the Meeting, your shares will be voted at the
discretion of the persons named as proxies.
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 and Plan of
Reorganization attached as Exhibit A because they contain details that are not
in the summary.
Comparison of Independence Fund to the John Hancock Fund
Independence Fund John Hancock Fund
- --------------------------------------------------------------------------------------------------------------------
Business A diversified series of The Advisors' Inner Circle A newly organized diversified series of
Fund, an open-end investment management John Hancock Equity Trust, an open-end
company organized as a Massachusetts business investment management company organized
trust. as a Massachusetts business trust.
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Net assets as of $ 22,160,437.68 None. The John Hancock Fund is newly
August 31, 2004 organized and does not expect to commence
investment operations until after the
reorganization occurs.
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4
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Independence Fund John Hancock Fund
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Investment advisers and Investment adviser: Investment adviser:
portfolio managers Independence Investment LLC (as defined John Hancock Advisers, LLC (as defined
above, "Independence") above, "JHA")
Portfolio Manager: Investment subadviser:
Charles S. Glovsky, CFA Independence Investment LLC (as defined
above, "Independence") Independence is an
o Principal and senior vice president of adviser affiliate of JHA.
o Joined adviser in 2000
o Senior portfolio manager, Dewey Square Portfolio Manager:
Investors Corp. (1998-2000) Charles S. Glovsky, CFA
o Began business career in 1979 o Principal and senior vice president of
subadviser
o Joined subadviser in 2000
o Senior portfolio manager, Dewey Square
Investors Corp. (1998-2000)
o Began business career in 1979
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Investment objectives The fund seeks maximum capital appreciation The fund seeks capital appreciation.
consistent with reasonable risk to principal.
The fund's investment objective is non-
The fund's investment objective is non- fundamental and can be changed without
fundamental and can be changed without shareholder approval.
shareholder approval.
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Primary investments At least 80% of its assets in equity securities of At least 80% of its assets in equity securities of
small capitalization companies (i.e., companies small capitalization companies (i.e., companies
with market capitalizations under $2 billion). in the capitalization range of the Russell 2000
Index which was $67.8 million to $1.97
billion as of August 31, 2004).
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Investment strategies In managing the portfolio, the portfolio manager selects securities using a bottom-up selection process
that focuses on stocks of statistically undervalued yet promising companies that the portfolio manager
believes are likely to show improving fundamental prospects with an identifiable catalyst for change. Such
catalysts may include a new product, new management, regulatory changes, industry or company restructuring
or a strategic acquisition.
The portfolio manager attempts to identify undervalued securities using quantitative screening parameters,
including various financial ratios and "earnings per share" revisions, which measure change in earnings
estimate expectations. The portfolio manager additionally narrows the list of stocks using fundamental
security analysis.
The fund may sell a security if, among other reasons, it reaches the target price set by the portfolio
manager, the portfolio manager determines that the security is overvalued or the portfolio manager
believes that earning expectations or the fundamental outlook for the company has deteriorated.
The fund may make limited use of derivatives (investments whose value is based on securities, indexes or
currencies).
The fund may trade securities actively.
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Temporary defensive During unusual economic, market, political or other circumstances, each fund may invest up to 100% of its
strategies assets temporarily in investment-grade short-term securities.
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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"). This means that with respect to 75% of a fund's total assets, the fund may not 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.
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Industry Concentration Each fund may not invest more than 25% of its assets in any one industry. This limitation does not apply
to investment in obligations of the U.S. government or any of its agencies, instrumentalities or
authorities.
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5
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Independence Fund John Hancock Fund
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Other investment As described above, the funds have substantially similar principal investment strategies and
policies and restrictions policies.
- ------------------------------------------------------------------------------------------------------------------------------------
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 (i.e., 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.
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Management and Your fund pays an advisory fee on an annual The John Hancock Fund will pay JHA a
administration fees, basis equal to 0.85% of the fund's average net management fee equal to 0.90% annually
distribution and service assets. In addition, your fund pays separate of average daily net assets. JHA pays the fee
(12b-1) fee and overall administration and transfer agency fees. of Independence as the subadviser to the
expenses John Hancock Fund. The John Hancock Fund
Shares of your fund are not subject to a pays separate accounting and legal services
12b-1 fee. and transfer agent fees.
Independence has agreed contractually to limit Class A shares are subject to a 12b-1 fee equal
your fund's total operating expenses (excluding to 0.30% annually of average daily net assets.
interest, taxes, brokerage commission and
extraordinary expenses) until March 1, 2005 For a period of one year following the
to 1.85% of its average net assets. Until reorganization, JHA has agreed to limit the
September 30, 2004, Independence temporarily John Hancock Fund's Class A total expenses
limited total operating expenses to 1.15% of to 1.65% of average daily net assets.
average daily net assets. During the twelve-
month period ended April 30, 2004, the fund's
total operating expenses per share (before
waiver of fees or reimbursement of expenses)
were equal to 2.49% of average daily net assets.
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Buying shares You may buy shares directly through the fund's Subject to sales charges except as noted above
transfer agent or other financial intermediaries (see "Sales charges"), you may buy shares
as described in detail in your fund's prospectus. through your financial representative or
directly through the fund's transfer agent as
described in detail in the John Hancock Fund's
prospectus.
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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.
The John Hancock Fund also offers a class of
shares designed for institutional investors. If
you qualify for such class after the closing of
the reorganization you may exchange the Class
A shares of the John Hancock Fund received
in the reorganization for shares of the
institutional class.
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6
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. Independence's investment strategy is to invest in a diversified
portfolio of common stocks, consisting primarily of securities of small
capitalization companies. Stocks in 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.
The value of an investment in either fund will fluctuate in response to stock
market movements or movements in the particular securities or types of
securities held by the fund.
The fund's management strategy has a significant influence on fund performance.
Small capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform investments that focus on medium or large
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 manager's security selection strategy or the quantitative screening
parameters do not perform as expected, the fund could underperform its peers or
lose money.
Stocks of smaller companies are more volatile than stocks of larger companies.
Many smaller companies have short track records, narrow product lines or niche
markets, making them highly vulnerable to isolated business setbacks.
To the extent that either fund makes investments with additional risks, these
risks could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses.
o In a down market, higher risk securities and derivatives could become
harder to value or to sell at a fair price; this risk could also affect
small capitalization stocks, especially those with low trading volumes.
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.
Other Consequences of the Reorganization
The funds each pay management fees, and the John Hancock Fund pays Rule 12b-1
fees, equal to the following annual percentages of average daily net assets:
John Hancock Fund
Independence Fund John Hancock Fund Combined Management Fee and
Management Fee Management Fee Class A Rule 12b-1 Fee
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0.85% 0.90% 1.20%
The annual management fee rate payable by the John Hancock Fund (without giving
effect to expense limitations) is higher than the rate paid by your fund. JHA
will pay Independence its subadvisory fee. In addition to the advisory fee,
your fund pays an administration fee that varies with the size of the fund and
other factors, including minimum fee requirements, and was 0.81% of the fund's
average daily net assets during the fund's twelve-month period ended April 30,
2004. JHA will provide these services either under its investment management
agreement or under a separate accounting and legal services agreement pursuant
to which JHA is entitled to be reimbursed for certain expenses, which
reimbursement is estimated to be approximately 0.03% of average daily net
assets. 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 equal to
0.30% 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 current management fee (as shown in the table above). Your
fund does not currently have a 12b-1 fee.
For the twelve-month period ended April 30, 2004, your fund's per share
operating expenses were 2.49% of average net assets (before waiver of fees or
reimbursement of expenses). Independence has contractually agreed to limit
certain of your fund's ordinary operating expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) until March 1, 2005 to 1.85%
of its average net assets. In addition, from November 19, 2002 to September 30,
2004 Independence voluntarily agreed to limit such ordinary operating expenses
to 1.15% of average daily net assets. Therefore, as of September 30, 2004,
ordinary operating expenses on your fund are expected to rise to the contractual
limit of 1.85%. Although the management fee and 12b-1 fee of the John Hancock
Fund when combined are higher than your Fund's current management fee (your fund
has no 12b-1 fee), the overall expenses of Class A shares of the John Hancock
Fund are limited to 1.65%. This is lower than the contractual expense limit of
7
1.85% currently on your fund. In addition, the contractual limit on your fund
expires on March 1, 2005, while the contractual expense limit on the John
Hancock Fund is in place at least until December 3, 2005. With regard to the
John Hancock Fund, JHA has agreed to waive, until the first anniversary of the
closing of the reorganization, all or a portion of its management fee or to
reimburse the fund to limit the fund's annual total expenses attributable to
Class A shares to 1.65% of average daily net assets. After such date JHA may,
but is not required to, limit the expenses of the John Hancock Fund.
Performance information for the John Hancock Fund is not presented because the
fund has not yet commenced operations. As successor to your fund, the John
Hancock Fund will assume your fund's historical performance after the
reorganization.
The chart below shows 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 broad-based market indexes. Past performance
before and after taxes does not indicate future results.
8
Calendar Year Total Returns*
[The following table was represented as a bar chart in the printed material.]
1999 4.59
2000 16.43
2001 16.55
2002 -15.23
2003 34.62
Your fund's year-to-date return as of June 30, 2004 was 10.00%.
* During the period shown in the bar chart, your fund's highest quarterly
return was 25.55% for the quarter ended June 30, 2001 and the lowest
quarterly return was -16.97% for the quarter ended September 30, 2002.
Average Annual Total Returns as of
December 31, 2003
------------------------------------------
1 year 5 years Since 12/16/98*
- -------------------------------------------------------------------------------------------
Independence Fund
Return Before Taxes 34.62 10.12 11.49
Return After Taxes on Distributions(1) 33.99 7.96 9.31
Return After Taxes on Distributions and Sale
of Fund Shares(1) 22.48 7.86 9.06
Russell 2000 Index(2) 47.25 7.13 7.13
S & P Small Cap 600 Index(3) 38.79 9.67 9.67
* Commencement of operations. Index comparisons begin on 12/31/98
(1) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and does 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 those who hold their shares through tax-deferred arrangements
such as 401(k) plans or IRAs.
(2) An unmanaged index which measures the performance of the 2,000 smallest of
the companies in the Russell 3000 Index based on market capitalization.
(3) An unmanaged index comprised of 600 U.S. stocks chosen for market size,
liquidity and industry group representation.
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
the twelve-month period ended April 30, 2004 and (ii) for the John Hancock
Fund, the estimated annual expenses of the John Hancock Fund Class A shares.
The John Hancock Fund's actual expenses may be greater or less.
Shareholder transaction fees (paid Independence John Hancock Fund
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 is less none none(2)
Redemption fee for shares held less than 90 days 2.00% none(3)
Exchange fee as a % of amount exchanged none none
9
Annual fund operating expenses
(deducted from fund assets) (as a % Independence John Hancock Fund
of average net assets) Fund Class A
- --------------------------------------------------------------------------------------
Management fee 0.85% 0.90%
Distribution and service (12b-1) fee none 0.30%
Other expenses 1.64% 0.53%
Total fund operating expenses 2.49% 1.73%
Expense reduction(4) (0.64)% (0.08)%
Net fund operating expenses 1.85% 1.65%
(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 and who are
named shareholders on the books of the Independence Fund.
(2) Except for investments of $1 million or more redeemed within one year.
(3) Does not include wire redemption fee (currently $4.00).
(4) Independence has contractually agreed to waive fees and reimburse expenses
in order to keep total annual fund operating expenses from exceeding 1.85%
of the fund's average daily net assets at least until March 1, 2005. Until
September 30, 2004, Independence temporarily waived a portion of its fees
to keep the Independence Fund's total expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) from exceeding 1.15% of
the Fund's average daily net assets. The expense reduction for the John
Hancock Fund is contractual and may not be modified or terminated until
December 3, 2005.
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
for your fund assumes that the contractual expense limit expires on March 1,
2005). The example for the John Hancock Fund assumes the expense limitation is
in effect until December 3, 2005. The examples are for comparison purposes only
and are not a representation of either fund's actual expenses or returns,
either past or future.
Independence John Hancock Fund
Example Fund Class A
- -----------------------------------------------
Year 1 $ 236 $ 168
Year 3 $ 760 $ 537
Year 5 $1,311 $ 931
Year 10 $2,814 $2,034
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION
The Reorganization
o The reorganization is scheduled to occur as of 5:00 P.M., Eastern Time, on
December 3, 2004, but may occur on any later date before June 30, 2005
unless your fund and the John Hancock Fund agree in writing to a later
date. Your fund will transfer all of its assets to the John Hancock Fund.
The John Hancock Fund will assume your fund's liabilities. 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
a result, your fund's shareholders will end up as shareholders of the John
Hancock Fund.
o After the distribution of shares, your fund will be liquidated and
terminated.
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 Wilmer Cutler Pickering Hale and Dorr LLP, counsel to
the John Hancock Fund.
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.
10
Reasons for the Proposed Reorganization
The trustees of your fund believe that the proposed reorganization will be
advantageous to the shareholders of your fund for several reasons. The trustees
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.
Over the long-term, if this potential for a larger asset base is realized, it
may reduce the fund's per share operating expenses and increase the portfolio
management options available to the fund.
Second, shareholders of your fund will enjoy continuity of portfolio management.
Because JHA will retain Independence 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. JHA will oversee Independence as
subadviser to the John Hancock Fund in accordance with the terms of their
Sub-Investment Management Contract.
Third, although Independence will manage the assets of the John Hancock Fund as
its subadviser, JHA will oversee the John Hancock Fund's operations. Your fund
will benefit from JHA's experience and resources in managing investment
companies. At June 30, 2004, JHA managed 50 investment companies and
approximately 100 institutional and private accounts with approximately $29
billion in assets. JHA also has significant experience in overseeing funds
managed by subadvisers. At June 30, 2004, JHA employed six subadvisers, that
subadvised for seven of JHA's mutual funds with approximately $3 billion in net
assets.
Fourth, at least until December 3, 2005, JHA will contractually limit the total
expenses of Class A shares of the John Hancock Fund to 1.65% of average daily
net assets. Even after the termination of this expense limitation, there is
potential that the John Hancock Fund's expenses will be the same or lower than
your fund's current expenses. Your fund's current expense limitation of 1.85% of
average daily net assets. The John Hancock Fund's management fee and Rule 12b-1
fee in the aggregate are higher than your fund's current management fee.
However, the greater long-term asset growth potential of the John Hancock Fund
may result in economies of scale and other efficiencies in expenses, and
ultimately lower overall expenses of the John Hancock Fund compared to those of
your fund. If, however, the John Hancock Fund's total expenses are not lower
than 1.65% and the expense limitation is terminated, overall expenses of the
John Hancock Fund may be higher than those of your fund. Your fund's contractual
limitation will expire on March 1, 2005. After that date, if the reorganization
is not completed, your expenses have the potential to increase. For instance,
for the twelve-month period ended April 30, 2004, total operating expenses
before the voluntary fee waiver and contractual expense limitation were 2.49%.
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.
The board of trustees of the John Hancock Fund considered 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, John Hancock Funds, LLC
(the "Distributor"), will benefit from the reorganization. Because the John
Hancock Fund will be the 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, Independence would similarly benefit from
increased assets. In addition, the Distributor will benefit through the adoption
of the Class A Rule 12b-1 plan.
Comparative Fees and Expense Ratios. As discussed above, the management fee paid
by your fund is lower than the fee paid by the John Hancock Fund. In addition,
the John Hancock Fund's management fee and Class A Rule 12b-1 fee combined are
higher than your fund's management fee alone. Your fund does not have a Rule
12b-1 fee. Nonetheless, JHA projects that the John Hancock Fund's other expenses
during the current fiscal year will be 0.53% of average daily net assets, which
is lower than your fund's other expenses of 1.64% of average daily net assets.
JHA has agreed at least until December 3, 2005 to limit the John Hancock Fund's
Class A total expenses to 1.65% of
11
average daily net assets, which is lower than your fund's annual total expense
ratio, after contractual expense limitation, for the twelve-month period ended
April 30, 2004.
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 Wilmer Cutler Pickering 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.
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 must either surrender the
certificates to your fund or deliver to your fund a lost certificate affidavit,
in the form and accompanied by the surety bonds that your fund may require
(collectively, an "Affidavit"). On the reorganization date, all certificates
that have not been surrendered will be canceled, will no longer evidence
ownership of your fund's shares and will evidence ownership of the John Hancock
Fund's shares. Shareholders may not redeem or transfer John Hancock Fund shares
received in the reorganization until they have surrendered their fund share
certificates or delivered an Affidavit. 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 Agreement and Declaration of Trust and
12
By-Laws. The funds' obligations are also subject to the receipt of a favorable
opinion of Wilmer Cutler Pickering 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 advisable.
Expenses of the Reorganization. JHA will pay the expenses your fund incurs in
connection with the reorganization.
CAPITALIZATION
The following table sets forth the capitalization of each fund as of August 31,
2004, and the pro forma combined capitalization of both funds as if the
reorganization had occurred on that date. This table reflects the pro forma
ratios of one Class A share of the John Hancock Fund being issued for each share
of your fund. The exchange ratio will remain 1:1 on the closing date of the
reorganization.
August 31, 2004
--------------------------------------------------------------
John Hancock Fund
John Hancock Fund Class A shares
Independence Fund Class A shares Pro Forma
- --------------------------------------------------------------------------------------------
Net Assets $22.2 million N/A $22.2 million
Net Asset Value Per Share $10.91 N/A $10.91
Shares Outstanding 2,030,298 N/A 2,030,298
It is impossible to predict how many shares of the John Hancock Fund will
actually be received and distributed by your fund on the reorganization date.
The table should not be relied upon to determine the amount of the John Hancock
Fund's shares that will actually be received and distributed.
BOARDS' EVALUATION AND RECOMMENDATION
For the reasons described above, the board of trustees of your fund, including
the trustees who are not "interested persons" of your fund or Independence
("independent trustees"), approved the reorganization. In particular, the board
of trustees 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 trustees of your fund recommend that the
shareholders of your fund vote FOR the proposal to
approve the Agreement and Plan of Reorganization.
13
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 a majority of
shareholders entitled to cast votes at the Meeting will constitute a quorum.
The favorable vote of two-thirds of the shares outstanding is required for
approval of the proposal.
- ----------------------------------------------------------------------------------------------------------------
Shares Quorum Voting
- ----------------------------------------------------------------------------------------------------------------
In General All shares "present" in person or by Shares "present" in person will be
proxy are counted towards a quorum. voted in person at the Meeting.
Shares present by proxy will be
voted in accordance with
instructions.
- ----------------------------------------------------------------------------------------------------------------
Broker Non-Vote (where Considered "present" at Meeting for Broker non-votes do not count as a
the underlying holder has purposes of quorum. vote "for" and effectively result in a
not voted and the broker vote "against."
does not have discretionary
authority to vote the
shares)
- ----------------------------------------------------------------------------------------------------------------
Proxy with No Voting Considered "present" at Meeting for Voted "for" the proposal.
Instruction (other than purposes of quorum.
- ----------------------------------------------------------------------------------------------------------------
Broker Non-Vote) Considered "present" at Meeting for Abstentions do not constitute a vote
Vote to Abstain purposes of quorum. "for" and effectively result in a vote
"against."
- ----------------------------------------------------------------------------------------------------------------
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 trustees will consider what further action may be appropriate.
ADDITIONAL INFORMATION ABOUT JOHN HANCOCK SMALL CAP 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 $29 billion in assets under management as of June 30, 2004 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 Financial Services,
Inc. ("JHFS") a financial services company with national headquarters at John
Hancock Place, Boston, Massachusetts. JHFS is wholly owned by Manulife Financial
Corporation ("Manulife"), a Canadian financial services company.
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 Contract and the Sub-Investment
Management Contract" below.
Investment Subadviser
Independence will serve as the John Hancock Fund's investment subadviser and is
located at 53 State Street, Boston, Massachusetts 02109. Independence was
founded in 1982 and provides investment advisory services to institutional
investors. Independence is a wholly owned subsidiary of JHFS (a subsidiary of
Manulife), and as of June 30, 2004, had total assets under management of over
$10 billion.
14
MATERIAL PROVISIONS OF THE MANAGEMENT CONTRACT AND THE SUB-INVESTMENT MANAGEMENT
CONTRACT
Management Contract -- Independence Fund
The following is a summary of the material terms of the your fund's existing
investment advisory agreement with Independence (the "Independence Management
Contract").
Services. Under the Independence Management Contract, Independence 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,
Independence furnishes office space and other facilities as may be required for
carrying out its duties under the Independence Management Contract and pays all
compensation of the personnel required by it to perform the services on the
terms and for the compensation provided for under the contract. All operating
costs and expenses relating to the fund not expressly assumed by Independence
under the contract are paid by the fund.
Compensation. As compensation under the Independence Management Contract, the
fund pays Independence a monthly investment advisory fee (accrued daily) based
upon the average daily net assets of the fund at the rate of 0.85% annually. For
the twelve-month period ended April 30, 2004, your fund incurred $132,219 in
advisory fees.
Independence has contractually agreed to limit certain ordinary operating
expenses to 1.85% of the average daily net assets of the fund. For the twelve
month period ended April 30, 2004, Independence waived $100,132 pursuant to the
fee waiver as well as $108,883 pursuant to the voluntary limitation.
Term. The Independence Management 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 Independence Management Contract provides that
Independence shall not be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in
carrying out its duties, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties thereunder, and except as may
otherwise be provided under provisions of applicable state law or Federal
securities law which cannot be waived or modified.
Termination, Continuance and Amendment. The Independence Management Contract
continues from year to year subject to approval of its continuance at least
annually by the vote of (1) a majority of the independent trustees and (2) by
all the trustees or by vote of a majority of the outstanding voting securities
of your fund, in each case cast in person at a meeting called for the purpose of
voting on such approval. The Independence Management Contract may be terminated
at any time, without penalty (x) by the vote of a majority of the board of
trustees, or by vote of a majority of the outstanding voting securities of the
fund, on 30 days' written notice to Independence, or (y) by Independence, on 90
days' written notice to the trust. The Independence Management Contract is
automatically terminated in the event of its "assignment," as defined in the
1940 Act. The Independence Management Contract was last approved by the board of
trustees at a meeting called for that purpose on November 11, 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
Independence as subadviser. In addition, JHA:
o pays the fee of Independence as subadviser and supervises Independence'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.
15
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 0.90% 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 first 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 annual total operating expenses
attributable to Class A shares will not exceed 1.65% 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.
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 Small Cap 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
Independence will serve as subadviser to the John Hancock Fund pursuant to a
sub-investment management contract among the fund, JHA and Independence (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 Independence 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 place orders for purchase and sale of securities;
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 Independence'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.
16
Independence as subadviser continues to trade through its own facilities.
Compensation. JHA will pay Independence a quarterly fee equal on an annual
basis to 0.41% of the fund's average daily net assets. Payment will begin as
soon as the fund breaks even on a cumulative incremental basis, or one year,
whichever comes first.
Limitation of Liability. The Sub-Investment Management Contract provides that
Independence 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 Independence with respect to the fund, except that
Independence shall be liable for and shall indemnify JHA and the fund from any
loss arising out of or based on (i) with regard to the fund, Independence
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
Independence by the trustees or JHA, (ii) with regard to the fund, Independence
causing the fund to fail to satisfy the requirements for qualification as a
regulated investment company under the Code, or (iii) Independence's willful
misfeasance, bad faith or gross negligence generally in the performance of its
duties or its reckless disregard of its obligations and duties under the
Sub-Investment Management Contract.
Term, Termination. The Sub-Investment Management Contract shall remain in force
until June 30, 2009 and from year to year thereafter, provided its continuance
is approved prior to June 30, 2006 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 1940 Act, and
may be terminated upon 30 days written notice by Independence. 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 Independence and any other series of the John Hancock Equity
Trust. The Sub-Investment Management Contract shall automatically terminate in
the event of its assignment or upon termination of the JHA Management Contract.
JOHN HANCOCK SMALL CAP 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 0.30% of the
John Hancock Fund's average daily net assets attributable to Class A shares.
The distribution fee will be used to reimburse 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 September 14, 2004. 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
17
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.
18
FINANCIAL HIGHLIGHTS
This table shows Independence Fund's financial performance for the fiscal
periods indicated. Certain information reflects financial results for a
single fund share. "Total return" shows how much your investment in the
Independence Fund would have increased or decreased during each period,
assuming you had reinvested all dividends and distributions. This
information for the fiscal periods indicated below (other than the
information for the period ended April 30, 2004, which is unaudited) has
been audited by PricewaterhouseCoopers LLP, independent registered public
accounting firm. Their report and Independence Fund's financial statements
are included in its Annual Report, which is available upon request.
Selected Per Share Data and Ratios
For a Share Outstanding Throughout Each Period
Institutional Class Shares
-------------------------------------------------------------------------------------------
Six Months
Ended December 16,
April 30, Year Ended Year Ended Year Ended Year Ended 1998*** to
2004 October 31, October 31, October 31, October 31, October 31,
(Unaudited) 2003 2002(2) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $ 10.06 $ 8.22 $ 12.99 $ 14.64 $ 9.44 $ 10.00
------- ------- ------- ------- ------- -------
Income from Operations:
Net Investment Loss (0.04) (0.05) (0.16) (0.29) (0.12) (0.09)
Net Realized and Unrealized
Gain (Loss) 1.23 2.22 0.36(1) (1.17) 5.32 (0.47)
------- ------- ------- ------- ------- -------
Total from Operations 1.19 2.17 0.20 (1.46) 5.20 (0.56)
------- ------- ------- ------- ------- -------
Distributions:
Net Realized Gain (0.14) (0.33) (4.97) (0.19) -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.14) (0.33) (4.97) (0.19) -- --
------- ------- ------- ------- ------- -------
Net Asset Value,
End of Period $ 11.11 $ 10.06 $ 8.22 $ 12.99 $ 14.64 $ 9.44
======= ======= ======= ======= ======= =======
Total Return+ 11.92%** 27.41% (3.59)% (9.92)% 55.08% (5.60)%**
======= ======= ======= ======= ======= =======
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $17,174 $15,709 $11,177 $ 9,877 $24,219 $15,893
Ratio of Expenses to Average
Net Assets 1.15%* 1.18% 2.28% 1.97% 1.39% 1.85%*
Ratio of Expenses to Average
Net Assets (Excluding
Waivers and/or
Reimbursements) 2.48%* 2.60% 2.69% 2.07% 1.49% 1.95%*
Ratio of Net Investment Loss to
Average Net Assets (0.70)%* (0.57)% (1.92)% (1.54)% (0.95)% (1.11)%*
Portfolio Turnover Rate 47% 79% 92% 65% 84% 91%
* Annualized
** Not Annualized
*** Commencement of Operations
+ Returns shown do not reflect the deduction of taxes that a shareholder
would pay on portfolio distributions or the redemption of portfolio shares.
Total return would have been lower had certain expenses not been waived by
the Adviser during the periods indicated.
(1) The amount shown for the year ended October 31, 2002 for a share
outstanding throughout the period does not accord with the aggregate net
losses on investments for that period because of the sales and repurchase
of Portfolio shares in relation to fluctuating market value of the
investments of the Portfolio.
(2) On June 24, 2002, the Advisors' Inner Circle Fund Independence Small Cap
Portfolio acquired the assets and liabilities of the UAM Independence Small
Cap Portfolio, a series of the UAM Funds, Inc. The operations of the
Advisors' Inner Circle Fund Independence Small Cap Portfolio prior to the
acquisition were those of the predecessor fund, the UAM Independence Small
Cap Portfolio.
Amounts designated as "--" are $0 or have been rounded to $0.
19
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 trustees, officers and employees of
your fund; by personnel of your fund's investment adviser, Independence, and
your fund's transfer agent, DST Systems, 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 will bear the cost of such solicitation.
Revoking Proxies
An Independence 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 your fund's transfer agent,
DST Systems, Inc., 330 W 9th Street, Kansas City, MO 64105, 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 secretary of your fund (without
complying with any formalities) at any time before it is voted.
Being present at the Meeting alone does not revoke a previously executed and
returned proxy.
Outstanding Shares and Quorum
As of October 5, 2004, [ ] shares of beneficial interest of your fund were
outstanding. Only shareholders of record on October 5, 2004 (the "record date")
are entitled to notice of and to vote at the Meeting. The presence in person or
by proxy by the majority of shareholders of your fund entitled to cast votes at
the Meeting will constitute a quorum.
Other Business
Your fund's board of trustees 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 or that abstained. 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 adjournment requires setting
a new record date or the adjournment is for more than 60 days from the initial
record date set forth original Meeting (in which case the board of trustees
of your fund will set a new record date), your fund will give notice of the
adjourned meeting to its shareholders.
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.
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, with a toll-free number to call if 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.
20
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 [ ] 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
Your fund is not required, and does not intend, to hold meetings of
shareholders each year. Instead, meetings will be held only when and if
required. Any shareholders desiring to present a proposal for consideration at
the next meeting for shareholders must submit the proposal in writing, so that
it is received by the fund at P.O. Box 219009, Kansas City, MO 64121 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 October 5, 2004, the following persons
owned of record or beneficially 5% or more of the outstanding shares of
Independence 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 October 5, 2004, the directors and officers of your fund, as a group,
owned in the aggregate approximately % 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 Independence Fund for
the fiscal year ended October 31, 2003 and the six-month period ended April 30,
2004 are incorporated by reference into this proxy statement and prospectus. The
financial statements and financial highlights (other than the information for
the period ended April 30, 2004, which is unaudited) for Independence Fund have
been audited by PricewaterhouseCoopers LLP, independence registered public
accounting firm, as stated in their reports appearing in the statement of
additional information. These financial statements and financial highlights have
been included in reliance on their reports given on their authority as experts
in accounting and auditing.
AVAILABLE INFORMATION
Independence Fund is and the John Hancock Fund will be subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
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
fee) at the public reference facilities of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C., Northeast Regional
Office, The Woolworth Building, 233 Broadway, New York, New York 10279, and at
the Midwest Regional Office (500 West Madison Street, Suite 1400, Chicago,
Illinois). Copies of these materials can also be obtained by mail from the
Public Reference Section of the 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.
21
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this th
day of September, 2004, by and between John Hancock Equity Trust, a
Massachusetts business trust (the "Acquiring Trust"), on behalf of John Hancock
Small Cap Fund (the "Acquiring Fund"), a series of the Acquiring Trust with its
principal place of business at 101 Huntington Avenue, Boston, Massachusetts
02199, and The Advisors' Inner Circle Fund, a Massachusetts business trust (the
"Trust"), on behalf of Independence Small Cap Portfolio (the "Acquired Fund"),
a series of the Trust with its principal place of business at One Freedom
Valley Road, Oaks, Pennsylvania 19456. The Acquiring Fund and the Acquired Fund
are sometimes referred to collectively herein as the "Funds" and individually
as a "Fund."
This Agreement is intended to be and is adopted as a plan of "reorganization"
as such term is used in Section 368(a) of the 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 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 the liabilities and
obligations of the Acquired Fund (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 Trust 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 Trustees of the 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 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 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. Such transactions shall
take place at the Closing (as defined in Paragraph 3.1 below).
1.2 (a) The Acquired Assets shall consist of all of the Acquired Fund's
property, including, without limitation, all portfolio securities and
instruments, dividends and interest receivables, cash, goodwill,
contractual rights of the Acquired Fund or the Trust in respect 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 Trust and the Acquiring Trust, be provided
access to) copies of all records that the Trust 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 to the extent such records
pertain to the Acquired Fund.
A-1
(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 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 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. Without limiting the forgoing, the Acquired
Fund agrees to assume the obligations of the Trust under the
Declaration of Trust to indemnify and hold harmless the trustees and
officers of the Trust with respect to any action or omission or
alleged action or omission prior to the Reorganization and relating to
the Acquired Fund, including the obligation to advance expenses, as
set forth in the Trust's Declaration of Trust.
1.4 On or as soon after the Closing Date (as defined below) as is
conveniently practicable (the "Liquidation Date"), the Trust shall
liquidate the Acquired Fund and 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 Trust instructing the
Acquiring Fund to transfer the Acquiring Fund Shares then credited to
the account of the Acquired Fund on the books of the Acquiring Fund to
open accounts on the share records of the Acquiring Fund established
and maintained by the Acquiring Fund's transfer agent in the names of
the Acquired Fund Shareholders and representing the respective pro
rata number of the Acquiring Fund Shares due such Acquired Fund
Shareholders. The Trust 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. The Acquired
Fund Shareholders holding certificates representing their ownership of
shares of beneficial interest of the Acquired Fund shall surrender
such certificates or deliver an affidavit with respect to lost
certificates in such form and accompanied by such surety bonds as the
Acquired Fund may require (collectively, an "Affidavit"), to John
Hancock Signature Services, Inc. prior to the Closing Date. Any
Acquired Fund share certificate which remains outstanding on the
Closing Date shall be deemed to be cancelled, shall no longer evidence
ownership of shares of beneficial interest of the Acquired Fund, but
shall evidence ownership of Acquiring Fund Shares as determined in
accordance with Paragraph 1.1. 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
Liquidation 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.
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, the assumption of the Assumed Liabilities by the Acquiring Fund,
and the distribution of the Acquiring Fund Shares by the Acquired Fund
to the Acquired Fund Shareholders pursuant to Paragraph 1.4, and the
Acquired Fund shall be terminated as a series of the Trust under the
laws of the Commonwealth of Massachusetts and in accordance with the
Trust's Declaration of Trust and By-Laws.
1.8 Any reporting responsibility of the Trust with respect to the Acquired
Fund, including, but not limited to, the responsibility for filing of
regulatory reports, Tax Returns (as defined in Paragraph 4.1), or
other docu-
A-2
ments with the Commission, any state securities commissions, and any
federal, state or local tax authorities or any other relevant
regulatory authority due prior to the Closing is and shall remain the
responsibility of the Trust.
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 SEI Investments Global Funds Services (the "Acquired Fund
Administrator") 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 Administrator, respectively, to
deliver a copy of its valuation report to the other party at Closing.
All computations of value shall be made by the Acquiring Fund
Custodian and the Acquired Fund Administrator 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 December 3, 2004 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 Wilmer Cutler Pickering
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, 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 Union Bank of California (the "Acquired Fund Custodian"), as
custodian of the Acquired Fund, 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. The Acquired Fund Custodian shall deliver
portfolio securities held of record by the Acquired Fund Custodian in
book-entry form on behalf of the Acquired Fund to the Acquiring Fund
Custodian, which shall record 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 instruction
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
A-3
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 Trust and its
Treasurer, Secretary or other authorized officer (the "Shareholder
List") as being an accurate record of the information (a) provided by
the Acquired Fund Shareholders, (b) provided by the Acquired Fund
Custodian, or (c) derived from the Trust's records by such officers or
one of the Trust's service providers. The Acquiring Fund shall issue
and deliver to the Acquired Fund a confirmation evidencing the
Acquiring Fund Shares to be credited on the Closing Date, or provide
evidence satisfactory to the Acquired Fund that such Acquiring Fund
Shares have been credited to the Acquired Fund's account on the books
of the Acquiring Fund. At the Closing, each party shall deliver to the
other such bills of sale, checks, assignments, stock certificates,
receipts or other documents as such other party or its counsel may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 Except as set forth on Schedule 4.1 hereto, the Trust, on behalf of
the Acquired Fund, represents, warrants and covenants to the Acquiring
Fund, which representations, warrantees and covenants 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 Acquired Fund is a series of the Trust. The Trust is a
business trust validly existing and in good standing under the
laws of the Commonwealth of Massachusetts and has the power to
own all of its properties and assets and, subject to approval by
the 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. Each of the Trust and 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 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. The Acquired Fund is a
diversified investment company under the Investment Company Act;
(c) The Trust is not in violation of, and the execution, delivery and
performance of its obligations under this Agreement in respect of
the Acquired Fund will not result in a violation of, any
provision of the Acquired Fund's Declaration of Trust (the
"Acquired Fund's Declaration") or By-Laws or any material
agreement, indenture, instrument, contract, lease or other
undertaking with respect to the Acquired Fund to which the Trust
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 Trust or 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. Neither the Trust nor the
Acquired Fund is a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially 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) 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) 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 year ended October 31, 2003 have been audited
by PricewaterhouseCoopers LLP, independent registered public
accountants, and are in accordance with generally accepted
accounting principals ("GAAP") consistently applied and fairly
reflect, in all material respects, the financial condition of the
Acquired Fund as of such dates and the results of its operations
for the
A-4
periods then ended, and all known liabilities, whether actual or
contingent, of the Acquired Fund 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 reflect, 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. 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 nor were such disclosures necessary in order 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;
(g) Since October 31, 2003, 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) (but not for any other purpose of this Agreement
including Paragraph 7.4), 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 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,
caused any action to be taken, or caused any action to fail
to be taken which action or failure has caused or could
cause the Acquired Fund to fail to qualify as a regulated
investment company under the Code.
(B) Within the times and in the manner prescribed by law, the
Acquired Fund has properly filed on a timely basis all Tax
Returns that it was required to file, and all such Tax
Returns were complete and accurate in all respects. 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;
(C) The Acquired Fund has timely paid, in the manner prescribed
by law, all Taxes (as defined below), which were due and
payable or which were claimed to be due;
(D) All Tax Returns filed by the Acquired Fund constitute
complete and accurate reports of the respective Tax
liabilities and attributes 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
return;
(E) The Acquired Fund has not waived or extended any applicable
statute of limitations relating to the assessment or
allocation of Taxes;
(F) The Acquired Fund has not been notified that any
examinations of the 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 to its
knowledge no deficiency has been proposed or threatened;
(G) The Acquired Fund has no actual or 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;
(H) The unpaid Taxes of the Acquired Fund for tax periods
through the Closing Date do not exceed the accruals and
reserves for Taxes (excluding accruals and reserves for
deferred Taxes established
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to reflect timing differences between book and Tax income)
set forth on the Statement of Assets and Liabilities, rather
than in any notes thereto (the "Tax Reserves"). 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 timely paid to the proper
governmental agency;
(I) The Acquired Fund has delivered to the Acquiring Fund or
made available to the 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 and complete and correct copies of
all private letter rulings, revenue agent reports,
information document requests, notices of proposed
deficiencies, deficiency notices, protests, petitions,
closing agreements, settlement agreements, pending ruling
requests and any similar documents submitted by, received by
or agreed to by or on behalf of the Acquired Fund. The
Acquired Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to
a substantial understatement of federal income Tax within
the meaning of Section 6662 of the Code;
(J) The Acquired Fund has not undergone, has not agreed to
undergo, and is not required to undergo (nor will it be
required as a result of the transactions contemplated in
this Agreement to undergo) 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 item of income in, or exclude
any 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;
(K) The Acquired Fund has not taken any action or agreed to take
any action and is not aware of any agreement, plan or other
circumstance that is inconsistent with the representations
in Annex B or that would otherwise prevent the
Reorganization from qualifying as a reorganization under
Section 368(a) of the Code;
(L) There are (and as of immediately following the Closing there
will be) no liens on the assets of the Acquired Fund
relating to or attributable to Taxes, except for Taxes not
yet due and payable;
(M) The Tax bases of the assets of the Acquired Fund are
accurately reflected on the Acquired Fund's Tax books and
records;
(N) The Acquired Fund has not incurred (or been allocated) an
"overall foreign loss" as defined in Section 904(f)(2) of
the Code which has not been previously recaptured in full as
provided in Sections 904(f)(2) and/or 904(f)(3) of the Code;
(O) The Acquired Fund is not a party to a gain recognition
agreement under Section 367 of the Code;
(P) The Acquired Fund does not own any interest in an entity
that is characterized as a partnership for income tax
purposes;
(Q) The Acquired Fund's Tax attributes are not limited under the
Code (including but not limited to any capital loss
carryforward limitations under Sections 382 or 383 of the
Code and the Treasury Regulations thereunder) or comparable
provisions of state law; and
(R) 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,
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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 an
unlimited number of shares of beneficial interest, at no par
value. All issued and outstanding shares of beneficial interest
of the Acquired Fund are, and at the Closing Date will be, duly
and validly issued and outstanding, fully paid and nonassessable
by the Acquired Fund. All of the issued and outstanding shares of
beneficial interest 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 beneficial interest of the
Acquired Fund, nor is there outstanding any security convertible
into any of its shares of beneficial interest 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 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 has been duly
authorized by all necessary action on the part of the Trust's
Board of Trustees, 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, bankruptcy,
insolvency, reorganization, moratorium and other laws relating to
or affecting creditors' rights and to general equity principles;
(l) 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;
(m) Upon the effectiveness of the Registration Statement, no consent,
approval, authorization or order of any court or governmental
authority is required for the consummation by the Trust or the
Acquired Fund of the transactions contemplated by this Agreement;
(n) All of the issued and outstanding shares of beneficial interest
of the Acquired Fund have been offered for sale and sold in
conformity with all applicable federal and state securities laws,
except as may have been previously disclosed in writing to the
Acquiring Fund;
(o) The prospectus and statement of additional information of the
Acquired Fund, each dated March 1, 2004 (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;
(p) The Acquired 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 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 Trust with respect
to the Acquired Fund.
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(q) 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;
(r) 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, nor, to the knowledge of
the Acquired Fund, has any affiliated person of the Acquired 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 disqualification as an investment adviser,
employee, officer or director of an investment company under
Section 9 of the Investment Company Act; and
(s) The Acquired Fund Tax Representation Certificate to be delivered
by the Acquired Fund to the Acquiring Fund and Wilmer Cutler
Pickering 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.
4.2 Except as set forth on Schedule 4.2 hereto, the Acquiring Trust on
behalf of the Acquiring Fund represents, warrants and covenants to the
Acquired Fund, which representations, warranties and covenants 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)
and will have no assets (other than the proceeds from the issue
of shares to John Hancock Advisors LLC (or one of its
affiliates)), liabilities or obligations;
(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 and statement of
additional information with respect to the Acquiring Fund, each
dated October 20, 2004, 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(l) hereof) will conform in all
material respects to the applicable requirements of the
Securities Act and the Investment Company Act and the rules and
regulations of the Commission thereunder. Neither the
Registration Statement nor the Proxy 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 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
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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 has not taken any action, caused any action to be taken or
caused any action to fail to be taken which action or failure
could cause the Acquiring Fund to fail to qualify as a regulated
investment company under 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 procedures established by the
Acquiring Trust with respect to the Acquiring Fund;
(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 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 Fund 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 disqualification as an investment
adviser,
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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 Wilmer Cutler
Pickering 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.
5. COVENANTS OF EACH OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 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 customary dividends and distributions and
any other dividends and distributions 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 Trust 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 Trust 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.
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 as of
the Valuation Time, which statement shall be prepared in accordance
with GAAP consistently applied and certified by the Trust's Treasurer
or Assistant Treasurer. As promptly as practicable, but in any case
within 30 days after the Closing Date, the Trust shall furnish to the
Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, 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 Trust.
5.8 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.
5.9 The Trust shall maintain errors and omissions insurance covering the
Trustees and Officers of the Acquired Fund prior to and including the
Closing Date.
5.10 From and after the date of this Agreement and until the Closing Date,
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 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.
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5.11 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.
5.12 Acquired Fund shall prepare, or cause to be prepared all Tax Returns
of the Acquired Fund for taxable periods that end on or before the
Closing Date and shall timely file, or cause to be timely filed, all
such Tax Returns. Acquired Fund shall make any payments of Taxes
required to be made with respect to any such Tax Returns. The
Acquiring Fund shall promptly reimburse the Acquired Fund for the
amount of any such Taxes paid by the Acquired Fund to the extent of
any Tax Reserves in respect of such Taxes for the unfiled Tax Returns
specifically set forth on the Statement of Assets and Liabilities.
5.13 The Acquired Fund will use it reasonable efforts to cause the Acquired
Fund Administrator to provide such back up certification regarding the
Acquired Fund's disclosure and internal controls as the Acquiring Fund
shall reasonably request in order to enable the officers of the
Acquiring Fund to make any required certifications in accordance with
the Sarbanes-Oxley Act or the regulations thereunder.
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 it
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 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 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 Paragraph 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
Wilmer Cutler Pickering 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;
6.4 With respect to the Acquiring Fund, 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 Acquiring Fund shall have delivered to the Acquired Fund an
opinion of counsel, which may be internal counsel of John Hancock
Advisers, LLC, dated as of the Closing Date, addressed to and in form
and substance satisfactory to the Trust, to the effect that: (i)
Acquiring Trust is duly organized under the laws of the Commonwealth
of Massachusetts and the Acquiring Fund is a validly existing series
of the Acquiring Trust; (ii) 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;
(iii) The Acquiring Fund has the trust power and authority to enter
into and perform its obligations under this Agreement; (iv) 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; provided,
however, that no opinion need be expressed with respect to provisions
of this Agreement relating to indemnification; (v) to the best of
counsel's knowledge, no consent, approval, authorization or order of
or filing with any federal or Commonwealth of Massachusetts state
court or administrative or regulatory
A-11
agency 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 that has not already been
obtained, other than where the failure to obtain any such consent,
approval, order or authorization would not have a material adverse
effect on the operations of the Acquiring Fund; and (vi) 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 have been duly authorized and upon issuance thereof in
accordance with this Agreement will be validly issued, fully paid and
non-assessable by the Acquiring Trust.
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 Trust and
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 of the Acquired Fund contained in
this Agreement by or on behalf of the Trust and Acquired Fund shall be
true and correct as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the
Closing Date with the same force and effect as if made on and as of
the Closing Date;
7.2 The Trust 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 Trust'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 its name of the Trust on behalf
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 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
Paragraph 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
Wilmer Cutler Pickering 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 With respect to the Acquired Fund, the Board of Trustees of the Trust
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.
7.6 The Acquired Fund shall have delivered to the Acquiring Fund an
opinion of counsel of Morgan, Lewis & Bockius LLP, dated as of the
Closing Date, addressed to and in form and substance satisfactory to
the Acquiring Trust, to the effect that: (i) Trust is duly organized
under the laws of the Commonwealth of Massachusetts and the Acquired
Fund is a validly existing series of the Trust; (ii) 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; (iii) The Acquired Fund 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 Trust
and/or the Acquired Fund has been duly authorized by all necessary
action on the part of the Trust, the Acquired Fund and their Board of
Trustees, and, assuming due authorization, execution and delivery by
the Acquiring Fund, this Agreement will constitute a valid and binding
obligation of the Trust and 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; provided, however,
that no opinion need be expressed with respect to provisions of this
Agreement relating to indemnification; and (iv) to the best of
counsel's knowledge, no consent, approval, authorization or order of
or filing with any court or administrative or regulatory agency is
required for the execution of this Agreement or the consummation of
the transactions contemplated by the Agreement by the Acquired Fund or
the Trust that has not already been obtained, other than where the
failure to obtain any such consent, approval, order or authorization
would not have a material adverse effect on the operations of the
Acquired Fund.
A-12
8. FURTHER CONDITIONS PRECEDENT
If any of the conditions set forth below do not exist on or before 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 Trust's Declaration of Trust 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;
8.5 The parties shall have received an opinion of Wilmer Cutler Pickering
Hale and Dorr LLP, satisfactory to the Trust 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 the Acquired Fund nor the Trust 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 attributable to the Acquired Fund incurred in
connection with the Reorganization whether or not the Reorganization
is consummated.
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, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in
connection herewith shall survive the consummation of the transactions
contemplated hereunder for a period of two years following the Closing
Date.
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-13
(a) because of a material breach by the other of any representation,
warranty, covenant or agreement contained herein to be performed
at or prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to the
obligations of the terminating party which has not been met and
which reasonably appears will not or cannot be met;
(c) by resolution of the 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 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 Acquired Fund Shareholders; or
(e) if the transactions contemplated by this Agreement shall not have
occurred on or prior to June 30, 2005 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, the
Trust or the Acquired Fund, or the Trustees or officers of the 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.
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 Trust and
the Acquiring Trust; provided, however, that following the meeting of the
Acquired Fund Shareholders called by the Trust 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 Paragraph 12 shall be construed to
prohibit the parties from amending this Agreement to change the Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any provisions
of this Agreement shall be in writing and shall be given by prepaid telegraph,
telecopy or certified mail addressed to the Acquired Fund, c/o SEI Investments,
One Freedom Valley Road, Oaks Pennsylvania 19456, Attention: William E.
Zitelli, with copies to: Morgan, Lewis & Bockius LLP, 1111 Pennsylvania Avenue,
N.W. Washington D.C. 20004, Attention: John M. Ford, Esq., and the Acquiring
Fund c/o John Hancock Advisers, LLC, 101 Huntington Avenue, Boston,
Massachusetts 02199, Attention: Susan S. Newton, with copies to Wilmer Cutler
Pickering 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 and
the Trust shall not be binding upon any of their respective trustees,
shareholders, nominees, officers, agents or employees personally, but
bind only to the trust property of the Acquiring Fund or the Acquired
Fund, as the case may be, as provided in the trust instruments of the
Acquiring Trust and the Trust, respectively. The execution and
delivery of this Agreement have been authorized by the Trustees of
each of the Acquiring Trust and the Trust and this Agreement has been
executed by authorized officers of the Acquiring Trust and the Trust,
acting as such, and neither such authorization by such Trustees nor
such execution and delivery by such officers shall be
A-14
deemed to have been made by any of them individually or to imposed any
liability on any of them personally, but shall bind only the trust
property of the Acquiring Fund and the Acquired Fund, as the case may
be, as provided in the trust instruments of the Acquiring Trust and
the Trust, respectively.
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: THE ADVISORS' INNER CIRCLE FUND on behalf of
INDEPENDENCE SMALL CAP PORTFOLIO
By:______________________________
By:______________________________
Name: Name:
Title:
Title:
Attest: JOHN HANCOCK EQUITY TRUST, on behalf of
JOHN HANCOCK SMALL CAP FUND
By:______________________________
By:______________________________
Name: Susan S. Newton Name:
Title: Secretary Title:
A-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
INDEPENDENCE SMALL CAP PORTFOLIO
SPECIAL MEETING OF SHAREHOLDERS- December 1, 2004
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) James Ndiaye
with full power of substitution in each, to vote all the shares of beneficial
interest of Independence Small Cap Portfolio. (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 Wilmer Cutler Pickering Hale and Dorr
LLP, 60 State Street, Boston, MA on December 1, 2004 at 10:00 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 October
20, 2004 is hereby acknowledged.
Date________________________________, 2004
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
Independence Small Cap Portfolio ("your fund") and John Hancock
Small Cap 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
Internet Proxy Voting Service
Proxy Voting Form
John Hancock Funds
Independence Small Cap Portfolio
THE TRUSTEES RECOMMEND A VOTE"FOR" THE FOLLOWING PROPOSAL.
Proposal (1) To approve an Agreement and Plan of [ ]FOR [ ] AGAINST
Reorganization between Independence Small Cap [ } ABSTAIN
Portfolio ("your fund") and John Hancock Small
Cap 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.
- --------------------------------------------------------------------------------
Please refer to the proxy statement for discussion of this matter.
If no specification is made on the proposal, the proposal will be voted for
- --------------------------------------------------------------------------------
_______
To receive an optional email confirmation, enter your email address here:_______
Please review your selections carefully before voting.
If you vote more than once on the same Proxy, only your last (most recent) vote
will be considered valid.
------
Press this button to Submit your Proxy Vote.
------
JOHN HANCOCK SMALL CAP FUND
STATEMENT OF ADDITIONAL INFORMATION
October 20, 2004
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with the related Prospectus (also dated October 20, 2004) which
covers Class A shares of beneficial interest of John Hancock Small Cap Fund to
be issued in exchange for shares of beneficial interest of Independence Small
Cap Portfolio. Please retain this Statement of Additional Information for
further reference.
The Prospectus is available to you free of charge (please call 1-800-225-5291).
EXHIBITS 2
INTRODUCTION 2
INCORPORATION BY REFERENCE 2
ADDITIONAL INFORMATION ABOUT INDEPENDENCE SMALL CAP PORTFOLIO 3
FUND HISTORY 3
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISK 3
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 3
INVESTMENT ADVISORY AND OTHER SERVICES 3
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 3
CALCULATION OF PERFORMANCE DATA 4
FINANCIAL STATEMENTS 4
ADDITIONAL INFORMATION ABOUT JOHN HANCOCK SMALL CAP FUND 4
FUND HISTORY 4
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISKS
MANAGEMENT OF JOHN HANCOCK SMALL CAP FUND 4
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 4
INVESTMENT ADVISORY AND OTHER SERVICES 4
BROKERAGE ALLOCATION AND OTHER PRACTICES 4
CAPITAL STOCK AND OTHER SECURITIES 4
PURCHASE, PREDEMPTON AND PRICING OF SHARES 4
TAXATION OF THE FUND 5
UNDERWRITERS 5
CALCULATION OF PERFORMANCE DATE 5
FINANCIAL STATEMENTS 5
-1-
EXHIBITS
The following documents are attached as exhibits to this Statement of
Additional Information ("SAI"):
Exhibit A - SAI, dated ____________, 2004, of John Hancock Small Cap Fund
(the "John Hancock Fund")
Exhibit B - SAI, dated May 1, 2004, of Independence Small Cap Portfolio
(the "Independence Portfolio")
Exhibit C - Annual Report and Semiannual Report, dated October 31, 2003 and
April 30, 2004, of Independence Portfolio
Pro forma financial statements are not included since Independence
Portfolio is being combined with John Hancock Small Cap 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 October 20,
2004 (the "Proxy Statement and Prospectus") relating to the proposed
reorganization of Independence Portfolio into John Hancock Fund in connection
with the solicitation by the management of Independence Portfolio of proxies to
be voted at the Meeting of Shareholders of Independence Portfolio to be held on
December 1, 2004.
INCORPORATION BY REFERENCE
The following documents are incorporated by reference into this SAI:
The Independence Portfolio SAI (file no. 811-6400), filed with the
Securities and Exchange Commission on March 1, 2004 (accession
Number: 0001135428-04-000095)
Annual Report for the period ended October 31, 2003 of Independence
Portfolio (file no. 811-6400), filed with the Securities and Exchange
Commission on January 5, 2004 (accession number: 0000935069-04-000049)
Semiannual Report for the period ended April 30, 2004 of Independence
Portfolio (file no. 811-6400), filed with the Securities and Exchange
Commission on July 7, 2004 (accession number:0000935069-04-000958)
The John Hancock Fund SAI (file no. 2-92548), filed with the Securities
and Exchange Commission on September 15, 2004 (accession number:
0001010521-04-000216 )
-2-
ADDITIONAL INFORMATION ABOUT
INDEPENDENCE PORTFOLIO
FUND HISTORY
For additional information about Independence Portfolio generally and its
history, see "The Trust" in the Independence Portfolio SAI.
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISKS
For additional information about the Independence Portfolio's investment
objective, policies, risks and restrictions, see "Description of Permitted
Investments", and "Investment Policies of the Fund" in the Independence
Portfolio SAI.
For additional information about Independence Portfolio's Board of Directors,
and the officers and management personnel of Independence Portfolio, see
"Trustees and Officers of the Trust" in the Independence Portfolio SAI.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For additional information about ownership of shares of Independence
Portfolio, see "5% and 25% Shareholders" in the Independence Portfolio SAI.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information about advisory and other services, see "Investment
Advisory and Other Services", "The Administrator", "The Distributor",
"Transfer Agent", and "Custodian" in the Independence Portfolio SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
For additional information about Independence Portfolio's brokerage
allocation practices, see "Brokerage Allocation and Other Practices" in the
Independence Portfolio SAI.
CAPITAL STOCK AND OTHER SECURITIES
For additional information about the voting rights and other characteristics
of Independence Portfolio's shares, see "Description of Shares" in the
Independence Portfolio SAI.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about share purchase, redemption and pricing of
Independence Portfolio shares, see "Purchasing and Redeeming Shares" and
"Determination of Net Asset Value" in the Independence Portfolio SAI.
TAXATION OF THE FUND
For additional information about tax matters, see "Taxes" in the Independence
Portfolio SAI.
UNDERWRITERS
For additional information, see "The Distributor" in the Independence
Portfolio SAI.
-3-
CALCULATION OF PERFORMANCE DATA
Not applicable.
FINANCIAL STATEMENTS
For additional information, see "Independent Auditors" in the Independence
Portfolio SAI.
ADDITIONAL INFORMATION ABOUT
JOHN HANCOCK SMALL CAP 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
-4-
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.
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
Not applicable.
-5-
820PN X/04
DRAFT 9/9/04
JOHN HANCOCK
Small Cap Fund
- --------------------------------------------------------------------------------
Prospectus ___.___.2004
- --------------------------------------------------------------------------------
[LOGO]
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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
- --------------------------------------------------------------------------------
JOHN HANCOCK SMALL CAP FUND 4
YOUR 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 13
Additional investor services 13
FUND DETAILS
------------------------------------------------------------------------------
Business structure 14
Financial highlights 15
FOR MORE INFORMATION BACK COVER
------------------------------------------------------------------------------
Small Cap Fund
[GRAPHIC OMITTED] GOAL AND STRATEGY
The fund seeks capital appreciation. To pursue this goal, the fund normally
invests at least 80% of its assets in equity securities of small-capitalization
companies (companies in the capitalization range of the Russell 2000 Index,
which was $67.8 million to $1.97 billion, as of August 31, 2004).
In managing the portfolio, the portfolio manager selects securities using a
bottom-up selection process that focuses on stocks of statistically undervalued
yet promising companies that he believes are likely to show improving
fundamental prospects with an identifiable catalyst for change. Such catalysts
may include, but are not limited to, a new product, new management, regulatory
changes, industry or company restructuring or a strategic acquisition.
The portfolio manager attempts to identify undervalued securities using
quantitative screening parameters, including various financial ratios and
"earnings per share" revisions, which measure the change in earnings estimate
expectations. The portfolio manager additionally narrows the list of stocks
using fundamental security analysis, which may include on-site visits, outside
research and analytical judgment.
The fund may sell a security if, among other things, it reaches the target price
set by the portfolio manager; the management team decides, by using the same
quantitative screens it analyzed in the selection process, that the stock is
statistically overvalued; or the portfolio manager believes earnings
expectations or the fundamental outlook for the company have deteriorated.
The fund may make limited use of certain derivatives (investments whose value is
based on securities, indexes, or currencies).
In abnormal circumstances, the fund may invest extensively in investment-grade
short-term securities. In these and other cases, the fund might not achieve its
goal.
The fund may trade securities actively, which could increase its transaction
costs (thus lowering performance) and increase your taxable distributions.
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[GRAPHIC OMITTED] PAST PERFORMANCE
This section normally shows how the fund's total return has varied from year to
year, along with a broad-based market index for reference. Performance
information is not shown because the fund has not yet commenced operations. If
approved by the shareholders of Independence Small Cap Portfolio, the fund will
acquire all of the assets of Independence Small Cap Portfolio on December 3,
2004, pursuant to an agreement and plan of reorganization in exchange for Class
A shares of the fund. As successor to Independence Small Cap Portfolio, the fund
will assume that fund's historical performance record after the reorganization.
For the past performance of Independence Small Cap Portfolio, see the
Independence Small Cap Portfolio prospectus dated March 1, 2004.
4
[GRAPHIC OMITTED] MAIN RISKS
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.
Small-capitalization stocks as a group could fall out of favor with the market,
causing the fund to underperform investments that focus on medium- or
large-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 manager's security selection strategies or the quantitative
screening parameters do not perform as expected, the fund could underperform its
peers or lose money.
Stocks of smaller companies are more volatile than stocks of larger companies.
Many smaller companies have short track records, narrow product lines or niche
markets, making them highly vulnerable to isolated business setbacks.
To the extent that the fund makes investments with additional risks, these risks
could increase volatility or reduce performance:
o Certain derivatives could produce disproportionate losses.
o In a down market, higher-risk securities and derivatives could become harder
to value or to sell at a fair price; this risk could also affect
small-capitalization stocks, especially those with low trading volumes.
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.
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED] YOUR EXPENSES
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 front-end sales charge (load) 5.00% none none
on purchases as a % of purchase price
Maximum deferred sales charge (load) none(2) 5.00% 1.00%
as a % of purchase or sale price,
whichever is less
- --------------------------------------------------------------------------------
Annual operating expenses Class A Class B Class C
- --------------------------------------------------------------------------------
Management fee 0.90% 0.90% 0.90%
Distribution and service (12b-1) fees 0.30% 1.00% 1.00%
Other expenses 0.53% 0.53% 0.53%
Total fund operating expenses 1.73% 2.43% 2.43%
Expense reimbursement (at least until 12-3-05) 0.08% 0.08% 0.08%
Net annual operating expenses 1.65% 2.35% 2.35%
The hypothetical example below shows what your expenses would be after the
expense reimbursement (through December 3, 2005) 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 $659 $1,010 $1,385 $2,433
Class B with redemption $738 $1,050 $1,488 $2,587
Class B without redemption $238 $750 $1,288 $2,587
Class C with redemption $338 $750 $1,288 $2,760
Class C without redemption $238 $750 $1,288 $2,760
(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."
SUBADVISER
Independence Investment LLC
Team responsible for day-to-day
investment management
A subsidiary of John Hancock Financial Services, Inc.
Founded in 1982
Supervised by the adviser
PORTFOLIO MANAGER
Charles S. Glovsky, CFA
Principal and senior vice president of subadviser
Joined subadviser in 2000
Senior portfolio manager, Dewey Square
Investors Corp. (1998-2000)
Began business career in 1979
FUND CODES
Class A Ticker --
CUSIP --
Newspaper --
SEC number 811-4079
JH fund number --
Class B Ticker --
CUSIP --
Newspaper --
SEC number 811-4079
JH fund number --
Class C Ticker --
CUSIP --
Newspaper --
SEC number 811-4079
JH fund number --
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 0.30%.
- --------------------------------------------------------------------------------
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 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 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.
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.
For actual past expenses of each share class, see the fund information earlier
in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, they may cost shareholders more
than other types of sales charges.
Other classes of shares of the fund, which have their own expense structure, may
be offered in separate prospectuses.
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 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
* Offering price is the net asset value per share plus any initial sales
charge.
You may qualify for a reduced Class A sales charge if you own or are purchasing
Class A, Class B, Class C, Class I or Class R shares of John Hancock mutual
funds. To receive the reduced sales charge, you must tell your broker or
financial adviser at the time you purchase a fund's Class A shares about any
other John Hancock mutual funds held by you, your spouse or your children under
the age of 21. This includes investments held in a retirement account, an
employee benefit plan or at a broker or financial adviser other than the one
handling your current purchase. John Hancock will credit the combined value, at
the current offering price, of all eligible accounts to determine whether you
qualify for a reduced sales charge on your current purchase. You may need to
provide documentation for these accounts, such as an account statement. For more
information about these reduced sales charges, you may visit the funds' Web site
at www.jhfunds.com. You may also consult your broker or financial adviser or
refer to the section entitled "Initial Sales Charge on Class A Shares" in the
funds' Statement of Additional Information. You may request a Statement of
Additional Information from your broker or financial adviser, access the funds'
Web site at www.jhfunds.com or call 1-800-225-5291.
Investments of $1 million or more Class A shares are available with no front-end
sales charge. There is a contingent deferred sales charge (CDSC) on any Class A
shares upon which a commission or finder's fee was paid that are sold within one
year of purchase, as follows:
- --------------------------------------------------------------------------------
Class A deferred charges 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 and Class C Shares are offered at their net asset value per share,
without any initial sales charge.
A CDSC may be charged if a commission has been paid and 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
- --------------------------------------------------------------------------------
CDSC on shares
Years after purchase 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.
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. The first 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. You can use a Letter of Intention to qualify for reduced
sales charges if you plan to invest at least $50,000 in a fund's Class A
shares during the next 13 months. The calculation of this amount would
include your current holdings of all classes of John Hancock funds, as well
as any reinvestment of dividends and capital gains distributions. However,
Class A shares of money market funds will be excluded unless you have already
paid a sales charge. When you sign this letter, the funds agree to charge you
the reduced sales charges listed above. Completing a Letter of Intention does
not obligate you to purchase additional shares. However, if you do not buy
enough shares to qualify for the lower sales charges by the earlier of the
end of the 13-month period or when you sell your shares, your sales charges
will be recalculated to reflect your actual purchase level. Also available
for retirement plan investors is a 48-month Letter of Intention, described in
the SAI.
o Combination Privilege -- lets you combine Class A shares of multiple funds
for purposes of calculating the sales charge.
To utilize any reduction you must: Complete the appropriate section of your
application, or contact your financial representative or Signature Services.
Consult the SAI for additional details (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 this program you must: Contact your financial representative or
Signature Services to find out how to qualify. Consult the SAI for additional
details (see the back cover of this prospectus).
YOUR ACCOUNT 7
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 certain retirement plans participating in Merrill Lynch or PruArray programs
o redemptions pursuant to the fund's right to liquidate an account less than
$1,000
o redemptions of Class A shares made after one year from the inception of a
retirement plan at John Hancock
o to make certain distributions from a retirement plan
o because of shareholder death or disability
To utilize this waiver you must: Contact your financial representative or
Signature Services. Consult the SAI for additional details (see the back cover
of this prospectus).
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 this privilege you must: 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 (and their
Immediate Family, as defined in the SAI)
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 (and their Immediate Family, as defined in the SAI)
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 participants in certain 529 plans that have a signed agreement with John
Hancock Funds (one-year CDSC may apply)
o certain retirement plans participating in Merrill Lynch or PruArray programs
o any shareholder account of Independence Small Cap Portfolio registered on
this fund's books in the shareholder's name as of December 3, 2004
To utilize a waiver you must: Contact your financial representative or Signature
Services. Consult the SAI for additional details (see the back cover of this
prospectus).
Other waivers Front-end sales charges and CDSCs are generally not imposed in
connection with the following transactions:
o exchanges from one John Hancock Fund to the same class of any other John
Hancock Fund (see "Transactions Policies" in this prospectus for additional
details)
o dividend reinvestments (see "Dividends and Account Policies" in this
prospectus for additional details)
- --------------------------------------------------------------------------------
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
3 All shareholders must complete the account application, carefully following
the instructions. When opening a corporate account, you must submit: (1) a
new account application; (2) a corporate business/organization resolution
certified within the past 12 months or a John Hancock Funds
business/organization certification form; and (3) articles of incorporation
or a government-issued business license. When opening a trust account, you
must submit: (1) a new account application and (2) a copy of the trust
document certified within the past 12 months. You must notify your
financial representative or Signature Services if this information changes.
Signature Services reserves the right to require additional documentation
prior to opening any account. 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
[GRAPHIC] o Make out a check for the investment amount, payable to o Make out a check for the investment amount payable to
"John Hancock Signature Services, Inc." "John Hancock Signature Services, Inc."
o Deliver the check and your completed application to your o Fill out the detachable investment slip from an
financial representative, or mail them to Signature account statement. If no slip is available, include a
Services (address below). 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
representative, or mail them to Signature Services
By exchange
[GRAPHIC] o Call your financial representative or Signature Services o Log on to www.jhfunds.com to process exchanges between
to request an exchange. funds.
o Call EASI-Line for automated service 24 hours a day
phone at 1 -800-338-8080.
o Call your financial representative or Signature Ser
exchange.
By wire
[GRAPHIC] o Deliver your completed application to your financial o Instruct your bank to wire the amount of your
representative, or mail it to Signature Services. 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 of your investment Specify the fund name, your share class, your account
to: number and the name(s) in which the account is
First Signature Bank & Trust registered. Your bank may charge a fee to wire funds.
Account # 900000260
Routing # 211475000
Specify the fund name, your choice of share class, the new
account number and the name(s) in which the account is
registered. Your bank may charge a fee to wire funds.
By Internet
[GRAPHIC] 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
[GRAPHIC] 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 call Signature
Services between 8 A.M. and 7 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
- ------------------------------------------------------------------------------------------------------------------------------------
To sell some or all of your shares
By letter o Accounts of any type. o Write a letter of instruction or complete a stock
power indicating the fund name, your share class, your
[GRAPHIC] o Sales of any amount. account number, the name(s) in which the account is
registered and the dollar value or 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
[GRAPHIC] 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
[GRAPHIC] 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 call Signature
Services between 8 A.M. and 7 P.M. Eastern Time on
most business days.
By wire or electronic funds transfer (EFT)
[GRAPHIC] o Requests by letter to sell any amount. o To verify that the Internet or telephone redemption
privilege is in place on an account, or to request the
o Requests by Internet or phone to sell up to $100,000. form to add it to an existing 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
[GRAPHIC] o Accounts of any type. o Obtain a current prospectus for the fund into which
you are exchanging by Internet or by calling your
o Sales of any amount. 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 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.
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 [GRAPHIC]
- ------------------------------------------------------------------------------------------------------------------------------------
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 partner o Letter of instruction.
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.
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 sellers o Call 1-800-225-5291 for instructions.
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. A CDSC rate that has increased will drop again with a
future exchange into a fund with a lower rate. A fund may change or cancel its
exchange policies at any time, upon 60 days' notice to its shareholders. For
further details, see "Additional Services and Programs" in the SAI (see the back
cover of this prospectus).
Until June 30, 2005, any shareholder of Independence Small Cap Portfolio
registered on this fund's books in the shareholder's name as of December 3, 2004
may convert their Class A shares to Class I shares of the fund upon request,
provided that the shareholder meets the criteria for investment in Class I
shares as set forth in the fund's Class I share prospectus.
Excessive trading The fund is intended for long-term investment purposes only
and does not knowingly accept shareholders who engage in "market timing" or
other types of excessive short-term trading. Short-term trading into and out of
the fund can disrupt portfolio investment strategies and may increase fund
expenses for all shareholders, including long-term shareholders who do not
generate these costs.
The fund reserves the right to reject any purchase request by any investor or
group of investors for any reason without prior notice, including, in
particular, if the fund reasonably believes that the trading activity in the
account(s) would be disruptive to the fund. For example, the fund may refuse a
purchase order if the fund's adviser believes that it would be unable to invest
the money effectively in accordance with the fund's investment policies or the
fund would otherwise be adversely affected due to the size of the transaction,
frequency of trading or other factors.
The fund and/or its service providers currently undertake a variety of measures
designed to help detect market timing activity including monitoring shareholder
transaction activity and cash flows. The trading history of accounts under
common ownership or control may be considered in enforcing these policies.
Despite these measures, however, the fund and/or its service providers may not
be able to detect or prevent all instances of short-term trading. For example,
the fund may not have sufficient information regarding the beneficial ownership
of shares owned through financial intermediaries or other omnibus-type account
arrangements to enforce these policies.
Account information John Hancock Funds is required by law to obtain information
for verifying an account holder's identity. For example, an individual will be
required to supply name, address, date of birth and social security number. 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 and take any 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.
12 YOUR ACCOUNT
- --------------------------------------------------------------------------------
DIVIDENDS AND ACCOUNT POLICIES
Account statements In general, you will receive account statements as follows:
o after every transaction (except a dividend reinvestment automatic investment
or systematic withdrawal) 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
annually 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. 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. No front-end sales
charge or CDSC will be imposed on shares derived from reinvestment of dividends
or capital gains distributions.
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, your fund may charge you $20 a
year to maintain your account. You will not be charged a CDSC if your account is
closed for this reason. Your account will not be closed or charged this fee if
its drop in value is due to fund performance or the effects of sales charges. If
your account balance is $100 or less and no action is taken, the account will be
liquidated.
- --------------------------------------------------------------------------------
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, semiannually, 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 and Roth IRAs, Coverdell ESAs, 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.
Fund securities The funds' portfolio securities disclosure policy can be found
in the Statement of Additional Information and on the funds' Web site,
www.jhfunds.com. The funds' Web site also lists fund holdings.
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 small-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. (a subsidiary of Manulife Financial Corporation) and
managed approximately $29 billion in assets as of June 30, 2004.
The subadviser Independence Investment LLC ("Independence") was founded in 1982
and provides investment advisory services to individual and institutional
investors, and was investment adviser to the fund's prede cessor, Independence
Small Cap Portfolio. Independence is a wholly owned subsidiary of John Hancock
Financial Services, Inc. (a subsidiary of Manulife Financial Corporation) and,
as of June 30, 2004, had total assets under management of approximately
$10 billion.
Management fee The fund pays the investment adviser a management fee at an
annual rate of 0.90% of the fund's average net assets.
-------------------
Shareholders
-------------------
----------------------------------------------
Financial services firms and
Distribution and their representatives
shareholder services
Advise current and prospective shareholders
on their fund investments, often
in the context of an overall financial plan.
----------------------------------------------
---------------------------------------------- -------------------------------------------------
Principal distributor Transfer agent
John Hancock Funds, LLC John Hancock Signature Services, Inc.
Markets the fund and distributes shares Handles shareholder services, including record-
through selling brokers, financial planners keeping and statements, distribution of dividends
and other financial representatives. and processing of buy and sell requests.
---------------------------------------------- -------------------------------------------------
- ----------------------------------- ----------------------------------- ---------------------------------------
Subadviser Investment adviser Custodian
Independence Investment LLC John Hancock Advisers, LLC The Bank of New York
53 State Street 101 Huntington Avenue One Wall Street Asset
Boston, MA 02109 Boston, MA 02199-7603 New York, NY 10286 management
Provides portfolio management to Manages the fund's business and Holds the fund's assets, settles all
the fund. investment activities. portfolio trades and collects most of
the valuation data required for
calculating the fund's NAV.
- ----------------------------------- ----------------------------------- ---------------------------------------
-----------------------------------
Trustees
Oversee the fund's activities.
-----------------------------------
14 FUND DETAILS
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FINANCIAL HIGHLIGHTS
This section normally details the performance of the fund's share classes,
including total return information showing how much an investment in the fund
has increased or decreased each year. Financial highlights are not shown because
the fund has not yet commenced operations. If approved by the shareholders of
Independence Small Cap Portfolio, a series of the Advisor's Inner Circle Fund,
the fund will acquire all of the assets of Independence Small Cap Portfolio on
December 3, 2004, pursuant to an agreement and plan of reorganization in
exchange for Class A shares of the fund. As successor to Independence Small Cap
Portfolio, the fund will assume that fund's financial highlights. For the
financial highlights of Independence Small Cap Portfolio, see the Independence
Small Cap Portfolio prospectus dated March 1, 2004.
FUND DETAILS 15
For more information
- --------------------------------------------------------------------------------
Two documents are available that offer further information on the John Hancock
Small Cap Fund:
Annual/Semiannual Report to Shareholders
Includes financial statements, a discussion of the market conditions and
investment strategies that significantly affected performance, as well as the
auditors' report (in annual report only).
Statement of Additional Information (SAI)
The SAI contains more detailed information on all aspects of the fund. The
current annual report is included in the SAI. A current SAI has been filed with
the Securities and Exchange Commission and is incorporated by reference into (is
legally a part of) this prospectus.
(C)2004 JOHN HANCOCK FUNDS, LLC 820PN X/04
To request a free copy of the current annual/semiannual report or the SAI,
please contact John Hancock:
By mail: John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, MA 02217-1000
By phone: 1-800-225-5291
By EASI-Line: 1-800-338-8080
By TDD: 1-800-554-6713
On the Internet: www.jhfunds.com
Or you may view or obtain these documents from the SEC:
By mail: Public Reference Section
Securities and Exchange Commission
Washington, DC 20549-0102
(duplicating fee required)
In person: at the SEC's Public Reference Room in Washington, DC.
For access to the Reference Room call 1-202-942-8090
By electronic request: publicinfo@sec.gov
(duplicating fee required)
On the Internet: www.sec.gov
[LOGO]
John Hancock Funds, LLC
MEMBER NASD
101 Huntington Avenue
Boston, MA 02199-7603
www.jhfunds.com
JOHN HANCOCK SMALL CAP FUND
Class A, Class B, Class C and Class I Shares
Statement of Additional Information
______ __, 2004
This Statement of Additional Information provides information about John Hancock
Small Cap Fund (the "Fund") in addition to the information that is contained in
the Fund's current Prospectus for Class A, B and C and in the Fund's current
Class I share prospectus (the "Prospectuses"). The Fund is a diversified series
of John Hancock Equity Trust (the "Trust").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which can be obtained free of
charge by writing or telephoning:
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 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 ................................................... 16
Those Responsible for Management .......................................... 18
Investment Advisory and Other Services .................................... 26
Distribution Contracts .................................................... 31
Sales Compensation ........................................................ 32
Net Asset Value ........................................................... 35
Initial Sales Charge on Class A Shares .................................... 35
Deferred Sales Charge on Class B and Class C Shares ....................... 38
Special Redemptions ....................................................... 42
Additional Services and Programs .......................................... 42
Purchase and Redemptions through Third Parties ............................ 44
Description of the Fund's Shares .......................................... 44
Tax Status ................................................................ 46
Calculation of Performance ................................................ 50
Brokerage Allocation ...................................................... 52
Transfer Agent Services ................................................... 55
Custody of Portfolio ...................................................... 56
Independent Registered Public Accounting Firm ............................. 56
Fund Securities ........................................................... 57
Appendix A- Description of Investment Risk ................................ A-1
Appendix B-Description of Bond Ratings .................................... B-1
Appendix C-Proxy Voting Summary ........................................... C-1
Financial Statements ...................................................... F-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 under the laws of The Commonwealth
of Massachusetts. Prior to August 28, 2000, the Trust was named John Hancock
Special Equities Fund. If approved by the shareholders of Independence Small Cap
Portfolio (the "Predecessor Fund"), on December 3, 2004, the Fund will acquire
all of the assets of the Predecessor Fund 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 the Predecessor Fund, and the Fund
will become the successor to Independence Small Cap Portfolio. The Predecessor
Fund is a series of the Advisors' Inner Circle Fund, a Massachusetts business
Trust organized in 1991.
John Hancock Advisers, LLC (prior to February 1, 2002, John Hancock Advisers,
Inc.) (the "Adviser") is the Fund's investment adviser. The Adviser is a wholly
owned subsidiary of John Hancock Financial Services, Inc., a subsidiary of
Manulife Financial Corporation ("Manulife Financial"). Founded in 1862, John
Hancock Financial Services and its subsidiaries today offer a broad range of
financial products and services, including whole, term, variable, and universal
life insurance, as well as college savings products, mutual funds, fixed and
variable annuities, long-term care insurance and various forms of business
insurance.
Manulife Financial is a leading Canadian-based financial services group serving
millions of customers in 19 countries and territories worldwide. Operating as
Manulife Financial in Canada and most of Asia, and primarily through John
Hancock in the United States, the Company offers clients a diverse range of
financial protection products and wealth management services through its
extensive network of employees, agents and distribution partners. Funds under
management by Manulife Financial and its subsidiaries were Cdn$360 billion
(US$269 billion) as at June 30, 2004.
Manulife Financial Corporation trades as 'MFC' on the TSX, NYSE and PSE, and
under '0945' on the SEHK. Manulife Financial can be found on the Internet at
www.manulife.com.
Independence Investment LLC ("Independence" or the "Sub-Adviser") (formerly
Independence Investment Associates, Inc.), which is a subsidiary of the John
Hancock Financial Services, Inc., is the Sub-Adviser to the Fund.
The Predecessor Fund is the successor to the UAM Funds Trust Independence Small
Cap Portfolio (the "UAM Portfolio"), a separately registered investment company.
The UAM Portfolio was managed by the Sub-Adviser under the same portfolio
management team and using the same investment objective, strategies, and
policies as those used by the Predecessor Fund. The UAM Portfolio dissolved and
reorganized into the Predecessor Fund on June 24, 2002. Substantially all of the
assets of the UAM Portfolio were acquired by the Predecessor Fund in connection
with its commencement of operations on June 24, 2002.
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 capital appreciation. To pursue this goal, the fund normally
invests at least 80% of its assets in equity securities of small-capitalization
companies (companies in the capitalization range of the Russell 2000 Index).
2
With respect to the Fund's investment policy of investing at least 80% of its
Assets in small 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 Sub-Adviser selects securities using a bottom-up
selection process that focuses on stocks of statistically undervalued yet
promising companies that it believes are likely to show improving fundamental
prospects with an identifiable catalyst for change. Such catalysts may include,
but are not limited to, a new product, new management, regulatory changes,
industry or company restructuring or a strategic acquisition. The Sub-Adviser
attempts to identify undervalued securities using quantitative screening
parameters, including various financial ratios and "earnings per share"
revisions, which measure the change in earnings estimate expectations. The
Sub-Adviser additionally narrows the list of stocks using fundamental security
analysis, which may include on-site visits, outside research and analytical
judgment. The fund may sell a security if it reaches the target price set by the
Sub-Adviser; the Sub-Adviser decides, by using the same quantitative screens it
analyzed in the selection process, that the stock is statistically overvalued;
or the Sub-Adviser decides earnings expectations or the fundamental outlook for
the company have deteriorated.
The fund may make limited use of derivatives (securities whose value is based on
securities, indexes, or currencies). In abnormal circumstances, such as
situations where the Fund experiences 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. The fund may trade securities actively.
In these and other cases, the fund might not achieve its goal.
Smaller Capitalization Companies. Smaller capitalization companies may have
limited product lines, market and financial resources, or they may be dependent
on smaller or less experienced management groups. In addition, trading volume
for these securities may be limited. Historically, the market price for these
securities has been more volatile than for securities of companies with greater
capitalization. However, securities of companies with smaller capitalization may
offer greater potential for capital appreciation since they may be overlooked
and thus undervalued by investors.
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. 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
3
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.
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
4
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.
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.
Initial Public Offerings ("IPOs"). The Fund may invest in IPOs. IPO investments
may be more volatile than other types of investments and the Fund's investments
in IPOs may be subject to more erratic price movements than the overall equity
market. IPOs could have a substantial impact on performance, either positive or
negative, particularly on a Fund with a small asset base. The actual effect of
IPOs on performance depends on a variety of factors, including the number of
IPOs the Fund invests in, whether and to what extent a security is purchased in
an IPO appreciates in value, and the asset base of the Fund. There is no
guarantee that a Fund's investments in IPOs, if any, will continue to have a
similar impact on the Fund's performance in the future.
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. Generally, ADRs are designed for use in the United States
securities markets and EDRs are designed for use in European securities markets.
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.
5
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.
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.
6
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.
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
7
more than 15% of its net assets in illiquid investments. If the Trustees
determine, based upon a continuing review of the trading markets for specific
Section 4(2) paper or Rule 144A securities, that they are liquid, they will not
be subject to the 15% limit on illiquid investments. The Trustees have adopted
guidelines and delegated to the Adviser the daily function of determining the
monitoring and liquidity of restricted securities. The Trustees, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. The Trustees will carefully monitor the Fund's investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Fund if
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
Options on Securities, Securities Indices and Currency. 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
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.
8
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.
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.
9
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
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.
10
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.
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
11
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
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.
Mortgage-Backed Securities. The Fund may invest in mortgage pass-through
certificates and multiple-class pass-through securities, such as real estate
mortgage investment conduits ("REMIC") pass-through certificates, collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"),
and other types of "Mortgage-Backed Securities" that may be available in the
future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to the GNMA, the FNMA and the FHLMC. GNMA certificates are
guaranteed by the full faith and credit of the U.S. Government for timely
12
payment of principal and interest on the certificates. FNMA certificates are
guaranteed by FNMA, a federally chartered and privately owned corporation, for
full and timely payment of principal and interest on the certificates. FHLMC
certificates are guaranteed by FHLMC, a corporate instrumentality of the U.S.
Government, for timely payment of interest and the ultimate collection of all
principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
lenders. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also
may be collateralized by other mortgage assets such as whole loans or private
mortgage pass-through securities. Debt service on CMOs is provided from payments
of principal and interest on collateral of mortgaged assets and any reinvestment
income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages primarily secured by interests in real property and
other permitted investments. Investors may purchase "regular" and "residual"
interest shares of beneficial interest in REMIC trusts although the Fund does
not intend to invest in residual interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the SEC
considers privately issued SMBS to be illiquid.
Structured or Hybrid Notes. Funds that may invest in mortgage-backed securities
may invest in "structured" or "hybrid" notes. The distinguishing feature of a
structured or hybrid note is that the amount of interest and/or principal
payable on the note is based on the performance of a benchmark asset or market
other than fixed-income securities or interest rates. Examples of these
benchmarks include stock prices, currency exchange rates and physical commodity
prices. Investing in a structured note allows the Fund to gain exposure to the
benchmark market while fixing the maximum loss that the Fund may experience in
the event that market does not perform as expected. Depending on the terms of
the note, the Fund may forego all or part of the interest and principal that
would be payable on a comparable conventional note; the Fund's loss cannot
exceed this foregone interest and/or principal. An investment in structured or
hybrid notes involves risks similar to those associated with a direct investment
in the benchmark asset.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income
13
securities. The major differences typically include more frequent interest and
principal payments (usually monthly), the adjustability of interest rates, and
the possibility that prepayments of principal may be made substantially earlier
than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, the Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When the Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage
pass-through securities and sequential pay CMOs are subject to all of these
risks, but are typically not leveraged. Thus, the magnitude of exposure may be
less than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
These securities include floating rate securities based on the Cost of Funds
Index ("COFI floaters"), other "lagging rate" floating rate securities, floating
rate securities that are subject to a maximum interest rate ("capped floaters"),
Mortgage-Backed Securities purchased at a discount, leveraged inverse floating
rate securities ("inverse floaters"), principal only debt securities ("POs"),
certain residual or support tranches of CMOs and index amortizing notes. Index
amortizing notes are not Mortgage-Backed Securities, but are subject to
extension risk resulting from the issuer's failure to exercise its option to
call or redeem the notes before their stated maturity date. Leveraged inverse
IOs combine several elements of the Mortgage-Backed Securities described above
and thus present an especially intense combination of prepayment, extension and
interest rate risks.
Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risk than
other Mortgage-Backed Securities, provided that prepayment rates remain within
expected prepayment ranges or "collars." To the extent that prepayment rates
remain within these prepayment ranges, the residual or support tranches of PAC
and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
14
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
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.
15
Short Sales. The Fund may engage in short sales "against the box". In a short
sale against the box, the Fund agrees to sell at a future date a security that
it either contemporaneously owns or has the right to acquire at no extra cost.
If the price of the security has declined at the time the Fund is required to
deliver the security, the Fund will benefit from the difference in the price. If
the price of the security has increased, the Fund will be required to pay the
difference.
Short-Term Trading and Portfolio Turnover. Short-term trading means the purchase
and subsequent sale of a security after it has been held for a relatively brief
period of time. The Fund may engage in short-term trading in response to stock
market conditions, changes in interest rates or other economic trends and
developments, or to take advantage of yield disparities between various fixed
income securities in order to realize capital gains or improve income.
Short-term trading may have the effect of increasing portfolio turnover rate. A
high rate of portfolio turnover (100% or greater) involves correspondingly
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
16
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.
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.
17
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.
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"). The following table
represents the composition of the Board of Trustees effective December 1, 2004,
subject to shareholder approval at a shareholder meeting of the Trust to be held
on that date.
18
- ---------------------------------------------------------------------------------------------------------------------
Number of
John Hancock
Funds
Position(s) Trustee/ Principal Occupation(s) and other Overseen by
Name, Address (1) Held with Officer Directorships Trustee
And Age Fund since(2) During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------------
Independent Trustees
- ---------------------------------------------------------------------------------------------------------------------
Charles L. Ladner Chairman 2004 Chairman and Trustee, Dunwoody Village, 50
Born: 1938 and Trustee Inc. (continuing care retirement
community)(until 2003); Senior Vice
President and Chief Financial Officer, UGI
Corporation (Public Utility Holding
Company) (retired 1998); Vice President
and Director for AmeriGas, Inc. (retired
1998); Director of AmeriGas Partners, L.P.
(until 1997)(gas distribution); Director,
EnergyNorth, Inc. (until 1995); Director,
Parks and History Association (since 2001).
- ---------------------------------------------------------------------------------------------------------------------
James F. Carlin Trustee 2004 Chairman and CEO, Alpha Analytical 50
Born: 1940 Laboratories (chemical analysis); Part
Owner and Treasurer, Lawrence Carlin
Insurance Agency, Inc. (since 1995); Part
Owner and Vice President, Mone Lawrence
Carlin Insurance Agency, Inc. (since
1996); Director/Treasurer, Rizzo
Associates (until 2000); Chairman and
CEO, Carlin Consolidated, Inc.
(management/investments);
Director/Partner, Proctor Carlin & Co.,
Inc. (until 1999); Trustee, Massachusetts
Health and Education Tax Exempt Trust;
Director of the following: Uno Restaurant
Corp. (until 2001), Arbella Mutual
(insurance) (until 2000), HealthPlan
Services, Inc. (until 1999), Flagship
Healthcare, Inc. (until 1999), Carlin
Insurance Agency, Inc. (until 1999),
Chairman, Massachusetts Board of Higher
Education (until 1999).
- ---------------------------------------------------------------------------------------------------------------------
Richard P. Chapman, Jr. Trustee 2004 President and Chief Executive Officer, 50
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).
- ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and non-independent 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) Non-Independent Trustee: holds positions with the Fund's investment
adviser, underwriter, and or certain other affiliates.
19
- ---------------------------------------------------------------------------------------------------------------------
William J. Cosgrove Trustee 2004 Vice President, Senior Banker and Senior 20
Born: 1933 Credit Officer, Citibank, N.A. (banking)
(retired 1991); Executive Vice President,
Citadel Group Representatives, Inc.
(financial reinsurance) (until 2004);
Director, Hudson City Bancorp (banking);
Trustee, Scholarship Fund for Inner City
Children (since 1986).
- ---------------------------------------------------------------------------------------------------------------------
William H. Cunningham Trustee 2004 Former Chancellor, University of Texas 50
Born: 1944 System and former President of the
University of Texas, Austin, Texas;
Chairman and CEO, IBT Technologies
(until 2001); Director of the following:
The University of Texas Investment
Management Company (until 2000),
Hire.com (since 2000), STC Broadcasting,
Inc. and Sunrise Television Corp. (until
2001), Symtx, Inc. (since 2001),
Adorno/Rogers Technology, Inc. (since
2001), Pinnacle Foods Corporation (since
2001), rateGenius (since 2001),
Jefferson-Pilot Corporation (diversified
life insurance company), New Century
Equity Holdings (formerly Billing
Concepts) (until 2001), eCertain (until
2001), ClassMap.com (until 2001), Agile
Ventures (until 2001), LBJ Foundation
(until 2000), Golfsmith International,
Inc. (until 2000), Metamor Worldwide
(until 2000), AskRed.com (until 2001),
Southwest Airlines and Introgen;
Advisory Director, Q Investments;
Advisory Director, Chase Bank (formerly
Texas Commerce Bank - Austin), LIN
Television (since 2002) , WilTel
Communications (since 2002).
- ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and non-independent 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) Non-Independent Trustee: holds positions with the Fund's investment
adviser, underwriter, and or certain other affiliates.
20
- ---------------------------------------------------------------------------------------------------------------------
Number of John
Position(s) Trustee/ Principal Occupation(s) and other Hancock Funds
Name, Address (1) Held with Officer Directorships Overseen by
And Age Fund since(2) During Past 5 Years Trustee
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Ronald R. Dion Trustee 2004 Chairman and Chief Executive Officer, 50
Born: 1946 R.M. Bradley & Co., Inc.; Director, The
New England Council and Massachusetts
Roundtable; Director, Boston Stock
Exchange; Trustee, North Shore Medical
Center; Director, BJ's Wholesale Club,
Inc. and a corporator of the Eastern
Bank; Trustee, Emmanuel College.
- ---------------------------------------------------------------------------------------------------------------------
John A. Moore Trustee 2004 President and Chief Executive Officer, 50
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 2004 Executive Director, Council for 50
Born: 1943 International 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);
Director, Ford Foundation, International
Fellowships Program (since 2002);
Director, Lois Roth Endowment (since
2002); Director, Council for
International Exchange (since 2003);
Advisory Board, UNCF, Global
Partnerships Center (since 2002).
- ---------------------------------------------------------------------------------------------------------------------
Steven Pruchansky Trustee 2004 Chairman and Chief Executive Officer, 50
Born: 1944 Mast Holdings, Inc. (since 2000);
Director and President, Mast Holdings,
Inc. (until 2000); Managing Director,
JonJames, LLC (real estate)(since 2001);
Director, First Signature Bank & Trust
Company (until 1991); Director, Mast
Realty Trust (until 1994); President,
Maxwell Building Corp. (until 1991).
- ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and non-independent 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) Non-Independent Trustee: holds positions with the Fund's investment
adviser, underwriter, and or certain other affiliates.
21
- ---------------------------------------------------------------------------------------------------------------------
Number of John
Position(s) Trustee/ Principal Occupation(s) and other Hancock Funds
Name, Address (1) Held with Officer Directorships Overseen by
And Age Fund since(2) During Past 5 Years Trustee
- ---------------------------------------------------------------------------------------------------------------------
Non-Independent Trustee
- ---------------------------------------------------------------------------------------------------------------------
James A. Shepherdson (3) Trustee, 2004 Executive Vice President, Manulife 50
Born: 1952 President Financial Corporation (since 2004);
and Chief Chairman, Director, President and Chief
Executive Executive Officer, John Hancock
Officer Advisers, LLC (the "Adviser") and The
Berkeley Group, LLC ("The Berkeley
Group"); Chairman, Director, President
and Chief Executive Officer, John
Hancock Funds, LLC. ("John Hancock
Funds"); Chairman, Director, President
and Chief Executive Officer, Sovereign
Asset Management Corporation
("SAMCorp."); President, John Hancock
Retirement Services, John Hancock Life
Insurance Company (until 2004);
Chairman, Essex Corporation (until
2004); Co-Chief Executive Office MetLife
Investors Group (until 2003), Senior
Vice President, AXA/Equitable Insurance
Company (until 2000).
- ---------------------------------------------------------------------------------------------------------------------
Principal Officers who are
not Trustees
- ---------------------------------------------------------------------------------------------------------------------
Richard A. Brown Senior Vice 2004 Senior Vice President, Chief Financial N/A
Born: 1949 President Officer and Treasurer, the Adviser, John
and Chief Hancock Funds, and The Berkeley Group;
Financial Second Vice President and Senior Associate
Officer Controller, Corporate Tax Department, John
Hancock Financial Services, Inc. (until 2001).
- ---------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and non-independent 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) Non-Independent Trustee: holds positions with the Fund's investment
adviser, underwriter, and or certain other affiliates.
22
- ---------------------------------------------------------------------------------------------------------------------
Number of John
Position(s) Trustee/ Principal Occupation(s) and other Hancock Funds
Name, Address (1) Held with Officer Directorships Overseen by
And Age Fund since(2) During Past 5 Years Trustee
- ---------------------------------------------------------------------------------------------------------------------
William H. King Vice 2004 Vice President and Assistant Treasurer, the N/A
Born: 1952 President Adviser; Vice President and Treasurer of
and each of the John Hancock funds; Assistant
Treasurer Treasurer of each of the John Hancock funds
until 2001).
- ------------------------------------------------------------------------------------------------------------------
Susan S. Newton Senior Vice 2004 Senior Vice President, Secretary and N/A
Born: 1950 President, Chief Legal Officer, SAMCorp., the
Secretary Adviser and each of the John Hancock
and Chief funds, John Hancock Funds and The
Legal Berkeley Group; Vice President,
Officer Signature Services (until 2000),
Capital. Director, Senior Vice President and
Secretary, NM
- ----------------------------------------------------------------------------------------------------------------------
(1) Business address for independent and non-independent 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) Non-Independent Trustee: holds positions with the Fund's investment
adviser, underwriter, and or certain other affiliates.
23
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 who are not "interested persons."
The Audit Committee members are Messrs. Glavin, Ladner and Moore and Ms. McGill
Peterson. All of the members of the Audit Committee are independent under the
New York Stock Exchange's Revised Listing Rules and each member is financially
literate with at least one having accounting or financial management expertise.
The Board has adopted a written charter for the Audit Committee. 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 members are all of the independent Trustees. The
Administration Committee reviews the activities of the other four standing
committees and makes the final selection and nomination of candidates to serve
as Independent Trustees. All members of the Administration Committee are
independent under the New York Stock Exchange's Revised Listing Rules and are
not interested persons, as defined in the 1940 Act, of John Hancock or the Fund
(the "Independent Trustees"). Among other things, the Administration Committee
acts as a nominating committee of the Board. The Trustees who are not
Independent Trustees and the officers of the Fund are nominated and selected by
the Board. The Administration Committee does not have at this time formal
criteria for the qualifications of candidates to serve as an Independent
Trustee, although the Administration Committee may develop them in the future.
In reviewing a potential nominee and in evaluating the renomination of current
Independent Trustees, the Administration Committee expects to apply the
following criteria: (i) the nominee's reputation for integrity, honesty and
adherence to high ethical standards, (ii) the nominee's business acumen,
experience and ability to exercise sound judgments, (iii) a commitment to
understand the Fund and the responsibilities of a trustee of an investment
company, (iv) a commitment to regularly attend and participate in meetings of
the Board and its committees, (v) the ability to understand potential conflicts
of interest involving management of the Fund and to act in the interests of all
shareholders, and (vi) the absence of a real or apparent conflict of interest
that would impair the nominee's ability to represent the interests of all the
shareholders and to fulfill the responsibilities of an Independent Trustee. The
Administration Committee does not necessarily place the same emphasis on each
criteria and each nominee may not have each of these qualities. The
Administration Committee does not discriminate on the basis of race, religion,
national origin, sex, sexual orientation, disability or any other basis
proscribed by law.
As long as an existing Independent Trustee continues, in the opinion of the
Administration Committee, to satisfy these criteria, the Fund anticipates that
the Committee would favor the renomination of an existing Trustee rather than a
new candidate. Consequently, while the Administration Committee will consider
nominees recommended by shareholders to serve as trustees, the Administration
Committee may only act upon such recommendations if there is a vacancy on the
Board or the Administration Committee determines that the selection of a new or
additional Independent Trustee is in the best interests of the Fund. In the
event that a vacancy arises or a change in Board membership is determined to be
advisable, the Administration Committee will, in addition to any shareholder
recommendations, consider candidates identified by other means, including
candidates proposed by members of the Administration Committee. While it has not
done so in the past, the Administration Committee may retain a consultant to
assist the Committee in a search for a qualified candidate.
Any shareholder recommendation must be submitted in compliance with all of the
pertinent provisions of Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, to be
24
considered by the Administration Committee. In evaluating a nominee recommended
by a shareholder, the Administration Committee, in addition to the criteria
discussed above, may consider the objectives of the shareholder in submitting
that nomination and whether such objectives are consistent with the interests of
all shareholders. If the Board determines to include a shareholder's candidate
among the slate of nominees, the candidate's name will be placed on the Fund's
proxy card. If the Administration Committee or the Board determines not to
include such candidate among the Board's designated nominees and the shareholder
has satisfied the requirements of Rule 14a-8, the shareholder's candidate will
be treated as a nominee of the shareholder who originally nominated the
candidate. In that case, the candidate will not be named on the proxy card
distributed with the Fund's proxy statement.
Shareholders may communicate with the members of the Board as a group or
individually. Any such communication should be sent to the Board or an
individual Trustee c/o the secretary of the Fund at the following address: 101
Huntington Avenue, Boston, MA 02199. The Secretary may determine not to forward
any letter to the members of the Board that does not relate to the business of
the Fund.
The Contracts/Operations Committee members are Messrs Carlin and Pruchansky. 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 members are Messrs. Chapman, Cunningham and
Dion. 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 funds in the John Hancock Fund Complex overseen by the
Trustee, as of December 31, 2003.
- -------------------------------------------------------------------------------------------------------------
Aggregate Dollar Range of holdings
Dollar Range of Fund Shares in John Hancock funds overseen by
Name of Trustee Owned by Trustee (1) Trustee (1)
- -------------------------------------------------------------------------------------------------------------
Independent Trustees
- -------------------------------------------------------------------------------------------------------------
James F. Carlin None Over 100,000
- -------------------------------------------------------------------------------------------------------------
Richard P. Chapman, Jr. None Over 100,000
- -------------------------------------------------------------------------------------------------------------
William J. Cosgrove None Over 100,000
- -------------------------------------------------------------------------------------------------------------
William H. Cunningham None $10,001-50,000
- -------------------------------------------------------------------------------------------------------------
Ronald R. Dion None Over 100,000
- -------------------------------------------------------------------------------------------------------------
Charles L. Ladner None Over 100,000
- -------------------------------------------------------------------------------------------------------------
Dr. John A. Moore None Over 100,000
- -------------------------------------------------------------------------------------------------------------
Patti McGill Peterson None Over 100,000
- -------------------------------------------------------------------------------------------------------------
Steven R. Pruchansky None Over 100,000
- -------------------------------------------------------------------------------------------------------------
Non-Independent Trustees
- -------------------------------------------------------------------------------------------------------------
James A. Shepherdson* None None
- -------------------------------------------------------------------------------------------------------------
(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
25
of December 31, 2003, 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.
Cunningham, none and over $100,000 for Mr. Dion and none and over $100,000
for Mr. Pruchansky.
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. Any 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.
*Mr. Shepherdson was appointed Trustee of the John Hancock Fund complex
effective May 11, 2004.
Aggregate Total Compensation From the
Compensation Fund and John Hancock Fund
Independent Trustees from the Fund (1) Complex to Trustees (2)
- -------------------- ----------------- -----------------------
Charles L. Ladner $ 700 $ 78,000
James F. Carlin 500 76,250
Richard P. Chapman* 500 79,000
William J. Cosgrove* 100 79,500
William H. Cunningham* 500 74,250
Ronald R. Dion* 500 77,250
Dr. John A. Moore* 500 74,000
Patti McGill Peterson 500 72,750
Steven R. Pruchansky* 500 79,250
-------- ----------
Total $4,300 $690,250
(1) Compensation is estimated for the current fiscal year ending October 31,
2005.
(2) Total compensation paid by the John Hancock Funds Complex to the Independent
Trustees is as of December 31, 2003. As of this date, there were fifty funds in
the John Hancock Fund Complex, with Dr. Moore and Ms. Peterson serving on
twenty-nine funds and each of the other Independent Trustees serving on twenty
funds.
*As of December 31, 2003, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock Funds Complex for Mr.
Chapman was $63,573, Mr. Cosgrove was $210,257, for Mr. Cunningham was $563,218,
for Mr. Dion was $193,220, for Dr. Moore was $248,464, and for Mr. Pruchansky
was $150,981 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,
a premier investment management company, managed $29 billion in open-end funds,
closed-end funds, private accounts and retirement plans for individual and
institutional investors as of June 30, 2004. Additional information about John
Hancock Advisers can be found on the website: www.jhfunds.com.
26
The Sub-Adviser, Independence Investment LLC, located at 53 State Street,
Boston, Massachusetts 02109, was organized in 1982 and as of June 30, 2004
managed over $27 billion in assets for primarily institutional clients. The
Sub-Adviser is a wholly-owned indirect subsidiary of John Hancock Financial
Services, Inc. (a subsidiary of Manulife Financial Coporation). The Sub-Adviser
served as the investment adviser to the Fund's predecessor, Independence Small
Cap Portfolio (the "Predecessor Fund"). Prior to February 2, 2001, the
Predecessor Fund was advised by Dewey Square Investors Corporation, which was a
subsidiary of Old Mutual (U.S.) Holdings Inc. ("Old Mutual") (formerly United
Asset Management Corporation). Old Mutual is a wholly-owned subsidiary of Old
Mutual plc, a financial services group based in the United Kingdom.
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.
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 0.90% 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 12b-1 and
transfer agent fees) to 1.05% of the Fund's average daily net assets with
respect to Class A, Class B, and Class C shares, and net operating expenses to
1.65% for Class A shares and 1.10% of the Fund's average
27
daily net assets with respect to Class I shares. The Adviser has agreed with the
Sub-Adviser not to terminate this limitation at least until December 3, 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 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 their 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.
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) with respect to the Fund, 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) with respect to the Fund, 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 John
Hancock Life Insurance Company (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.
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 0.41% of the average daily net asset
value of the Fund. For a period of one year from the effective date of the
Sub-Advisory Agreement, the Sub-Adviser has agreed to waive its fee unless the
net revenue received by the Adviser from its Advisory fee exceeds the Adviser's
28
cumulative costs and to limit its Sub-Advisory fee to the amount of such net
revenue if such net revenue is less than the Sub-Advisory fee.
Under the investment management agreement between the Sub-Adviser and the Fund's
predecessor, Independence Small Cap Portfolio, the Predecessor Fund paid a
management fee at an annual rate equal to 0.85% of the Fund's average daily net
assets. The Sub-Adviser had contractually agreed to waive fees and reimburse
expenses in order to limit the Predecessor Fund's total operating expenses from
exceeding 1.85% of the Fund's average daily net assets. In addition, the
Sub-Adviser had voluntarily agreed to the extent necessary to limit the
Predecessor Fund's total expenses (excluding interest, taxes, brokerage
commissions and extraordinary expenses) from exceeding 1.15% of the Predecessor
Fund's average daily net assets. The total investment advisory fees paid by the
Predecessor Fund to the Sub-Adviser for the fiscal years ended October 31, 2003,
2002, and 2001, respectively, were $0, $100,666, and $122,250 (after all fee
reductions and expense limitations). (For the periods prior to June 24, 2002,
the investment management fees paid by the Predecessor Fund represent the fees
paid by the UAM Portfolio.)
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 re-approved by both the Board of
Trustees and a majority of the Independent Trustees voting separately.
The Fund's Board of Trustees is responsible for overseeing the performance of
the Fund's investment Adviser and Sub-Adviser and determining whether to approve
and renew the Fund's Advisory Agreement and Sub-Advisory Agreement. The Board
has a standing request that the Adviser provide the Board with certain
information the Board has deemed important to evaluating the short- and
long-term performance of the Adviser and Sub-Adviser. This information includes
periodic performance analysis and status reports from the Adviser and quarterly
Portfolio and Investment Performance Reports. The Fund's portfolio managers meet
with the Board from time to time to discuss the management and performance of
the Fund and respond to the Board's questions concerning the performance of the
Adviser. When the Board considers whether to renew an investment advisory
contract, the Board takes into account numerous factors, including: (1) the
nature, extent and quality of the services provided by the Adviser and
Sub-Adviser; (2) the investment performance of the Fund; (3) the fair market
value of the services provided by the Adviser and Sub-Adviser; (4) a comparative
analysis of expense ratios of, and advisory fees paid by, similar funds; (5) the
extent to which the Adviser has realized or will realize economies of scale as
the Fund grows; (6) other sources of revenue to the Adviser or its affiliates
from its relationship with the Fund and intangible or "fall-out" benefits that
accrue to the adviser and its affiliates, if relevant; and (7) the Adviser's
control of the operating expenses of the fund, such as transaction costs,
including ways in which portfolio transactions for the fund are conducted and
brokers are selected.
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, Independence Small
Cap Portfolio. The Independent Trustees determined that the performance
results of the Fund's predecessor were reasonable, as compared with
relevant performance standards, including the performance results of
comparable small cap funds derived from data provided by Lipper Inc. and
appropriate market indexes.
29
o The fee charged by the Adviser for investment advisory and administrative
services, as well as other compensation received by affiliates of the
Adviser, the fee payable to the Sub-Adviser by the Adviser, the Fund's
projected total operating expenses and the expense limitation provided by
the Adviser. The Independent Trustees determined that these fees and
expenses were reasonable based on the average advisory fees and operating
expenses for comparable funds.
o The Adviser and Sub-Adviser's investment staff and portfolio management
process, as well as the Sub-Adviser's experience in managing the Fund's
predecessor, the experience of the Adviser supervising sub-advisers and the
historical quality of services provided by the Adviser and Sub-Adviser.
The Independent Trustees 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 Non-Independent 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.
The Advisory Agreement, Sub-Advisory Agreement and Distribution Agreement
(discussed below) will continue in effect from year to year, provided that its
continuance is approved annually both by (i) by the holders of a majority of the
outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Both agreements may be terminated on 60 days
written notice by any party or by a vote of a majority of the outstanding voting
securities of the Fund and will terminate automatically if it is assigned. The
Sub-Advisory Agreement terminates automatically upon the termination of the
Advisory Agreement.
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.
Under the administration agreement between the Predecessor Fund and SEI
Investments Global Fund Services (the "Administrator") (formerly SEI Investments
Mutual Fund Services), a Delaware statutory trust with its principal business
offices at Oaks, Pennsylvania 19456, the Predecessor Fund paid the Administrator
a fee equal at an annual rate of 0.12% for the first $250 million in assets
under management; 0.10% for the next $250 million in assets; 0.08% for the next
$250 million in assets; and 0.04% for all assets greater than $750 million,
subject to a minimum fee. For the fiscal years ended October 31, 2003, 2002, and
2001, the Predecessor Fund (and the UAM Portfolio for periods prior to June 24,
2002) paid $125,000, $85,168, and $72,831, respectively, to the Administrator.
Proxy Voting. The Fund's Trustees have delegated to the Adviser the authority to
vote proxies on behalf of the Fund. The Trustees have approved the proxy voting
guidelines of the Adviser and will review the guidelines and suggest changes as
they deem advisable. A summary of the Adviser's proxy voting guidelines is
attached to this statement of additional information as Appendix C.
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.
30
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, banks and registered investment advisors ("Selling Firms") that
have entered into selling agreements with John Hancock Funds. These Selling
Firms 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 that are continually offered at net asset
value next determined, plus any applicable sales charge, if any. In connection
with the sale of Fund shares, John Hancock Funds and Selling Firms receive
compensation from a sales charge imposed, in the case of Class A shares, at the
time of sale. In the case of Class B, Class C shares, the Selling Firm 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 0.30% for Class A shares and 1.00% for Class B
and Class C shares of the Fund's average daily net assets attributable to shares
of that class. However, the service 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 John Hancock Funds for its distribution expenses,
including but not limited to: (i) initial and ongoing sales compensation to
Selling Firms and others (including affiliates of John Hancock Funds) engaged in
the sale of Fund shares; (ii) marketing, promotional and overhead expenses
incurred in connection with the distribution of Fund shares; and (iii) with
respect to Class B and Class C shares only, interest expenses on unreimbursed
distribution expenses. The service fees will be used to compensate Selling Firms
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
of the Fund.
The Plans and all amendments were approved by the Trustees, including a majority
of the Trustees who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plans (the
"Independent Trustees"), by votes cast in person at meetings called for the
purpose of voting on 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 Plan and the purpose for
which these expenditures were made. The Trustees review these reports on a
quarterly basis to determine their continued appropriateness.
The Plans provide that they will continue in effect only so long as their
continuance is approved at least annually by a majority of both the Trustees and
the Independent Trustees. The Plans provide that they may be terminated without
penalty (a) by a vote of a majority of the Independent Trustees, (b) by a vote
of a majority of the Fund's outstanding shares of the applicable class in each
case upon 60 days' written notice to John Hancock Funds, and (c) automatically
in the event of assignment. The Plans further provide that they may not be
amended to increase the maximum amount of the fees for the services described
therein without the approval of a majority of the outstanding shares of the
class of the Fund which has voting
31
rights with respect to the Plan. Each 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 of the Fund. The holders of Class A, Class
B and Class C shares have exclusive voting rights with respect to the Plan
applicable to their respective class of shares. In adopting the Plans, the
Trustees concluded that, in their judgment, there is a reasonable likelihood
that the Plans will benefit the holders of the applicable class of shares of the
Fund.
Class I shares of the Fund are not subject to any distribution plan. Expenses
associated with the obligation of John Hancock Funds to use its best efforts to
sell Class I shares will be paid by the Adviser or by John Hancock Funds and
will not be paid from the fees paid under Class A, Class B or Class C Plans.
Amounts paid to 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
Funds.
Shares of the Predecessor Fund were not subject to any Distribution Plan.
SALES COMPENSATION
As part of their business strategies, the Fund, along with John Hancock Funds,
pay compensation to Selling 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 Selling Firm 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 Selling 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 Firm which sells shares of the Fund. This payment
may not exceed 0.15% of the amount invested.
Initial compensation Whenever you make an investment in Class A, Class B or
Class C shares of the Fund, the Selling Firm receives a
reallowance/payment/commission as described on the next page. The Selling Firm
also receives the first year's 12b-1 service fee at this time.
Annual compensation For Class A, Class B and Class C shares of the Fund,
beginning in the second year after an investment is made, the Selling Firm
receives an annual 12b-1 service fee of 0.25% of its average daily net (aged)
assets. In addition, beginning in the second year after an investment is made in
Class C shares, the Distributor will pay the Selling Firm a distribution fee in
an amount not to exceed 0.75% of the average daily net (aged) assets. These
service and distribution fees are paid quarterly in arrears.
Selling Firms receive service and distribution fees if, for the preceding
quarter, (1) their clients/shareholders have invested combined average daily net
assets of no less than $1,000,000 in eligible (aged) assets; or (2) an
individual registered representative of the Selling Firm has no less than
$250,000 in eligible (aged) assets. The reason for these criteria is to save the
Fund the
32
expense of paying out de minimus amounts. As a result, if a Selling Firm does
not meet one of the criteria noted above, the money for that firm's fees remains
in the Fund.
In addition, from time to time, John Hancock Funds, at its expense, and without
additional cost to the Fund or its shareholders, may provide significant
additional compensation to financial services firms in connection with their
promotion of the Fund or sale of shares of the Fund. Such compensation provided
by John Hancock Funds may include, for example, financial assistance to Selling
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 Selling Firm-sponsored events or
activities. From time to time, John Hancock Funds may provide expense
reimbursements for special training of a Selling Firm's registered
representatives and other employees in group meetings or non-cash compensation
in the form of occasional gifts, meals, tickets or other entertainment. Payments
may also include amounts for sub-administration and other services for
shareholders whose shares are held of record in omnibus or other group accounts.
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.
33
First Year Broker or Other Selling Firm Compensation
Investor pays
sales charge Selling Firm Selling Firm
(% of offering receives receives 12b-1 Total Selling Firm
Class A investments price) commission (1) service fee (2) compensation (3)(4)
- ------------------- ------ -------------- --------------- -------------------
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 of Class A shares of $1
million or more (5)
First $1M - $4,999,999 -- 0.75% 0.25% 1.00%
Next $1 - $5M above that -- 0.25% 0.25% 0.50%
Next $1 or more above that -- 0.00% 0.25% 0.25%
Class B investments
All amounts -- 3.75% 0.25% 4.00%
Class C investments
All amounts -- 0.75% 0.25% 1.00%
Class I investments
All amounts -- 0.00% 0.00% 0.00%(6)
(1) For Class A investments under $1 million, a portion of the Selling Firm's
commission is paid out of the sales charge.
(2) For Class A, B and C shares, the Selling Firm receives 12b-1 fees in the
first year as a % of the amount invested and after the first year as a % of
average daily net eligible assets (paid quarterly in arrears).
(3) Selling Firm commission and 12b-1 service fee percentages are calculated
from different amounts, and therefore may not equal the total Selling Firm
compensation percentages if combined using simple addition.
(4) Underwriter retains the balance.
(5) See "Initial Sales Charge on Class A Shares" for discussion on how to
qualify for a reduced sales charge. John Hancock Funds may take recent
redemptions into account in determining if an investment qualifies as a new
investment
(6) John Hancock Funds may make a one-time payment at time of initial purchase
out of its own resources to a Selling Firm that 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 Selling Firm
commissions when there is no initial sales charge.
34
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 are generally valued at last
sale price on the day of valuation or in the case of securities traded on
NASDAQ, the NASDAQ official closing price. 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 4:00 p.m., London time (11:00 a.m.,
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 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") or on a contingent deferred basis
(the "contingent deferred sales charge or CDSC"). The fund no longer issues
share certificates. Shares are electronically recorded. The Trustees reserve the
right to change or waive the Fund's minimum investment requirements and to
reject any order to purchase shares (including purchase by exchange) when in the
judgment of the Adviser such rejection is in the Fund's best interest.
The sales charges applicable to purchases of Class A 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
35
current offering price of the Class A, Class B, Class C, Class I, or Class R
shares of the John Hancock mutual funds owned by the investor (see "Accumulation
Privilege" below).
In order to receive the reduced sales charge, the investor must notify his/her
financial adviser and/or the financial adviser must notify John Hancock
Signature Services, Inc. ("Signature Services") at the time of purchase of the
Class A shares, about any other John Hancock mutual funds owned by the investor,
the investor's spouse and their children under the age of 21 (see "Combination
Privilege" below). This includes investments held in a retirement account, an
employee benefit plan or at a broker or financial adviser other than the one
handling your current purchase. John Hancock will credit the combined value, at
the current offering price, of all eligible accounts to determine whether you
qualify for a reduced sales charge on your current purchase.
Without Sales Charges. Class A shares may be offered without a front-end sales
charge or contingent deferred sales charge ("CDSC") to various individuals and
institutions as follows:
o A Trustee or officer of the Trust; a Director or officer of the Adviser and
its affiliates, sub-adviser or Selling Firms; 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, child, grandparent, grandchild, parent, sibling, mother-in-law,
father-in-law, daughter-in-law, son-in-law, niece, nephew and same sex
domestic partner; "Immediate Family") 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 Certain retirement plans participating in Merrill Lynch servicing programs
offered in Class A shares, including transferee recording arrangements,
Merrill Lynch Connect Arrangements and third party administrator
recordkeeping arrangements. See your Merrill Lynch Financial Consultant for
further information.
o Retirement plans investing through the PruArray Program sponsored by a
Prudential Financial company.
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 Participants in certain 529 Plans that have a signed agreement with John
Hancock Funds. No CDSC will be due for redemptions on plan purchases made
at NAV with no finder's fee. However, if a plan had a finder's fee or
commission, and the entire plan redeemed within 12 months of the first
investment in the plan, a CDSC would be due.
36
o Participant directed retirement plans with at least 100 eligible employees
at the inception of the Fund account. Each of these employees may purchase
Class A shares with no initial sales charge, if the plan sponsor notifies
Signature Services of the number of employees at the time the account is
established. However, if the shares are redeemed within 12 months of the
inception of the plan, a CDSC will be imposed at the following rate:
Amount Invested CDSC Rate
--------------- ---------
First $1 to $4,999,999 1.00%
Next $1 to $5M above that 0.50%
Next $1 or more above that 0.25%
o Any shareholder account of Independence Small Cap Portfolio registered on
Independence Small Cap Portfolio's books in the shareholder's name (and not
in the name of a broker or other omnibus account) as of December 3, 2004.
Class A shares may also be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
With Reduced Sales Charges
Combination Privilege. For all shareholders 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). 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 Firm's
representative.
Accumulation Privilege. Class A investors may also reduce their Class A sales
charge by taking into account not only the amount being invested but also the
current offering price of all the Class A, Class B, Class C, Class I and Class R
shares of all John Hancock funds already held by such person. However, 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. To receive a reduced sales charge, the investor must
tell his/her financial adviser or Signature Services at the time of the purchase
about any other John Hancock mutual funds held by that investor or his/her
Immediate Family.
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 Class A sales charges under the Accumulation
Privilege 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
37
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 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 can be
combined to satisfy an LOI (either 13 or 48 months). Since some retirement plans
are held in an omnibus account, an investor wishing to count retirement plan
holdings towards a Class A purchase must notify Signature Services of these
holdings. Such an investment (including accumulations, combinations and
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.
DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARES
Investments in Class B and Class C 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
contingent deferred sales charge ("CDSC") at the rates set forth in the
Prospectus as a percentage of the dollar amount subject to the CDSC. The charge
will be assessed on an amount equal to the lesser of the current market value or
the original purchase cost of the Class B or Class C shares being redeemed. No
CDSC will be imposed on increases in account value above the initial purchase
prices 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. You must notify
Signature Services of the number of eligible employees at the time your account
is established.
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.
38
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:
o Proceeds 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)
-- -------
o Amount 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 Firms 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 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.
39
* 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.)
* Certain retirement plans participating in Merrill Lynch servicing programs
offered in Class A, Class B and Class C shares, including transferee
recording arrangements, Merrill Lynch Connect Arrangements and third party
administrator recordkeeping arrangements. 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 a Prudential Financial company.
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 certain distributions, as outlined in the chart
on the following page, 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), 403(b), 457 and 408
(SEPs and SIMPLE IRAs) of the Internal Revenue Code.
Please see matrix for some examples.
40
- ---------------------------------------------------------------------------------------------------------------
Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-retirement
Distribution (401 (k), Rollover
MPP, 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 Waived Waived Waived Waived for Life 12% of account
and 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
- ---------------------------------------------------------------------------------------------------------------
41
* Required minimum distributions based on John Hancock Mutual Fund IRA assets
only.
If you qualify for a CDSC waiver under one of these situations, you must notify
Signature Services at the time you make your redemption. The waiver will be
granted once Signature Services has confirmed that you are entitled to the
waiver.
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 for shares
of the same class in any other John Hancock fund offering that same class.
Investors may exchange Class I shares for Class I shares of other John Hancock
funds, shares of any John Hancock institutional fund, or Class A shares of John
Hancock Money Market Fund. If an investor exchanges Class I shares for Class A
shares of Money Market Fund, any future exchanges out of the Money Market Fund
Class A must be to another Class I or institutional fund.
Exchanges between funds are based on their respective net asset values. No sales
charge is imposed, except on exchanges of Class A shares from Money Market Fund
or U.S. Government Cash Reserve Fund to another John Hancock fund, if a sales
charge has not previously been paid on those shares. 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. 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.
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 does not permit market timing or other excessive trading practices
which may disrupt portfolio management strategies and increase fund expenses. To
protect the interests of other investors in the Fund, the Fund may cancel the
exchange privileges (or reject any exchange or purchase orders) of any parties
who, in the opinion of the Fund, are engaging in market timing. For these
purposes, the Fund may consider an investor's trading history in the Fund or
other John Hancock funds, and accounts under common ownership or control. The
Fund may change or cancel its exchange policies at any time, upon 60 days'
notice to its shareholders.
42
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
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.
The Fund may refuse any reinvestment request and 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."
43
Retirement plans participating in Merrill Lynch's servicing programs:
Class A shares are available at net asset value for Merrill Lynch retirement
plans, including transferee recording arrangements, Merrill Lynch Connect
Arrangements and third party administrator recordkeeping arrangements. See your
Merrill Lynch Financial Consultant for further information.
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 Selling Firms.
Selling Firms may charge the investor additional fees for their services. The
Fund will be deemed to have received a purchase or redemption order when an
authorized Selling Firm, or if applicable, a Selling Firm's authorized designee,
receives the order. Orders may be processed at the NAV next calculated after the
Selling Firm receives the order. The Selling Firm 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
Selling Firms that maintain network/omnibus/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. This fee is paid by the Adviser, the Fund
and/or John Hancock Funds, LLC (the Fund's principal distributor).
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 one
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.
44
In the event of liquidation, shareholders of each class are entitled to share
pro rata in the net assets of the Fund available for distribution to these
shareholders. Shares entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights. When
issued, shares are fully paid and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Fund has no intention of holding annual meetings of shareholders.
Fund shareholders may remove a Trustee by the affirmative vote of at least
two-thirds of the Trust's outstanding shares and the Trustees shall promptly
call a meeting for such purpose when requested to do so in writing by the record
holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the 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. Selling Firms 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
45
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.
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
46
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.
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
47
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
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. As of October 31, 2003 there were no capital loss carryforwards
from the Predecessor Fund.
If the Fund should have dividend income that qualifies as Qualified Dividend
Income, as provided in the Jobs and Growth Tax Relief Reconciliation Act of
2003, the maximum amount allowable will be designated by the Fund. This amount
will be reflected on Form 1099-DIV for the current calendar year.
If the Fund should have dividend income that qualifies for the
dividends-received deduction for corporations, it will be subject to the
limitations applicable under the Code. The qualifying portion is limited to
properly designated distributions attributed to dividend income (if any) the
Fund receives from certain stock in U.S. domestic corporations and the deduction
is subject to holding period requirements and debt-financing limitations under
the Code.
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
48
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
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
49
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.
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
The average annual total return before taxes is computed by finding the average
annual compounded rate of return over the 1-year, 5-year and 10-year periods, or
the period since the commencement of operations, that would equate the initial
amount invested to the ending redeemable value according to the following
formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1-year, 5-year or 10-year periods (or
fractional portion).
The Fund discloses average annual total returns after taxes for Class A shares
for the one, five and 10 year periods, or the period since the commencement of
operations 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.
50
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:
n
P(1+T) = ATV
D
Where:
P= a hypothetical initial payment of $1,000.
T= average annual total return (after taxes on distributions)
n= number of years
ATV = ending value of a hypothetical $1,000 payment made at
D 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:
n
P(1+T) = ATV
DR
Where:
P= a hypothetical initial payment of $1,000.
T= average annual total return (after taxes on distributions
and redemption)
n= number of years
ATV = ending value of a hypothetical $1,000 payment made at
DR 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:
51
a-b 6
Yield=2 ( [ (---) + 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.
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 Sub-Adviser'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
52
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. The Adviser and Sub-Adviser do not 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 Sub-Adviser of the Fund.
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 Adviser that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. "Commissions", as interpreted by the SEC,
include fees paid to brokers for trades conducted on an agency basis, and
certain mark-ups, mark-downs, commission equivalents and other fees received by
dealers in riskless principal transactions placed in the over-the-counter
market.
The term "brokerage and research service" includes research services received
from broker-dealers which 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
specialized consultations with the Adviser's or Sub-Adviser'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 Sub-Adviser since
the broker-dealers used by the Adviser or Sub-Adviser tend to follow a broader
universe of securities and other matters than the Adviser's or Sub-Adviser's
staff can follow. In addition, the research provides the Adviser or Sub-Adviser
with a diverse perspective on financial markets. Research services provided to
the Adviser or Sub-Adviser by broker-dealers are available for the benefit of
all accounts managed or advised by the Adviser or by its affiliates, or by the
Sub-Adviser 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
Sub-Adviser'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.
53
The Adviser and Sub-Adviser 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 Sub-Adviser'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 Sub-Adviser. 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 Sub-Adviser.
However, to the extent that the Adviser or Sub-Adviser would have purchased
research services had they not been provided by broker-dealers, or would have
developed comparable information through its own staff, the expenses to the
Adviser or Sub-Adviser 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 Sub-Adviser may result in research
information and statistical assistance beneficial to the Fund. The Fund will
make no commitment to allocate portfolio transactions upon any prescribed basis.
Broker-dealers may be willing to furnish statistical, research and other factual
information or service to the Adviser for no consideration other than brokerage
or underwriting commissions. Securities may be bought or sold from time to time
through such broker-dealers on behalf of the Fund or the Adviser's other
clients.
In effecting portfolio transactions on behalf of the Fund and the Adviser's
other clients, the Adviser may from time to time instruct the broker-dealer that
executes the transaction to allocate, or "step-out", a portion of the
transaction to another broker-dealer. The broker-dealer to which the Adviser
"stepped-out" would then settle and complete the designated portion of the
transaction. Each broker-dealer would receive a commission or brokerage fee with
respect to that portion of the transaction that it settles and completes.
While the Adviser and/or the Sub-Adviser will be primarily responsible for its
allocation of the Fund's brokerage business, the policies and practices of the
Adviser or Sub-Adviser in this regard must be consistent with the foregoing and
at all times be subject to review by the Trustees.
The Adviser or Sub-Adviser 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 Sub-Adviser in particular. 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 Sub-Adviser
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
Sub-Adviser ("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
54
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 Sub-Adviser or the Affiliated Broker. Because the Adviser or
Sub-Adviser 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 "Affiliated Broker"). The
Adviser's indirect parent, Manulife Financial, is the parent of another
broker-dealer, Manulife Financial Securities, LLC ("MF Securities" or
"Affiliated Broker").
Other investment advisory clients advised by the Adviser or Sub-Adviser may also
invest in the same securities as the Fund. When these clients buy or sell the
same securities at substantially the same time, the Adviser or Sub-Adviser may
average the transactions as to price and allocate the amount of available
investments in a manner which the Adviser or Sub-Adviser believes to be
equitable to each client, including the Fund. Because of this, client accounts
in a particular style may sometimes not sell or acquire securities as quickly or
at the same prices as they might if each were managed and traded individually.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each 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
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 Sub-Adviser may aggregate securities to be sold or purchased for
the Fund with those to be sold or purchased for other clients managed by it in
order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc., 1 John Hancock Way, Suite 1000, Boston,
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
55
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 0.30% of each
class's average daily net assets at least until December 3, 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. For shares held of
record in omnibus or there group accounts where administration and other
shareholder services are provided by the Selling Firm or group administrator,
the Selling Firm or administrator will charge a service fee to the Fund. For
such shareholders, Signature Services does not charge its account fee.
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 REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP has been selected to serve as independent registered
public accountants to the Fund. PricewaterhouseCoopers LLP also served as
independent registered public accountants to the Fund's predecessor,
Independence Small Cap Portfolio.
56
FUND SECURITIES
The Fund has a policy for disclosure of its portfolio securities. Information
about the securities held by the Fund may not be disclosed except as follows:
On the fifth business day after month-end, certain information is published on
www.jhfunds.com, including but not limited to top ten holdings, sector analysis,
and investment performance. The complete portfolio is published on
www.jhfunds.com each month with a one-month lag (for example, information as of
December 31 will be published on February 1). Once published, the portfolio
information is available to the public and all categories of investors and
potential investors.
More current portfolio information is disclosed (subject always to
confidentiality agreements) when necessary for the efficient management of the
Fund's portfolio. Parties receiving more current information are: The Fund's
proxy voting service; publishers and writers for the Fund's financial reports;
risk management and portfolio analysis systems; and rating agencies. No
compensation or other consideration is received by the Fund, its adviser or any
affiliated party in regard to disclosure.
Exceptions to the above policy must be authorized by the Fund's chief legal
officer or chief compliance officer, and are subject to ratification by the
Board of Trustees.
57
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
A-1
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).
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
APPENDIX C
John Hancock Advisers, LLC
Sovereign Asset Management Corporation
Proxy Voting Summary
We believe in placing our clients' interests first. Before we invest in a
particular stock or bond, our team of portfolio managers and research analysts
look closely at the company by examining its earnings history, its management
team and its place in the market. Once we invest, we monitor all our clients'
holdings, to ensure that they maintain their potential to produce results for
investors.
As part of our active investment management strategy, we keep a close eye on
each company we invest in. Routinely, companies issue proxies by which they ask
investors like us to vote for or against a change, such as a new management
team, a new business procedure or an acquisition. We base our decisions on how
to vote these proxies with the goal of maximizing the value of our clients'
investments.
Currently, John Hancock Advisers, LLC ("JHA") and Sovereign Asset Management
Corporation ("Sovereign") manage open-end funds, closed-end funds and portfolios
for institutions and high-net-worth investors. Occasionally, we utilize the
expertise of an outside asset manager by means of a subadvisory agreement. In
all cases, JHA or Sovereign makes the final decision as to how to vote our
clients' proxies. There is one exception, however, and that pertains to our
international accounts. The investment management team for international
investments votes the proxies for the accounts they manage. Unless voting is
specifically retained by the named fiduciary of the client, JHA and Sovereign
will vote proxies for ERISA clients.
In order to ensure a consistent, balanced approach across all our investment
teams, we have established a proxy oversight group comprised of associates from
our investment, operations and legal teams. The group has developed a set of
policies and procedures that detail the standards for how JHA and Sovereign vote
proxies. The guidelines of JHA have been approved and adopted by each fund
client's board of trustees who have voted to delegate proxy voting authority to
their investment adviser, JHA. JHA and Sovereign's other clients have granted us
the authority to vote proxies in our advisory contracts or comparable documents.
JHA and Sovereign have hired a third party proxy voting service which has been
instructed to vote all proxies in accordance with our established guidelines
except as otherwise instructed.
In evaluating proxy issues, our proxy oversight group may consider information
from many sources, including the portfolio manager, management of a company
presenting a proposal, shareholder groups, and independent proxy research
services. Proxies for securities on loan through securities lending programs
will generally not be voted, however a decision may be made to recall a security
for voting purposes if the issue is material.
Below are the guidelines we adhere to when voting proxies. Please keep in mind
that these are purely guidelines. Our actual votes will be driven by the
particular circumstances of each proxy. From time to time votes may ultimately
be cast on a case-by-case basis, taking into consideration relevant facts and
circumstances at the time of the vote. Decisions on these matters (case-by-case,
abstention, recall) will normally be made by a portfolio manager under the
supervision of the chief investment officer and the proxy oversight group. We
may abstain from voting a proxy if we conclude that the effect on our clients'
economic interests or the value of the portfolio holding is indeterminable or
insignificant.
C-1
Proxy Voting Guidelines
Board of Directors
We believe good corporate governance evolves from an independent board.
We support the election of uncontested director nominees, but will withhold our
vote for any nominee attending less than 75% of the board and committee meetings
during the previous fiscal year. Contested elections will be considered on a
case by case basis by the proxy oversight group, taking into account the
nominee's qualifications. We will support management's ability to set the size
of the board of directors and to fill vacancies without shareholder approval but
will not support a board that has fewer than 3 directors or allows for the
removal of a director without cause.
We will support declassification of a board and block efforts to adopt a
classified board structure. This structure typically divides the board into
classes with each class serving a staggered term.
In addition, we support proposals for board indemnification and limitation of
director liability, as long as they are consistent with corporate law and
shareholders' interests. We believe that this is necessary to attract qualified
board members.
Selection of Auditors
We believe an independent audit committee can best determine an auditor's
qualifications.
We will vote for management proposals to ratify the board's selection of
auditors, and for proposals to increase the independence of audit committees.
Capitalization
We will vote for a proposal to increase or decrease authorized common or
preferred stock and the issuance of common stock, but will vote against a
proposal to issue or convert preferred or multiple classes of stock if the board
has unlimited rights to set the terms and conditions of the shares, or if the
shares have voting rights inferior or superior to those of other shareholders.
In addition, we will support a management proposal to: create or restore
preemptive rights; approve a stock repurchase program; approve a stock split or
reverse stock split; and, approve the issuance or exercise of stock warrants
Acquisitions, mergers and corporate restructuring
Proposals to merge with or acquire another company will be voted on a
case-by-case basis, as will proposals for recapitalization, restructuring,
leveraged buyout, sale of assets, bankruptcy or liquidation. We will vote
against a reincorporation proposal if it would reduce shareholder rights. We
will vote against a management proposal to ratify or adopt a poison pill or to
establish a supermajority voting provision to approve a merger or other business
combination. We would however support a management proposal to opt out of a
state takeover statutory provision, to spin-off certain operations or divisions
and to establish a fair price provision.
Corporate Structure and Shareholder Rights
C-2
In general, we support proposals that foster good corporate governance
procedures and that provide shareholders with voting power equal to their equity
interest in the company.
To preserve shareholder rights, we will vote against a management proposal to
restrict shareholders' right to: call a special meeting and to eliminate a
shareholders' right to act by written consent. In addition, we will not support
a management proposal to adopt a supermajority vote requirement to change
certain by-law or charter provisions or a non-technical amendment to by-laws or
a charter that reduces shareholder rights.
Equity-based compensation
Equity-based compensation is designed to attract, retain and motivate talented
executives and independent directors, but should not be so significant as to
materially dilute shareholders' interests.
We will vote against the adoption or amendment of a stock option plan if:
o the compensation committee is not fully independent
o plan dilution is more than 10% of outstanding common stock,
o the company allows or has allowed the re-pricing or replacement of
underwater options in the past three fiscal years (or the exchange of
underwater options) without shareholder approval.
o the option is not premium priced or indexed, or does not vest based on
future performance
With respect to the adoption or amendment of employee stock purchase plans or a
stock award plan, we will vote against management if:
o the plan allows stock to be purchased at less than 85% of fair market
value;
o this plan dilutes outstanding common equity greater than 10%
o all stock purchase plans, including the proposed plan, exceed 15% of
outstanding common equity
o the potential dilution from all company plans is more than 85%
With respect to director stock incentive/option plans, we will vote against
management if:
o the minimum vesting period for options or time lapsing restricted
stock is less than one year
o the potential dilution for all company plans is more than 85%
Other Business
For routine business matters which are the subject of many proxy related
questions, we will vote with management proposals to:
o change the company name;
o approve other business;
o adjourn meetings;
o make technical amendments to the by-laws or charters;
o approve financial statements;
o approve an employment agreement or contract.
Shareholder Proposals
C-3
Shareholders are permitted per SEC regulations to submit proposals for inclusion
in a company's proxy statement. We will generally vote against shareholder
proposals and in accordance with the recommendation of management except as
follows where we will vote for proposals:
o calling for shareholder ratification of auditors;
o calling for auditors to attend annual meetings;
o seeking to increase board independence;
o requiring minimum stock ownership by directors;
o seeking to create a nominating committee or to increase the
independence of the nominating committee;
o seeking to increase the independence of the audit committee.
Corporate and social policy issues
We believe that "ordinary business matters" are primarily the responsibility of
management and should be approved solely by the corporation's board of
directors.
Proposals in this category, initiated primarily by shareholders, typically
request that the company disclose or amend certain business practices. We
generally vote against business practice proposals and abstain on social policy
issues, though we may make exceptions in certain instances where we believe a
proposal has substantial economic implications.
C-4
John Hancock Advisers, LLC
Sovereign Asset Management Corporation
Proxy Voting Procedures
The role of the proxy voting service
John Hancock Advisers, LLC ("JHA") and Sovereign Asset Management Corporation
("Sovereign") have hired a proxy voting service to assist with the voting of
client proxies. The proxy service coordinates with client custodians to ensure
that proxies are received for securities held in client accounts and acted on in
a timely manner. The proxy service votes all proxies received in accordance with
the proxy voting guidelines established and adopted by JHA and Sovereign. When
it is unclear how to apply a particular proxy voting guideline or when a
particular proposal is not covered by the guidelines, the proxy voting service
will contact the proxy oversight group coordinator for a resolution.
The role of the proxy oversight group and coordinator
The coordinator will interact directly with the proxy voting service to resolve
any issues the proxy voting service brings to the attention of JHA or Sovereign.
When a question arises regarding how a proxy should be voted the coordinator
contacts the firm's investment professionals and the proxy oversight group for a
resolution. In addition the coordinator ensures that the proxy voting service
receives responses in a timely manner. Also, the coordinator is responsible for
identifying whether, when a voting issue arises, there is a potential conflict
of interest situation and then escalating the issue to the firm's Executive
Committee. For securities out on loan as part of a securities lending program,
if a decision is made to vote a proxy, the coordinator will manage the
return/recall of the securities so the proxy can be voted.
The role of mutual fund trustees
The boards of trustees of our mutual fund clients have reviewed and adopted the
proxy voting guidelines of the funds' investment adviser, JHA. The trustees will
periodically review the proxy voting guidelines and suggest changes they deem
advisable.
Conflicts of interest
Conflicts of interest are resolved in the best interest of clients.
With respect to potential conflicts of interest, proxies will be voted in
accordance with JHA's or Sovereign's predetermined policies. If application of
the predetermined policy is unclear or does not address a particular proposal, a
special internal review by the JHA Executive Committee or Sovereign Executive
Committee will determine the vote. After voting, a report will be made to the
client (in the case of an investment company, to the fund's board of trustees),
if requested. An example of a conflict of interest created with respect to a
proxy solicitation is when JHA or Sovereign must vote the proxies of companies
that they provide investment advice to or are currently seeking to provide
investment advice to, such as to pension plans.
C-5
FINANCIAL STATEMENTS
F-1
THE ADVISORS' INNER CIRCLE FUND
INDEPENDENCE SMALL CAP PORTFOLIO
INSTITUTIONAL CLASS SHARES PROSPECTUS MARCH 1, 2004
- --------------------------------------------------------------------------------
[LOGO]
INDEPENDENCE
INVESTMENTS
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FUND SUMMARY............................................................ 1
WHAT IS THE FUND'S OBJECTIVE? ...................................... 1
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES? ............... 1
WHAT ARE THE FUND'S PRINCIPAL RISKS? ............................... 1
HOW HAS THE FUND PERFORMED? ........................................ 2
WHAT ARE THE FUND'S FEES AND EXPENSES? ............................. 4
INVESTING WITH THE FUND................................................. 5
BUYING SHARES ...................................................... 5
REDEEMING SHARES ................................................... 6
TRANSACTION POLICIES ............................................... 7
ACCOUNT POLICIES ................................................... 10
ADDITIONAL INFORMATION ABOUT THE FUND................................... 13
OTHER INVESTMENT PRACTICES AND STRATEGIES .......................... 13
INVESTMENT MANAGEMENT .............................................. 14
SHAREHOLDER SERVICING ARRANGEMENTS ................................. 15
FINANCIAL HIGHLIGHTS.................................................... 16
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FUND SUMMARY
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S OBJECTIVE?
- --------------------------------------------------------------------------------
The fund seeks maximum capital appreciation consistent with reasonable risk
to principal by investing in primarily smaller companies. The fund may
change its investment objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
- --------------------------------------------------------------------------------
Normally, the fund seeks to achieve its goal by investing at least 80% of
its net assets in equity securities of companies whose market
capitalization is under $2 billion. The adviser selects securities for the
fund using a bottom-up selection process that focuses on stocks of
statistically undervalued yet promising companies that it believes are
likely to show improving fundamental prospects with an identifiable
catalyst for change. Examples of some of the catalysts the adviser may
consider include a new product, new management, regulatory changes,
industry or company restructuring or a strategic acquisition.
The adviser will attempt to identify undervalued securities using
quantitative screening parameters, including various financial ratios and
"earnings per share" revisions, which measure the change in earnings
estimate expectations. The adviser additionally narrows the list of stocks
using fundamental security analysis, which may include on-site visits,
outside research and analytical judgment.
The fund may sell a stock if it reaches the target price set by the
adviser; the adviser decides, by using the same quantitative screens it
analyzed in the selection process, that the stock is statistically
overvalued; or the adviser decides earnings expectations or fundamental
outlook for the company have deteriorated.
As timing the market is not an important part of the adviser's investment
strategy, cash reserves will normally represent a small portion of the
fund's assets (under 20%).
WHAT ARE THE FUND'S PRINCIPAL RISKS?
- --------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any
1
financial institution, government authority or the FDIC. You may lose money
by investing in the fund.
As with all equity funds, the risks that could affect the value of the
fund's shares and the total return on your investment include the
possibility that the equity securities held by the fund will experience
sudden, unpredictable drops in value or long periods of decline in value.
This may occur because of factors that affect the securities markets
generally, such as adverse changes in economic conditions, the general
outlook for corporate earnings, interest rates or investor sentiment.
Equity securities may also lose value because of factors affecting an
entire industry or sector, such as increases in production costs, or
factors directly related to a specific company, such as decisions made by
its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have
narrower product lines and more limited financial resources. Their stocks
may trade less frequently and in limited volume.
HOW HAS THE FUND PERFORMED?
- --------------------------------------------------------------------------------
Effective June 24, 2002, the fund became the successor to a separate mutual
fund, the UAM Funds, Inc. Independence Small Cap Portfolio (the
"Predecessor Fund"). The Predecessor Fund was managed by the same employees
of the adviser who currently manage the fund, had identical investment
objectives and strategies and was subject to substantially similar fees and
expenses. The performance shown in the following bar chart and performance
table represents the performance of the Predecessor Fund for periods prior
to June 24, 2002.
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund and Predecessor Fund
has varied from year to year. Returns are based on past results and are not
an indication of future performance.
2
CALENDAR YEAR RETURNS
[BAR CHART OMITTED]
1999 4.59%
2000 16.43%
2001 16.55%
2002 -15.23%
2003 34.62%
During the periods shown in the chart for the fund and Predecessor Fund,
the highest return for a quarter was 25.55% (quarter ending 6/30/01) and
the lowest return for a quarter was -16.97% (quarter ending 9/30/02).
AVERAGE ANNUAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2003
The average annual return table compares average annual returns of the fund
and Predecessor Fund to those of certain broad-based securities market
indices. Returns are based on past results and are not an indication of
future performance.
Since
1 Year 5 Years 12/16/98*
- --------------------------------------------------------------------------------
Average Annual Return Before Taxes 34.62% 10.12% 11.49%
- --------------------------------------------------------------------------------
Average Annual Return After Taxes on
Distributions** 33.99% 7.96% 9.31%
- --------------------------------------------------------------------------------
Average Annual Return After Taxes on
Distributions and Sale
of Fund Shares** 22.48% 7.86% 9.06%
- --------------------------------------------------------------------------------
S&P Small Cap 600 Index# (reflects no
deduction for fees, expenses or taxes) 38.79% 9.67% 9.67%
- --------------------------------------------------------------------------------
Russell 2000 Index+ (reflects no deduction
for fees, expenses or taxes) 47.25% 7.13% 7.13%
* Commencement of operations. Index comparisons begin on 12/31/98.
** 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. 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.
# An unmanaged index comprised of 600 domestic stocks chosen for market
size, liquidity, and industry group representation.
+ An unmanaged index which measures the performance of the 2,000 smallest
of the companies in the Russell 3000 Index based on total market
capitalization.
3
WHAT ARE THE FUND'S FEES AND EXPENSES?
- --------------------------------------------------------------------------------
The table describes the fees and expenses you may pay if you buy and hold
shares of the fund.
SHAREHOLDER TRANSACTION FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Redemption Fee (as a percentage of amount redeemed) 2.00%
The fund may charge a redemption fee that would be paid directly from your
investment. Shareholders may pay a redemption fee when they redeem shares
held for less than ninety days. For more information, see "Redemption Fee"
in the section on "Transaction Policies."
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
The fund's annual operating expenses are deducted from fund assets.
Therefore, shareholders indirectly pay the fund's annual operating
expenses, as described below.
Management Fee 0.85%
- --------------------------------------------------------------------------------
Other Expenses 1.75%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.60%
- --------------------------------------------------------------------------------
Fee Waivers and Expense Reimbursements (0.75)%
- --------------------------------------------------------------------------------
Actual Total Annual Fund Operating Expenses* 1.85%
* The adviser has contractually agreed to waive fees and reimburse
expenses in order to keep Total Annual Fund Operating Expenses from
exceeding 1.85% for a period of one year from the date of this
prospectus. In addition to this contractual fee waiver, the adviser has
voluntarily agreed to waive a portion of its fees to keep the fund's
total expenses (excluding interest, taxes, brokerage commissions and
extraordinary expenses) from exceeding a specified level. The adviser
may change or cancel its expense limitation at any time. With these fee
waivers, the fund's actual total operating expenses are expected to be
as follows:
Independence Small Cap Portfolio 1.15%
For more information about these fees, see "Investment Management."
EXAMPLE
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
$188 $737 $1,313 $2,879
4
- --------------------------------------------------------------------------------
INVESTING WITH THE FUND
- --------------------------------------------------------------------------------
BUYING SHARES
- --------------------------------------------------------------------------------
All investments must be made by check or wire. All checks must be made
payable in U.S. dollars and drawn on U.S. financial institutions. The fund
does not accept purchases made by cash or certain cash equivalents (for
instance, you may not pay by money order or traveler's check). The fund
does not accept purchases made by credit card checks.
The fund reserves the right to reject any specific purchase order,
including exchange purchases, for any reason. The fund is not intended for
excessive trading by shareholders in response to short-term market
fluctuations. For more information about the fund's policy on excessive
trading, see "Excessive Trading."
The fund does not generally accept investments by non-U.S. persons.
Non-U.S. persons may be permitted to invest in the fund subject to the
satisfaction of enhanced due diligence. Please contact the fund for more
information.
BY MAIL
You can open an account with the fund by sending a check and your account
application to the address below. You can add to an existing account by
sending a check and, if possible, the "Invest by Mail" stub that
accompanied your statement to the fund. Be sure your check identifies
clearly your name, your account number and the fund name.
REGULAR MAIL ADDRESS
Independence Small Cap Portfolio
PO Box 219009
Kansas City, MO 64121
EXPRESS MAIL ADDRESS
Independence Small Cap Portfolio
330 West 9th Street
Kansas City, MO 64105
BY WIRE
To open an account by wire, first call 800-791-4226 for an account number
and wire control number. Next, send your completed account application to
the fund. Finally, wire your money using the wiring instructions set forth
below. To add to an existing account by wire, call 800-791-4226 to get a
wire control number and wire your money to the fund.
WIRING INSTRUCTIONS
United Missouri Bank
ABA # 101000695
The Independence Small Cap Portfolio
DDA Acct. # 9871063178
Ref: account number/account name/
wire control number
5
BY AUTOMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mail- ing a
completed application to the fund. To cancel or change a plan, write to the
fund at Independence Small Cap Portfolio, PO Box 219009, Kansas City, MO
64121 (Express Mail Address: 330 West 9th Street, Kansas City, MO 64105).
Allow up to 15 days to create the plan and 3 days to cancel or change it.
MINIMUM INVESTMENTS
You can open an account with the fund with a minimum initial investment of
$2,500 ($500 for individual retirement accounts (IRAs) and $250 for Spousal
IRAs). You can buy additional shares for as little as $100.
FUND CODES
The fund's reference information, which is listed below, will be helpful to
you when you contact the fund to purchase shares, check daily net asset
value per share (NAV) or get additional information.
Trading Fund
Symbol CUSIP Code
---------------------------------------------------------------------------
DSISX 00758M238 1228
REDEEMING SHARES
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BY MAIL
You may contact the fund directly by mail at Independence Small Cap
Portfolio, PO Box 219009, Kansas City, MO 64121 (Express Mail Address: 330
West 9th Street, Kansas City, MO 64105). Send a letter to the fund signed
by all registered parties on the account specifying:
o The fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered share owner(s) must sign the letter in the exact name(s) and
any special capacity in which they are registered.
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) or call
800-791-4226 if you need more information.
6
BY TELEPHONE
You must first establish the telephone redemption privilege (and, if
desired, the wire redemption privilege) by completing the appropriate
sections of the account application. Call 800-791-4226 to redeem your
shares. Based on your instructions, the fund will mail your proceeds to you
or wire them to your bank.
BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your account to another financial institution. To
participate in this service, you must complete the appropriate sections of
the account application and mail it to the fund.
TRANSACTION POLICIES
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CALCULATING YOUR SHARE PRICE
You may buy or sell shares of the fund on each day the New York Stock
Exchange ("NYSE") is open at a price equal to its net asset value per share
("NAV") next computed after it receives and accepts your order. The fund
calculates NAV once each day the NYSE is open for business (a "Business
Day") as of the regularly scheduled close of normal trading on the NYSE
(normally, 4:00 p.m., Eastern Time). To receive the NAV on any given day,
the fund must accept your order before the close of trading on the NYSE
that day. Otherwise, you will receive the NAV that is calculated at the
close of trading on the following business day if the NYSE is open for
trading that day. If the NYSE closes early -- such as on days in advance of
certain generally observed holidays -- the fund reserves the right to
calculate NAV as of the earlier closing time.
Since securities that are traded on foreign exchanges may trade on days
when the NYSE is closed, the value of the fund may change on days when you
are unable to purchase or redeem shares.
The fund calculates its NAV by adding the total value of its assets,
subtracting its liabilities and then dividing the result by the number of
shares outstanding. The fund uses current market prices to value its
investments. However, the fund may value investments at fair value when
market prices are not readily available or when events occur that make
established valuation methods (such as stock exchange closing prices)
unreliable. The fund will determine an investment's fair value according to
methods established by the Board of Trustees of The Advisors' Inner Circle
Fund (the "Board"). The fund values debt securities that are purchased with
remaining maturities of 60 days or less at amortized cost, which
approximates market value. The fund may use a Board-approved pricing
service to value some of its assets.
7
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
You may buy or sell shares of the fund through a financial intermediary
(such as a financial planner or adviser). To buy or sell shares at the NAV
of any given day your financial intermediary must receive your order before
the close of trading on the NYSE that day. Your financial intermediary is
responsible for transmitting all purchase and redemption requests,
investment information, documentation and money to the fund on time. Your
financial intermediary may charge additional transaction fees for its
services.
Certain financial intermediaries have agreements with the fund that allow
them to enter confirmed purchase or redemption orders on behalf of clients
and customers. Under this arrangement, the financial intermediary must send
your payment to the fund by the time the fund's shares are priced on the
following business day. If your financial intermediary fails to do so, it
may be responsible for any resulting fees or losses.
IN-KIND TRANSACTIONS
Under certain conditions and at the fund's discretion, you may pay for
shares of the fund with securities instead of cash. In addition, the fund
may pay part of your redemption proceeds (in excess of $250,000) with
securities instead of cash.
PAYMENT OF REDEMPTION PROCEEDS
Redemption proceeds can be mailed to your account address, sent to your
bank by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The fund will pay for all shares redeemed
within seven days after they receive a redemption request in proper form.
The fund may require that signatures be guaranteed by a bank or member firm
of a national securities exchange. Signature guarantees are for the
protection of shareholders. Before they grant a redemption request, the
fund may require a shareholder to furnish additional legal documents to
insure proper authorization.
If you redeem shares that were purchased by check, you will not receive
your redemption proceeds until the check has cleared, which may take up to
15 days from the purchase date. You may avoid these delays by paying for
shares with a certified check or bank check.
REDEMPTION FEE
The fund will deduct a 2.00% redemption fee from the redemption proceeds of
any shareholder redeeming shares of the fund held for less than ninety
days. In determining how long shares of the fund have been held, the fund
assumes that shares held by the investor the longest period of time will be
sold first.
8
The fund will retain the fee for the benefit of the remaining shareholders.
The fund charges the redemption fee to help minimize the impact the
redemption may have on the performance of the fund, to facilitate fund
management and to offset certain transaction costs and other expenses the
fund incurs because of the redemption. The fund also charges the redemption
fee to discourage market timing by those shareholders initiating
redemptions to take advantage of short-term market movements.
The fund reserves the right to waive the redemption fee at its discretion
where it believes such waiver is in the best interests of the fund,
including when it determines that imposition of the redemption fee is not
necessary to protect the fund from the effects of short-term trading. In
addition, the fund reserves the right to modify or eliminate the redemption
fee or waivers at any time.
TELEPHONE TRANSACTIONS
The fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The fund will not be responsible for
any loss, liability, cost or expense for following instructions received by
telephone reasonably believed to be genuine.
RIGHTS RESERVED BY THE FUND
PURCHASES
At any time and without notice, the fund may:
o Stop offering shares;
o Reject any purchase order; or
o Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting management
and by increasing expenses.) The fund will consider various factors in
determining whether an investor has engaged in excessive trading. These
factors include, but are not limited to, the investor's historic trading
pattern, the number of transactions, the size of the transactions, the
time between transactions and the percentage of the investor's account
involved in each transaction. For more information about the fund's
policies on excessive trading, see "Excessive Trading."
REDEMPTIONS
At any time and without notice, the fund may change or eliminate any of the
redemption methods described above, except redemption by mail. The fund may
suspend your right to redeem if:
o Trading on the NYSE is restricted or halted; or
o The Securities and Exchange Commission allows the fund to delay
redemptions.
9
ACCOUNT POLICIES
- --------------------------------------------------------------------------------
EXCESSIVE TRADING
The fund is intended for long-term investment purposes only and does not
knowingly accept shareholders who engage in "market timing" or other types
of excessive short-term trading. Short-term trading into and out of the
fund can disrupt portfolio investment strategies and may increase fund
expenses for all shareholders, including long-term shareholders who do not
generate these costs.
The fund reserves the right to reject any purchase request by any investor
or group of investors for any reason without prior notice, including, in
particular, if the fund reasonably believes that the trading activity in
the account(s) would be disruptive to the fund. For example, the fund may
refuse a purchase order if the fund's adviser believes that it would be
unable to invest the money effectively in accordance with the fund's
investment policies or the fund would otherwise be adversely affected due
to the size of the transaction, frequency of trading or other factors.
The fund and/or its service providers currently undertake a variety of
measures designed to help detect market timing activity including
monitoring shareholder transaction activity and cash flows. The trading
history of accounts under common ownership or control may be considered in
enforcing these policies. Despite these measures, however, the fund and/or
its service providers may not be able to detect or prevent all instances of
short-term trading. For example, the fund may not have sufficient
information regarding the beneficial ownership of shares owned through
financial intermediaries or other omnibus-type account arrangements to
enforce these policies.
The SEC recently has proposed rules that set forth specific requirements
for market timing policies and procedures for all mutual funds. The fund
intends to fully comply with these rules when they are adopted.
CUSTOMER IDENTIFICATION AND VERIFICATION
To help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain,
verify, and record information that identifies each person who opens an
account.
What this means to you: When you open an account, we will ask your name,
address, date of birth, and other information that will allow us to
identify you. This information is subject to verification to ensure the
identity of all persons opening a mutual fund account.
The fund is required by law to reject your new account application if the
required identifying information is not provided.
In certain instances, the fund is required to collect documents to fulfill
its legal obligation. Documents provided in connection with your
application will be used solely to establish and verify a customer's
identity.
10
Attempts to collect the missing information required on the application
will be performed by either contacting you or, if applicable, your broker.
If this information is unable to be obtained within a timeframe established
in the sole discretion of the fund, your application will be rejected.
Upon receipt of your application in proper form (or upon receipt of all
identifying information required on the application), your investment will
be accepted and your order will be processed at the net asset value per
share next-determined.
However, the fund reserves the right to close your account at the
then-current day's price if it is unable to verify your identity. Attempts
to verify your identity will be performed within a timeframe established in
the sole discretion of the fund. If the fund is unable to verify your
identity, the fund reserves the right to liquidate your account at the
then-current day's price and remit proceeds to you via check. The fund
reserves the further right to hold your proceeds until your original check
clears the bank. In such an instance, you may be subject to a gain or loss
on fund shares and will be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the fund's overall
obligation to deter money laundering under federal law. The fund has
adopted an Anti-Money Laundering Compliance Program designed to prevent the
fund from being used for money laundering or the financing of terrorist
activities. In this regard, the fund reserves the right to (i) refuse,
cancel or rescind any purchase or exchange order, (ii) freeze any account
and/or suspend account services or (iii) involuntarily close your account
in cases of threatening conduct or suspected fraudulent or illegal
activity. These actions will be taken when, in the sole discretion of fund
management, they are deemed to be in the best interest of the fund or in
cases when the fund is requested or compelled to do so by governmental or
law enforcement authority. If your account is closed at the request of
governmental or law enforcement authority, you may not receive proceeds of
the redemption if the fund is required to withhold such proceeds.
SMALL ACCOUNTS
The fund may redeem your shares without your permission if the value of
your account falls below 50% of the required minimum initial investment
(see "Buying Shares" for minimum initial investment amounts). This
provision does not apply:
o To retirement accounts and certain other
accounts; or
o When the value of your account falls because of market
fluctuations and not your redemptions.
The fund will provide you at least 30 days' written notice to allow you
sufficient time to add to your account and avoid the sale of your shares.
11
DISTRIBUTIONS
Normally, the fund distributes its net investment income quarterly and its
net capital gains at least once a year. The fund will automatically
reinvest dividends and distributions in additional shares of the fund,
unless you elect on your account application to receive them in cash.
FEDERAL TAXES
The following is a summary of the federal income tax consequences of
investing in the fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such
accounts may, however, be taxable at some time in the future. You should
always consult your tax advisor for specific guidance regarding the
federal, state and local tax effect of your investment in the fund.
TAXES ON DISTRIBUTIONS The fund will distribute substantially all of its
net investment income and its net realized capital gains, if any. The
dividends and distributions you receive may be subject to federal, state,
and local taxation, depending upon your tax situation. Income
distributions, including distributions of net short-term capital gains but
excluding distributions of qualified dividend income, are generally taxable
at ordinary income tax rates. Capital gains distributions and distributions
of qualified dividend income are generally taxable at the rates applicable
to long-term capital gains. Each sale of fund shares may be a taxable
event. Once a year the fund will send you a statement showing the types and
total amount of distributions you received during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In
this case, you would be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of your investment. This is known as "buying a
dividend" and should be avoided by taxable investors. Call 800-791-4226 to
find out when the fund expects to make a distribution to shareholders.
Each sale of shares of a fund may be a taxable event. A sale may result in
a capital gain or loss to you. The gain or loss generally will be treated
as short term if you held the shares 12 months or less, long term if you
held the shares for longer.
If the fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest a fund received
from sources in foreign countries. The fund may elect to treat some of
those taxes as a distribution to shareholders, which would allow
shareholders to offset some of their U.S. federal income tax.
More information about taxes is in the SAI.
12
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
OTHER INVESTMENT PRACTICES AND STRATEGIES
- --------------------------------------------------------------------------------
In addition to its principal investment strategies, the fund may use the
investment strategies described below. The fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For information concerning
these and other investment practices and their risks, you should read the
SAI.
DERIVATIVES
The fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify the fund's gains or losses. There are various factors that
affect the fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives the
fund buys or sells. The fund could be negatively affected if the change in
market value of its securities fails to correlate perfectly with the values
of the derivatives it purchased or sold.
SHORT TERM INVESTING
The investments and strategies described in this prospectus are those that
are used under normal circumstances. During unusual economic, market,
political or other circumstances, the fund may invest up to 100% of its
assets in short-term, high quality debt instruments, such as U.S.
government securities. These instruments would not ordinarily be consistent
with the fund's principal investment strategies, and may prevent the fund
from achieving its investment objective. The fund will use a temporary
strategy if the adviser believes that pursuing the fund's investment
objective will subject it to a significant risk of loss. The fund has a
policy requiring it to invest at least 80% of its net assets in particular
types of securities as described in the fund's principal investment
strategy. In addition to the temporary defensive measures discussed above,
the fund may also temporarily deviate from this 80% policy in other
limited, appropriate circumstances, such as unusually large cash inflows or
redemptions. When the adviser pursues a temporary defensive strategy, the
fund may not profit from favorable developments that it would have
otherwise profited from if it were pursuing its normal strategies.
13
INVESTMENT MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Independence Investment LLC located at 53 State Street, Boston,
Massachusetts 02109, is the investment adviser to the fund. The adviser
manages and supervises the investment of the fund's assets on a
discretionary basis. The adviser, an affiliate of John Hancock Financial
Services, Inc., has provided investment management services to various
other corporations, foundations, endowments, pension and profit sharing
plans, trusts, estates and other institutions and individuals since 1982.
For its services, the fund has agreed to pay the adviser a management fee
equal to 0.85% of the fund's average net assets. The adviser has
contractually agreed not to impose all or a portion of its fee and, if
necessary, to limit other ordinary operating expenses to the extent
required to reduce the fund's total annual fund operating expenses to 1.85%
of average net assets for a period of one year from the date of this
prospectus. The adviser may renew, terminate or modify such expense
limitation for additional periods in its sole discretion. In addition, the
adviser has voluntarily agreed to further limit the expenses of the fund to
the extent necessary to keep its total annual fund operating expenses from
exceeding 1.15% of average daily net assets. The adviser may discontinue
all or part of this voluntary waiver at any time. For the fiscal year ended
October 31, 2003, the adviser waived the entire amount of its advisory fee.
PORTFOLIO MANAGER
Charles Glovsky, CFA, is responsible for the day to day management of the
fund. Mr. Glovsky is a Senior Vice President with the adviser. Prior to
that he served as a Senior Portfolio Manager with Dewey Square Investors
Corporation, which he joined in 1998. Prior to joining Dewey Square
Investors Corporation, he was a Managing Partner of Glovsky-Brown Capital
Management, a firm he co-founded that specialized in small and
mid-capitalization stocks. Prior to that position, he was an analyst, a
portfolio manager and Senior Vice President at State Street Research where
he was responsible for that firm's small cap growth stock portfolios. He
has also worked as an analyst for Alex Brown & Sons and Eppler, Guerin &
Turner. He received a B.A. from Dartmouth College in 1975 and an M.B.A.
from Stanford University. He has 25 years of investment experience and is a
member of the Boston Security Analysts Society.
14
SHAREHOLDER SERVICING ARRANGEMENTS
- --------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial
representatives may receive compensation from the fund or its service
providers for providing a variety of services. This section briefly
describes how the financial representatives may get paid.
For providing certain services to their clients, financial representatives
may be paid a fee based on the assets of the fund that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with the
fund. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of a fund or for servicing your
account. Your financial representative should provide you with a schedule
of its fees and services.
The fund may pay all or part of the fees paid to financial representatives.
Periodically, the Board reviews these arrangements to ensure that the fees
paid are appropriate for the services performed. The fund does not pay
these service fees on shares purchased directly. In addition, the adviser
and its affiliates may, at their own expense, pay financial representatives
for these services.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with
respect to the fund. The adviser may also pay its affiliated companies for
distribution and marketing services performed with respect to the fund.
15
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
financial performance of the fund for the fiscal periods indicated. Certain
information contained in the table reflects the financial results for a
single share. The total returns in the table represent the rate that an
investor would have earned on an investment in the fund assuming all
dividends and distributions were reinvested. The information below relates
to the fund and the Predecessor Fund. On June 24, 2002, The Advisors' Inner
Circle Fund Independence Small Cap Portfolio acquired all of the assets of
the Predecessor Fund. PricewaterhouseCoopers LLP, independent auditors,
have audited the fund's and the Predecessor Fund's information. The
financial statements and the unqualified opinion of PricewaterhouseCoopers
LLP are included in the annual report of the fund, which is available upon
request by calling the fund at 800-791-4226.
Years Ended October 31, 2003 2002(2) 2001 2000 1999#
------------------------------------------------------------------------------------
Net Asset Value, Beginning
of Period $8.22 $ 12.99 $14.64 $ 9.44 $10.00
------ ------- ------ ------ ------
Income from Investment Operations:
Net Investment Loss (0.05) (0.16) (0.29) (0.12) (0.09)
Net Realized and
Unrealized Gain (Loss) 2.22 0.36(1) (1.17) 5.32 (0.47)
------ ------- ------ ------ ------
Total From Investment
Operations 2.17 0.20 (1.46) 5.20 (0.56)
------ ------- ------ ------ ------
Distributions:
Net Realized Gain (0.33) (4.97) (0.19) -- --
------ ------- ------ ------ ------
Net Asset Value, End of Period $10.06 $ 8.22 $12.99 $14.64 $ 9.44
------ ------- ------ ------ ------
------ ------- ------ ------ ------
Total Return+ 27.41% (3.59)% (9.92)% 55.08% (5.60)%@
------ ------- ------ ------ ------
------ ------- ------ ------ ------
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $15,709 $11,177 $9,877 $24,219 $15,893
Ratio of Expenses to
Average Net Assets 1.18% 2.28% 1.97% 1.39% 1.85%*
Ratio of Expenses to Average
Net Assets (Excluding Waivers
and/or Reimbursements) 2.60% 2.69% 2.07% 1.49% 1.95%*
Ratio of Net Investment
Loss to Average
Net Assets (0.57)% (1.92)% (1.54)% (0.95)% (1.11)%*
Portfolio Turnover Rate 79% 92% 65% 84% 91%
<FN>
* Annualized
@ Not annualized
# For the period from December 16, 1998 (commencement of operations) to
October 31, 1999.
+ Returns shown do not reflect the deduction of taxes that a shareholder
would pay on portfolio distributions or the redemption of portfolio
shares. Total return would have been lower had certain expense not been
waived by the adviser during the periods indicated.
(1) The amount shown for the year ended October 31, 2002 for a share
outstanding throughout the period does not accord with the aggregate
net losses on investments for that period because of the sales and
repurchase of portfolio shares in relation to fluctuating market value
of the investments of the portfolio.
(2) On June 24, 2002, The Advisors' Inner Circle Fund Independence Small
Cap Portfolio acquired the assets and liabilities of the UAM
Independence Small Cap Portfolio, a series of the UAM Funds, Inc. The
operations of The Advisors' Inner Circle Fund Independence Small Cap
Portfolio prior to the acquisition were those of the Predecessor Fund,
the UAM Independence Small Cap Portfolio.
</FN>
Amounts designated as "--" are either $0 or have been rounded to $0.
16
INDEPENDENCE SMALL CAP PORTFOLIO
Investors who want more information about the fund should read the fund's
annual/semi-annual reports and the fund's SAI. The annual/semi-annual
reports of the fund provide additional information about its investments.
In the annual report, you will also find a discussion of the market
conditions and investment strategies that significantly affected the
performance of the fund during the last fiscal year. The SAI contains
additional detailed information about the fund and is incorporated by
reference into (legally part of) this prospectus.
Investors can receive free copies of the SAI, shareholder reports and other
information about the fund or and can make shareholder inquiries by writing
to or calling:
Independence Small Cap Portfolio
PO Box 219009
Kansas City, MO 64121
(Toll free) 800-791-4226
You can review and copy information about the fund (including the SAI) at
the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. You can get information on the operation of the Public
Reference Room by calling the Securities and Exchange Commission at
202-942-8090. Reports and other information about a fund are available on
the EDGAR Database on the Securities and Exchange Commission's Internet
site at: HTTP://WWW.SEC.GOV. You may obtain copies of this information,
after paying a duplicating fee, by electronic request at the following
E-mail address: PUBLICINFO@SEC.GOV, or by writing the Securities and
Exchange Commission's Public Reference Section, Washington, D.C.
20549-0102.
Investment Company Act of 1940 file number: 811-06400.
STATEMENT OF ADDITIONAL INFORMATION
INDEPENDENCE SMALL CAP PORTFOLIO
a series of THE ADVISORS' INNER CIRCLE FUND
March 1, 2004
Investment Adviser:
Independence Investment LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
is intended to provide additional information regarding the activities and
operations of The Advisors' Inner Circle Fund (the "Trust") and the Independence
Small Cap Portfolio (the "Fund"). This SAI should be read in conjunction with
the prospectus dated March 1, 2004. Capitalized terms not defined herein are
defined in the prospectus. The financial statements and notes thereto contained
in the 2003 Annual Report to Shareholders are herein incorporated by reference
into and deemed to be part of this SAI. A copy of the 2003 Annual Report to
Shareholders must accompany the delivery of this SAI. Shareholders may get
copies of the Fund's prospectus or Annual Report free of charge by calling the
Fund at 800-791-4226.
TABLE OF CONTENTS
THE TRUST....................................................................S-1
GLOSSARY S-1
DESCRIPTION OF PERMITTED INVESTMENTS.........................................S-2
INVESTMENT POLICIES OF THE FUND.............................................S-27
INVESTMENT ADVISORY AND OTHER SERVICES......................................S-29
THE ADMINISTRATOR...........................................................S-30
THE DISTRIBUTOR.............................................................S-31
TRANSFER AGENT..............................................................S-32
CUSTODIAN...................................................................S-32
INDEPENDENT AUDITORS........................................................S-32
LEGAL COUNSEL...............................................................S-32
TRUSTEES AND OFFICERS OF THE TRUST..........................................S-32
PURCHASING AND REDEEMING SHARES.............................................S-37
DETERMINATION OF NET ASSET VALUE............................................S-37
TAXES ...................................................................S-38
BROKERAGE ALLOCATION AND OTHER PRACTICES....................................S-41
DESCRIPTION OF SHARES.......................................................S-44
SHAREHOLDER LIABILITY.......................................................S-44
LIMITATION OF TRUSTEES' LIABILITY...........................................S-44
PROXY VOTING................................................................S-44
CODES OF ETHICS.............................................................S-45
5% AND 25% SHAREHOLDERS.....................................................S-45
APPENDIX A - RATINGS.........................................................A-1
APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES............................B-1
March 1, 2004
IND-SX-001-0300
THE TRUST
General. The Fund is a separate series of the Trust, an open-end investment
management company established under Massachusetts law as a Massachusetts
business trust under a Declaration of Trust dated July 18, 1991, as amended
February 18, 1997. The Declaration of Trust permits the Trust to offer separate
series ("funds") of shares of beneficial interest ("shares"). The Trust reserves
the right to create and issue shares of additional funds. Each fund is a
separate mutual fund, and each share of each fund represents an equal
proportionate interest in that fund. All consideration received by the Trust for
shares of any fund and all assets of such fund belong solely to that fund and
would be subject to liabilities related thereto. The Fund pays its (i) operating
expenses, including fees of its service providers, expenses of preparing
prospectuses, proxy solicitation material and reports to shareholders, costs of
custodial services and registering its shares under federal and state securities
laws, pricing and insurance expenses, brokerage costs, interest charges, taxes
and organization expenses and (ii) pro rata share of the Trust's other expenses,
including audit and legal expenses. Expenses not attributable to a specific fund
are allocated across all of the funds on the basis of relative net assets.
History of the Fund. The Fund is the successor to the UAM Funds, Inc.
Independence Small Cap Portfolio (the "Predecessor Fund"). The Predecessor Fund
was managed by Independence Investment LLC ("Independence" or the "Adviser")
using the same investment objective, strategies, policies and restrictions as
those used by the Fund. The Predecessor Fund's date of inception was December
16, 1998. The Predecessor Fund dissolved and reorganized into the Independence
Small Cap Portfolio on June 24, 2002. Substantially all of the assets of the
Predecessor Fund were transferred to its successor in connection with the Fund's
commencement of operations on June 24, 2002.
Voting Rights. Each share held entitles the shareholder of record to one vote
for each dollar invested. In other words, each shareholder of record is entitled
to one vote for each dollar of net asset value of the shares held on the record
date for the meeting. The Fund will vote separately on matters relating solely
to it. As a Massachusetts business trust, the Trust is not required, and does
not intend, to hold annual meetings of shareholders. Shareholders approval will
be sought, however, for certain changes in the operation of the Trust and for
the election of Trustees under certain circumstances. Under the Declaration of
Trust, the Trustees have the power to liquidate the Fund without shareholder
approval. While the Trustees have no present intention of exercising this power,
they may do so if the Fund fails to reach a viable size within a reasonable
amount of time or for some other extraordinary reason.
In addition, a Trustee may be removed by the remaining Trustees or by
shareholders at a special meeting called upon written request of shareholders
owning at least 10% of the outstanding shares of the Trust. In the event that
such a meeting is requested, the Trust will provide appropriate assistance and
information to the shareholders requesting the meeting.
S-1
GLOSSARY
All terms that this SAI does not otherwise define have the same meaning in the
SAI as they do in the Fund's prospectus.
o 1933 Act means the Securities Act of 1933, as amended.
o 1934 Act means the Securities Exchange Act of 1934, as amended.
o 1940 Act means the Investment Company Act of 1940, as amended.
o Adviser means Independence Investment LLC, the investment adviser to the
Fund.
o Board Member refers to a single member of the Trust's Board of Trustees.
o Board refers to the Trust's Board of Trustees as a group.
o Trust refers to The Advisors' Inner Circle Fund.
o NAV is the net asset value per share of the Fund.
o NYSE is the New York Stock Exchange.
o SEC is the U.S. Securities and Exchange Commission.
o Administrator is SEI Investments Global Funds Services, Inc. (formerly
named SEI Investments Mutual Funds Services)
o Distributor is SEI Investments Distribution Co..
o Code is the Internal Revenue Code of 1986, as amended.
o CFTC is the Commodity Futures Trading Commission.
Capitalized terms not defined herein are defined in the Fund's prospectus.
DESCRIPTION OF PERMITTED INVESTMENTS
What Investment Strategies May the Fund Use?
The Fund's investment objectives and principal investment strategies are
described in the prospectus(es). The following information supplements, and
should be read in conjunction with, the prospectus. For a description of certain
permitted investments discussed below, see "Description of Permitted
Investments" in this SAI.
Debt Securities
Corporations and governments use debt securities to borrow money from investors.
Most debt securities promise a variable or fixed rate of return and repayment of
the amount borrowed at maturity. Some debt securities, such as zero-coupon
bonds, do not pay current interest and are purchased at a discount from their
face value.
Types of Debt Securities:
U.S. Government Securities - U.S. government securities are securities issued by
the U.S. Treasury (treasury securities) and securities issued by a federal
agency or a government-sponsored entity (agency securities). Treasury securities
include treasury bills, which have initial maturities of less than one year, and
treasury notes, which have initial maturities of one to ten years, and treasury
bonds, which have initial maturities of at least ten years, and certain types of
mortgage-backed securities that are described under "Mortgage-Backed Securities"
and "Other Asset-Backed Securities." This SAI discusses mortgage-backed treasury
and agency securities in detail in "Mortgage-Backed Securities" and "Other
Asset-Backed Securities."
S-2
The full faith and credit of the U.S. government supports treasury securities.
Unlike treasury securities, the full faith and credit of the U.S. government
generally does not back agency securities. Agency securities are typically
supported in one of three ways:
o By the right of the issuer to borrow from the U.S. Treasury;
o By the discretionary authority of the U.S. government to buy the
obligations of the agency; or
o By the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject to
the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the credit
risk is minimal. The U.S. government does not guarantee the net asset value of
the assets of the Fund.
Corporate Bonds - Corporations issue bonds and notes to raise money for working
capital or for capital expenditures such as plant construction, equipment
purchases and expansion. In return for the money loaned to the corporation by
investors, the corporation promises to pay investors interest, and repay the
principal amount of the bond or note.
Mortgage-Backed Securities - Mortgage-backed securities are interests in pools
of mortgage loans that various governmental, government-related and private
organizations assemble as securities for sale to investors. Unlike most debt
securities, which pay interest periodically and repay principal at maturity or
on specified call dates, mortgage-backed securities make monthly payments that
consist of both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Since homeowners usually have the option of paying either part or
all of the loan balance before maturity, the effective maturity of a
mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The Adviser will consider such
insurance and guarantees and the creditworthiness of the issuers thereof in
determining whether a mortgage-related security meets its investment quality
standards. It is possible that the private insurers or guarantors will not meet
their obligations under the insurance policies or guarantee arrangements.
S-3
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA) - GNMA is the principal
governmental guarantor of mortgage-related securities. GNMA is a wholly-owned
corporation of the U.S. government and it falls within the Department of Housing
and Urban Development. Securities issued by GNMA are considered the equivalent
of treasury securities and are backed by the full faith and credit of the U.S.
government. GNMA guarantees the timely payment of principal and interest on
securities issued by institutions approved by GNMA and backed by pools of
FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the market value
or yield of mortgage-backed securities or the value of the Fund's shares. To buy
GNMA securities, the Fund may have to pay a premium over the maturity value of
the underlying mortgages, which the Fund may lose if prepayment occurs.
Federal National Mortgage Association (FNMA) - FNMA is a government-sponsored
corporation owned entirely by private stockholders. FNMA is regulated by the
Secretary of Housing and Urban Development. FNMA purchases conventional
mortgages from a list of approved sellers and service providers, including state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Securities issued by
FNMA are agency securities, which means FNMA, but not the U.S. government,
guarantees their timely payment of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC) - FHLMC is a stockholder owned
corporation chartered by Congress in 1970 to increase the supply of funds that
mortgage lenders, such as commercial banks, mortgage bankers, savings
institutions and credit unions, can make available to homebuyers and multifamily
investors. FHLMC issues Participation Certificates (PCs) which represent
interests in conventional mortgages. FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers - Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers also create pass-through
pools of conventional mortgage loans. In addition to guaranteeing the
mortgage-related security, such issuers may service and/or have originated the
underlying mortgage loans. Pools created by these issuers generally offer a
higher rate of interest than pools created by GNMA, FNMA & FHLMC because they
are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities - Yield characteristics of mortgage-backed
securities differ from those of traditional debt securities in a variety of
ways. For example, payments of interest and principal are more frequent (usually
monthly) and their interest rates are sometimes adjustable. In addition, a
variety of economic, geographic, social and other factors, such as the sale of
the underlying property, refinancing or foreclosure, can cause investors to
repay the loans underlying a mortgage-backed security sooner than expected. When
prepayment occurs, the Fund may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities - These securities are interests in pools of a
broad range of assets other than mortgages, such as automobile loans, computer
leases and credit card receivables. Like mortgage-backed securities, these
securities are pass-through. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets, which raises the possibility
that recoveries on repossessed collateral may not be available to support
payments on these securities. For example, credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which allow debtors to reduce their
balances by offsetting certain amounts owed on the credit cards. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. Due to the quantity of vehicles involved and
requirements under state laws, asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables.
S-4
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the pool
("credit support"). Delinquency or loss more than that anticipated or failure of
the credit support could adversely affect the return on an investment in such a
security.
The Fund may also invest in residual interests in asset-backed securities, which
consist of the excess cash flow remaining after making required payments on the
securities and paying related administrative expenses. The amount of residual
cash flow resulting from a particular issue of asset-backed securities depends
in part on the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets.
Collateralized Mortgage Obligations (CMOs) - CMOs are hybrids between
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
CMOs usually pay interest monthly and have a more focused range of principal
payment dates than pass-through securities. While whole mortgage loans may
collateralize CMOs, mortgage-backed securities guaranteed by GNMA, FHLMC, or
FNMA and their income streams more typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Code, and
invests in certain mortgages primarily secured by interests in real property and
other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche of
CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments - To earn a return on uninvested assets, meet anticipated
redemptions, or for temporary defensive purposes, the Fund may invest a portion
of its assets in the short-term securities listed below, U.S. government
securities and investment-grade corporate debt securities. Unless otherwise
specified, a short-term debt security has a maturity of one-year or less.
Bank Obligations - The Fund will only invest in a security issued by a
commercial bank if the bank:
o Has total assets of at least $1 billion, or the equivalent in other
currencies;
o Is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
o Is a foreign branch of a U.S. bank and the Adviser believes the security
is of an investment quality comparable with other debt securities that the
Fund may purchase.
S-5
Time Deposits - Time deposits are non-negotiable deposits, such as savings
accounts or certificates of deposit, held by a financial institution for a fixed
term with the understanding that the depositor can withdraw its money only by
giving notice to the institution. However, there may be early withdrawal
penalties depending upon market conditions and the remaining maturity of the
obligation. The Fund may only purchase time deposits maturing from two business
days through seven calendar days.
Certificates of Deposit - Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank or savings and loan
association for a definite period of time and earning a specified return.
Bankers' Acceptance - A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction (to finance the import, export, transfer or storage of
goods).
Commercial Paper - Commercial paper is a short-term obligation with a maturity
ranging from 1 to 270 days issued by banks, corporations and other borrowers.
Such investments are unsecured and usually discounted. The Fund may invest in
commercial paper rated A-1 or A-2 by Standard and Poor's Ratings Services
("S&P") or Prime-1 or Prime-2 by Moody's Investors Service ("Moody's"), or, if
not rated, issued by a corporation having an outstanding unsecured debt issue
rated A or better by Moody's or by S&P. See "Bond Ratings" for a description of
commercial paper ratings.
Stripped Mortgage-Backed Securities - Stripped mortgage-backed securities are
derivative multiple-class mortgage-backed securities. Stripped mortgage-backed
securities usually have two classes that receive different proportions of
interest and principal distributions on a pool of mortgage assets. Typically,
one class will receive some of the interest and most of the principal, while the
other class will receive most of the interest and the remaining principal. In
extreme cases, one class will receive all of the interest ("interest only" or
"IO" class) while the other class will receive the entire principal ("principal
only" or "PO" class). The cash flow and yields on IOs and POs are extremely
sensitive to the rate of principal payments (including prepayments) on the
underlying mortgage loans or mortgage-backed securities. A rapid rate of
principal payments may adversely affect the yield to maturity of IOs. Slower
than anticipated prepayments of principal may adversely affect the yield to
maturity of a PO. The yields and market risk of interest only and principal only
stripped mortgage-backed securities, respectively, may be more volatile than
those of other fixed income securities, including traditional mortgage-backed
securities.
Yankee Bonds - Yankee bonds are dollar-denominated bonds issued inside the U.S.
by foreign entities. Investment in these securities involve certain risks which
are not typically associated with investing in domestic securities. See "Foreign
Securities."
Zero Coupon Bonds - These securities make no periodic payments of interest, but
instead are sold at a discount from their face value. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. The amount of
the discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. The market value of zero coupon securities may exhibit greater
price volatility than ordinary debt securities because a stripped security will
have a longer duration than an ordinary debt security with the same maturity.
The Fund's investments in pay-in-kind, delayed and zero coupon bonds may require
it to sell certain of its portfolio securities to generate sufficient cash to
satisfy certain income distribution requirements.
S-6
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by their
holder, typically a custodian bank or investment brokerage firm. Once the holder
of the security has stripped or separated corpus and coupons, it may sell each
component separately. The principal or corpus is then sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. The underlying
treasury security is held in book-entry form at the Federal Reserve Bank or, in
the case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the owners
thereof. Purchasers of stripped obligations acquire, in effect, discount
obligations that are economically identical to the zero coupon securities that
the U.S. Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program known
as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," the Fund may record its beneficial ownership of the coupon or
corpus directly in the book-entry record-keeping system.
Terms to Understand:
Maturity - Every debt security has a stated maturity date when the issuer must
repay the amount it borrowed (principal) from investors. Some debt securities,
however, are callable, meaning the issuer can repay the principal earlier, on or
after specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity of a
debt security is usually its nearest call date.
Mutual funds that invest in debt securities have no real maturity. Instead, they
calculate their weighted average maturity. This number is an average of the
effective or anticipated maturity of each debt security held by the mutual fund,
with the maturity of each security weighted by the percentage of the assets of
the mutual fund it represents.
Duration - Duration is a calculation that seeks to measure the price sensitivity
of a debt security, or of a mutual fund that invests in debt securities, to
changes in interest rates. It measures sensitivity more accurately than maturity
because it takes into account the time value of cash flows generated over the
life of a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the number
of years they will be received to produce a value expressed in years -- the
duration. Effective duration takes into account call features and sinking fund
prepayments that may shorten the life of a debt security.
An effective duration of four years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security is
estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return based
on an expectation of how much interest rates, in general, will change. While
serving as a good estimator of prospective returns, effective duration is an
imperfect measure.
Factors Affecting the Value of Debt Securities - The total return of a debt
instrument is composed of two elements: the percentage change in the security's
price and interest income earned. The yield to maturity of a debt security
estimates its total return only if the price of the debt security remains
unchanged during the holding period and coupon interest is reinvested at the
same yield to maturity. The total return of a debt instrument, therefore, will
be determined not only by how much interest is earned, but also by how much the
price of the security and interest rates change.
S-7
o Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
o Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can reduce the value of mortgage-backed
securities, which may cause your share price to fall. Lower rates may motivate
people to pay off mortgage-backed and asset-backed securities earlier than
expected. The Fund may then have to reinvest the proceeds from such prepayments
at lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest rates
may also shorten or lengthen the average maturity of the Fund. If left
unattended, drifts in the average maturity of the Fund can have the unintended
effect of increasing or reducing the effective duration of the Fund, which may
adversely affect the expected performance of the Fund.
o Extension Risk
The other side of prepayment risk occurs when interest rates are rising. Rising
interest rates can cause the Fund' average maturity to lengthen unexpectedly due
to a drop in mortgage prepayments. This would increase the sensitivity of the
Fund to rising rates and its potential for price declines. Extending the average
life of a mortgage-backed security increases the risk of depreciation due to
future increases in market interest rates. For these reasons, mortgage-backed
securities may be less effective than other types of U.S. government securities
as a means of "locking in" interest rates.
o Credit Rating
Coupon interest is offered to investors of debt securities as compensation for
assuming risk, although short-term Treasury securities, such as three-month
treasury bills, are considered "risk free." Corporate securities offer higher
yields than Treasury securities because their payment of interest and complete
repayment of principal is less certain. The credit rating or financial condition
of an issuer may affect the value of a debt security. Generally, the lower the
quality rating of a security, the greater the risks that the issuer will fail to
pay interest and return principal. To compensate investors for taking on
increased risk, issuers with lower credit ratings usually offer their investors
a higher "risk premium" in the form of higher interest rates above comparable
Treasury securities.
Changes in investor confidence regarding the certainty of interest and principal
payments of a corporate debt security will result in an adjustment to this "risk
premium." If an issuer's outstanding debt carries a fixed coupon, adjustments to
the risk premium must occur in the price, which affects the yield to maturity of
the bond. If an issuer defaults or becomes unable to honor its financial
obligations, the bond may lose some or all of its value.
S-8
A security rated within the four highest rating categories by a rating agency is
called investment-grade because its issuer is more likely to pay interest and
repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the Adviser may determine that it is of
investment-grade. The Adviser may retain securities that are downgraded, if it
believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly speculative
securities that are usually issued by smaller, less credit worthy and/or highly
leveraged (indebted) companies. A corporation may issue a junk bond because of a
corporate restructuring or other similar event. Compared with investment-grade
bonds, junk bonds carry a greater degree of risk and are less likely to make
payments of interest and principal. Market developments and the financial and
business condition of the corporation issuing these securities influences their
price and liquidity more than changes in interest rates, when compared to
investment-grade debt securities. Insufficient liquidity in the junk bond market
may make it more difficult to dispose of junk bonds and may cause the Fund to
experience sudden and substantial price declines. A lack of reliable, objective
data or market quotations may make it more difficult to value junk bonds
accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial strength.
The Fund currently uses ratings compiled by Moody's, S&P, and Fitch. Credit
ratings are only an agency's opinion, not an absolute standard of quality, and
they do not reflect an evaluation of market risk. The section "Appendix A -
Ratings" contains further information concerning the ratings of certain rating
agencies and their significance.
The Adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time the Fund buys it. A rating agency
may change its credit ratings at any time. The Adviser monitors the rating of
the security and will take appropriate actions if a rating agency reduces the
security's rating. The Fund are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded. The Fund may invest
in securities of any rating.
Derivatives
Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, or an underlying economic factor, such as an
interest rate or a market benchmark. Unless otherwise stated in the Fund's
prospectus, the Fund may use derivatives for risk management purposes, including
to gain exposure to various markets in a cost efficient manner, to reduce
transaction costs or to remain fully invested. The Fund may also invest in
derivatives to protect it from broad fluctuations in market prices, interest
rates or foreign currency exchange rates (a practice known as "hedging"). When
hedging is successful, the Fund will have offset any depreciation in the value
of its portfolio securities by the appreciation in the value of the derivative
position. Although techniques other than the sale and purchase of derivatives
could be used to control the exposure of the Fund to market fluctuations, the
use of derivatives may be a more effective means of hedging this exposure.
Types of Derivatives:
Futures - A futures contract is an agreement between two parties whereby one
party sells and the other party agrees to buy a specified amount of a financial
instrument at an agreed upon price and time. The financial instrument underlying
the contract may be a stock, stock index, bond, bond index, interest rate,
foreign exchange rate or other similar instrument. Agreeing to buy the
underlying financial information is called buying a futures contract or taking a
long position in the contract. Likewise, agreeing to sell the underlying
financial instrument is called selling a futures contract or taking a short
position in the contract.
S-9
Futures contracts are traded in the U.S. on commodity exchanges or boards of
trade -- known as "contract markets" -- approved for such trading and regulated
by the CFTC. These contract markets standardize the terms, including the
maturity date and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit "initial margin" with a futures broker, known as a futures commission
merchant or custodian bank, when they enter into the contract. Initial margin
deposits are typically equal to a percentage of the contract's value. After they
open a futures contract, the parties to the transaction must compare the
purchase price of the contract to its daily market value. If the value of the
futures contract changes in such a way that a party's position declines, that
party must make additional "variation margin" payments so that the margin
payment is adequate. On the other hand, the value of the contract may change in
such a way that there is excess margin on deposit, possibly entitling the party
that has a gain to receive all or a portion of this amount. This process is
known as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery of
and payment for the underlying security, in many cases the parties may close the
contract early by taking an opposite position in an identical contract. If the
sale price upon closing out the contract is less than the original purchase
price, the person closing out the contract will realize a loss. If the sale
price upon closing out the contract is more than the original purchase price,
the person closing out the contract will realize a gain. If the purchase price
upon closing out the contract is more than the original sale price, the person
closing out the contract will realize a loss. If the purchase price upon closing
out the contract is less than the original sale price, the person closing out
the contract will realize a gain.
The Fund may incur commission expenses when it opens or closes a futures
position.
Options - An option is a contract between two parties for the purchase and sale
of a financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the right
to sell the security). Options have various types of underlying instruments,
including specific securities, indices of securities prices, foreign currencies,
interest rates and futures contracts. Options may be traded on an exchange
(exchange-traded-options) or may be customized agreements between the parties
(over-the-counter or "OTC options"). Like futures, a financial intermediary,
known as a clearing corporation, financially backs exchange-traded options.
However, OTC options have no such intermediary and are subject to the risk that
the counter-party will not fulfill its obligations under the contract.
S-10
Purchasing Put and Call Options
When the Fund purchases a put option, it buys the right to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Fund pays the current market price for the option (known as the "option
premium"). The Fund may purchase put options to offset or hedge against a
decline in the market value of its securities ("protective puts") or to benefit
from a decline in the price of securities that it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs. However, if the price of the underlying
instrument does not fall enough to offset the cost of purchasing the option, a
put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that the Fund obtains the right
to purchase, rather than sell, the underlying instrument at the option's strike
price. The Fund would normally purchase call options in anticipation of an
increase in the market value of securities it owns or wants to buy. The Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying instrument exceeded the exercise price plus the premium paid and
related transaction costs. Otherwise, the Fund would realize either no gain or a
loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
o Closing it out in the secondary market at its current price.
o Selling (Writing) Put and Call Options
When the Fund writes a call option it assumes an obligation to sell specified
securities to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. Similarly, when the Fund
writes a put option it assumes an obligation to purchase specified securities
from the option holder at a specified price if the option is exercised at any
time before the expiration date. The Fund may terminate its position in an
exchange-traded put option before exercise by buying an option identical to the
one it has written. Similarly, it may cancel an over-the-counter option by
entering into an offsetting transaction with the counter-party to the option.
The Fund could try to hedge against an increase in the value of securities it
would like to acquire by writing a put option on those securities. If security
prices rise, the Fund would expect the put option to expire and the premium it
received to offset the increase in the security's value. If security prices
remain the same over time, the Fund would hope to profit by closing out the put
option at a lower price. If security prices fall, the Fund may lose an amount of
money equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the Fund of the opportunity
to profit from a decrease in the market price of the securities it would like to
acquire.
The characteristics of writing call options are similar to those of writing put
options, except that call writers expect to profit if prices remain the same or
fall. The Fund could try to hedge against a decline in the value of securities
it already owns by writing a call option. If the price of that security falls as
expected, the Fund would expect the option to expire and the premium it received
to offset the decline of the security's value. However, the Fund must be
prepared to deliver the underlying instrument in return for the strike price,
which may deprive it of the opportunity to profit from an increase in the market
price of the securities it holds.
S-11
The Fund is permitted only to write covered options. At the time of selling the
call option, the Fund may cover the option by owning, among other things:
o The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
o A call option on the same security or index with the same or lesser
exercise price;
o A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
o Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
o In the case of an index, the portfolio of securities that corresponds to
the index.
At the time of selling a put option, the Fund may cover the put option
by, among other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
o Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the difference
between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o Options on Securities Indices
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.
o Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the option
by the holder, the contract market clearing house establishes a corresponding
short position for the writer of the option (in the case of a call option) or a
corresponding long position (in the case of a put option). If the option is
exercised, the parties will be subject to the futures contracts. In addition,
the writer of an option on a futures contract is subject to initial and
variation margin requirements on the option position. Options on futures
contracts are traded on the same contract market as the underlying futures
contract.
The buyer or seller of an option on a futures contract may terminate the option
early by purchasing or selling an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or sold.
The difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
S-12
The Fund may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Fund may buy a put option on a futures
contract for the same reasons it would sell a futures contract. It also may
purchase such put options in order to hedge a long position in the underlying
futures contract. The Fund may buy call options on futures contracts for the
same purpose as the actual purchase of the futures contracts, such as in
anticipation of favorable market conditions.
The Fund may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If the
price of the futures contract at expiration were below the exercise price, the
Fund would retain the option premium, which would offset, in part, any decline
in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contracts, except that, if the market price declines, the Fund would
pay more than the market price for the underlying instrument. The premium
received on the sale of the put option, less any transaction costs, would reduce
the net cost to the Fund.
o Combined Positions
The Fund may purchase and write options in combination with each other, or in
combination with futures or forward contracts, to adjust the risk and return
characteristics of the overall position. For example, the Fund could construct a
combined position whose risk and return characteristics are similar to selling a
futures contract by purchasing a put option and writing a call option on the
same underlying instrument. Alternatively, the Fund could write a call option at
one strike price and buy a call option at a lower price to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
o Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell a
specific amount of currency at a future date or date range at a specific price.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. Forward
foreign currency exchange contracts differ from foreign currency futures
contracts in certain respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
o Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed
to futures contracts which are traded only on exchanges regulated by the
CFTC.
o Do not require an initial margin deposit.
S-13
o May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies - A "settlement hedge" or "transaction
hedge" is designed to protect the Fund against an adverse change in foreign
currency values between the date a security is purchased or sold and the date on
which payment is made or received. Entering into a forward contract for the
purchase or sale of the amount of foreign currency involved in an underlying
security transaction for a fixed amount of U.S. dollars "locks in" the U.S.
dollar price of the security. The Fund may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or selling
securities denominated in foreign currency, even if it has not yet selected the
specific investments.
The Fund may use forward contracts to hedge against a decline in the value of
existing investments denominated in foreign currency. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the currency in which the
Fund's investment is denominated. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a direct hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities that the Fund owns or intends to purchase or sell. They
simply establish a rate of exchange that one can achieve at some future point in
time. Additionally, these techniques tend to minimize the risk of loss due to a
decline in the value of the hedged currency and to limit any potential gain that
might result from the increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from
one currency into another. Such transactions may call for the delivery of one
foreign currency in exchange for another foreign currency, including currencies
in which its securities are not then denominated. This may include shifting
exposure from U.S. dollars to a foreign currency, or from one foreign currency
to another foreign currency. This type of strategy, sometimes known as a
"cross-hedge," will tend to reduce or eliminate exposure to the currency that is
sold, and increase exposure to the currency that is purchased. Cross-hedges may
protect against losses resulting from a decline in the hedged currency, but will
cause the Fund to assume the risk of fluctuations in the value of the currency
it purchases. Cross-hedging transactions also involve the risk of imperfect
correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the Fund may have to purchase additional foreign currency on the
spot market if the market value of a security it is hedging is less than the
amount of foreign currency it is obligated to deliver. Conversely, the Fund may
have to sell on the spot market some of the foreign currency it received upon
the sale of a security if the market value of such security exceeds the amount
of foreign currency it is obligated to deliver.
S-14
Swaps, Caps, Collars and Floors
Swap Agreements - A swap is a financial instrument that typically involves the
exchange of cash flows between two parties on specified dates (settlement
dates), where the cash flows are based on agreed-upon prices, rates, indices,
etc. The nominal amount on which the cash flows are calculated is called the
notional amount. Swaps are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors, such
as interest rates, foreign currency rates, mortgage securities, corporate
borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the Fund and its share price. The performance of swap agreements
may be affected by a change in the specific interest rate, currency, or other
factors that determine the amounts of payments due to and from the Fund. If a
swap agreement calls for payments by the Fund, the Fund must be prepared to make
such payments when due. In addition, if the counter-party's creditworthiness
declined, the value of a swap agreement would be likely to decline, potentially
resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the prior
written consent of the other party. The Fund may be able to eliminate its
exposure under a swap agreement either by assignment or by other disposition, or
by entering into an offsetting swap agreement with the same party or a similarly
creditworthy party. If the counter-party is unable to meet its obligations under
the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may
not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify the Fund's gains
or losses. In order to reduce the risk associated with leveraging, the Fund may
cover its current obligations under swap agreements according to guidelines
established by the SEC. If the Fund enters into a swap agreement on a net basis,
it will segregate assets with a daily value at least equal to the excess, if
any, of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If the Fund enters
into a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement.
o Equity Swaps
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can gain
exposure to stocks making up the index of securities without actually purchasing
those stocks. Equity index swaps involve not only the risk associated with
investment in the securities represented in the index, but also the risk that
the performance of such securities, including dividends, will not exceed the
return on the interest rate that the Fund will be committed to pay.
o Interest Rate Swaps
Interest rate swaps are financial instruments that involve the exchange of one
type of interest rate for another type of interest rate cash flow on specified
dates in the future. Some of the different types of interest rate swaps are
"fixed-for floating rate swaps," "termed basis swaps" and "index amortizing
swaps." Fixed-for floating rate swaps involve the exchange of fixed interest
rate cash flows for floating rate cash flows. Termed basis swaps entail cash
flows to both parties based on floating interest rates, where the interest rate
indices are different. Index amortizing swaps are typically fixed-for floating
swaps where the notional amount changes if certain conditions are met.
S-15
Like a traditional investment in a debt security, the Fund could lose money by
investing in an interest rate swap if interest rates change adversely. For
example, if the Fund enters into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Fund may have to pay more
money than it receives. Similarly, if the Fund enters into a swap where it
agrees to exchange a fixed rate of interest for a floating rate of interest, the
Fund may receive less money than it has agreed to pay.
o Currency Swaps
A currency swap is an agreement between two parties in which one party agrees to
make interest rate payments in one currency and the other promises to make
interest rate payments in another currency. The Fund may enter into a currency
swap when it has one currency and desires a different currency. Typically the
interest rates that determine the currency swap payments are fixed, although
occasionally one or both parties may pay a floating rate of interest. Unlike an
interest rate swap, however, the principal amounts are exchanged at the
beginning of the contract and returned at the end of the contract. Changes in
foreign exchange rates and changes in interest rates, as described above may
negatively affect currency swaps.
Caps, Collars and Floors - Caps and floors have an effect similar to buying or
writing options. In a typical cap or floor agreement, one party agrees to make
payments only under specified circumstances, usually in return for payment of a
fee by the other party. For example, the buyer of an interest rate cap obtains
the right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level. The seller of an interest rate floor is obligated
to make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Risks of Derivatives:
While transactions in derivatives 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 of the Fund than if it had not entered into any
derivatives transactions. Derivatives may magnify the Fund's gains or losses,
causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
Fund holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could expose
the Fund to greater risks.
Correlation of Prices - The Fund's ability to hedge its securities through
derivatives depends on the degree to which price movements in the underlying
index or instrument correlate with price movements in the relevant securities.
In the case of poor correlation, the price of the securities the Fund is hedging
may not move in the same amount, or even in the same direction as the hedging
instrument. The Adviser will try to minimize this risk by investing only in
those contracts whose behavior it expects to resemble with the portfolio
securities it is trying to hedge. However, if the Fund's prediction of interest
and currency rates, market value, volatility or other economic factors is
incorrect, the Fund may lose money, or may not make as much money as it
expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
S-16
o current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract;
o a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops; and
o differences between the derivatives, such as different margin
requirements, different liquidity of such markets and the participation of
speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on a
broad market index. Since narrower indices are made up of a smaller number of
securities, they are more susceptible to rapid and extreme price fluctuations
because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of the
investments of the Fund. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Fund's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the Fund's investments precisely over time.
Lack of Liquidity - Before a futures contract or option is exercised or expires,
the Fund can terminate it only by entering into a closing purchase or sale
transaction. Moreover, the Fund may close out a futures contract only on the
exchange the contract was initially traded. Although the Fund intends to
purchase options and futures only where there appears to be an active market,
there is no guarantee that such a liquid market will exist. If there is no
secondary market for the contract, or the market is illiquid, the Fund may not
be able to close out its position.
In an illiquid market, the Fund may:
o have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
o the facilities of the exchange may not be adequate to handle current
trading volume;
o equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other occurrences may disrupt normal trading
activity; or
o investors may lose interest in a particular derivative or category of
derivatives.
S-17
Management Risk - If the Adviser incorrectly predicts stock market and interest
rate trends, the Fund may lose money by investing in derivatives. For example,
if the Fund were to write a call option based on the Adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the Fund could be required to sell the security upon exercise at a
price below the current market price. Similarly, if the Fund were to write a put
option based on the Adviser's expectation that the price of the underlying
security would rise, but the price were to fall instead, the Fund could be
required to purchase the security upon exercise at a price higher than the
current market price.
Margin - Because of the low margin deposits required upon the opening of a
derivative position, such transactions involve an extremely high degree of
leverage. Consequently, a relatively small price movement in a derivative may
result in an immediate and substantial loss (as well as gain) to the Fund and it
may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell
securities at a time when it is disadvantageous to do so to meet its minimum
daily margin requirement. The Fund may lose its margin deposits if a broker with
whom it has an open futures contract or related option becomes insolvent or
declares bankruptcy.
Volatility and Leverage - The prices of derivatives are volatile (i.e., they may
change rapidly, substantially and unpredictably) and are influenced by a variety
of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum amount
that the price of a derivative may vary from the settlement price of that
derivative at the end of trading on the previous day. Once the price of a
derivative reaches this value, the Fund may not trade that derivative at a price
beyond that limit. The daily limit governs only price movements during a given
day and does not limit potential gains or losses. Derivative prices have
occasionally moved to the daily limit for several consecutive trading days,
preventing prompt liquidation of the derivative.
Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in an
immediate and substantial loss (as well as gain) to the Fund and it may lose
more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell
securities at a time when it is disadvantageous to do so to meet its minimum
daily margin requirement. The Fund may lose its margin deposits if a
broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
S-18
Equity Securities
Types of Equity Securities:
Common Stocks - Common stocks represent units of ownership in a company. Common
stocks usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the Board.
Preferred Stocks - Preferred stocks are also units of ownership in a company.
Preferred stocks normally have preference over common stock in the payment of
dividends and the liquidation of the company. However, in all other respects,
preferred stocks are subordinated to the liabilities of the issuer. Unlike
common stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates and
perceived credit risk.
Convertible Securities - Convertible securities are securities that may be
exchanged for, converted into, or exercised to acquire a predetermined number of
shares of the issuer's common stock at the Fund's option during a specified time
period (such as convertible preferred stocks, convertible debentures and
warrants). A convertible security is generally a fixed income security that is
senior to common stock in an issuer's capital structure, but is usually
subordinated to similar non-convertible securities. In exchange for the
conversion feature, many corporations will pay a lower rate of interest on
convertible securities than debt securities of the same corporation. In general,
the market value of a convertible security is at least the higher of its
"investment value" (i.e., its value as a fixed income security) or its
"conversion value" (i.e., its value upon conversion into its underlying common
stock).
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities. The price of a convertible security tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as the market
value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. government securities and (ii) call options or warrants on
the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the income
derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security's
underlying common stock. A synthetic convertible position has similar investment
characteristics, but may differ with respect to credit quality, time to
maturity, trading characteristics, and other factors. Because the Fund will
create synthetic convertible positions only out of high grade fixed income
securities, the credit rating associated with the Fund's synthetic convertible
investments is generally expected to be higher than that of the average
convertible security, many of which are rated below high grade. However, because
the options used to create synthetic convertible positions will generally have
expirations between one-month and three years of the time of purchase, the
maturity of these positions will generally be shorter than average for
convertible securities. Since the option component of a convertible security or
synthetic convertible position is a wasting asset (in the sense of losing "time
value" as maturity approaches), a synthetic convertible position may lose such
value more rapidly than a convertible security of longer maturity; however, the
gain in option value due to appreciation of the underlying stock may exceed such
time value loss, the market price of the option component generally reflects
these differences in maturities, and the Adviser and applicable sub-adviser take
such differences into account when evaluating such positions. When a synthetic
convertible position "matures" because of the expiration of the associated
option, the Fund may extend the maturity by investing in a new option with
longer maturity on the common stock of the same or different issuer. If the Fund
does not so extend the maturity of a position, it may continue to hold the
associated fixed income security.
S-19
Rights and Warrants - A right is a privilege granted to existing shareholders of
a corporation to subscribe to shares of a new issue of common stock before it is
issued. Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower price
than the public offering price. Warrants are securities that are usually issued
together with a debt security or preferred stock and that give the holder the
right to buy proportionate amount of common stock at a specified price. Warrants
are freely transferable and are traded on major exchanges. Unlike rights,
warrants normally have a life that is measured in years and entitles the holder
to buy common stock of a company at a price that is usually higher than the
market price at the time the warrant is issued. Corporations often issue
warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other
types of investments. Generally, rights and warrants do not carry 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. In
addition, their value does not necessarily change with the value of the
underlying securities, and they cease to have value if they are not exercised on
or before their expiration date. Investing in rights and warrants increases the
potential profit or loss to be realized from the investment as compared with
investing the same amount in the underlying securities.
Risks of Investing in Equity Securities:
General Risks of Investing in Stocks - While investing in stocks allows
investors to participate in the benefits of owning a company, such investors
must accept the risks of ownership. Unlike bondholders, who have preference to a
company's earnings and cash flow, preferred stockholders, followed by common
stockholders in order of priority, are entitled only to the residual amount
after a company meets its other obligations. For this reason, the value of a
company's stock will usually react more strongly to actual or perceived changes
in the company's financial condition or prospects than its debt obligations.
Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production
costs; and
o Changes in general financial market conditions that are relatively
unrelated to the company or its industry, such as changes in interest
rates, currency exchange rates or inflation rates.
S-20
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies - Investors in small and medium-sized companies
typically take on greater risk and price volatility than they would by investing
in larger, more established companies. This increased risk may be due to the
greater business risks of their small or medium size, limited markets and
financial resources, narrow product lines and frequent lack of management depth.
The securities of small and medium-sized companies are often traded in the
over-the-counter market and might not be traded in volumes typical of securities
traded on a national securities exchange. Thus, the securities of small and
medium capitalization companies are likely to be less liquid, and subject to
more abrupt or erratic market movements, than securities of larger, more
established companies.
Technology Companies - Stocks of technology companies have tended to be subject
to greater volatility than securities of companies that are not dependent upon
or associated with technological issues. Technology companies operate in various
industries. Since these industries frequently share common characteristics, an
event or issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
Initial Public Offerings ("IPO") - The Fund may invest a portion of its assets
in securities of companies offering shares in IPOs. IPOs may have a magnified
performance impact on the Fund with a small asset base. The impact of IPOs on
the Fund's performance likely will decrease as the Fund's asset size increases,
which could reduce the Fund's total returns. IPOs may not be consistently
available to the Fund for investing, particularly as the Fund's asset base
grows. Because IPO shares frequently are volatile in price, the Fund may hold
IPO shares for a very short period of time. This may increase the turnover of
the Fund's portfolio and may lead to increased expenses for the Fund, such as
commissions and transaction costs. By selling IPO shares, the Fund may realize
taxable gains it will subsequently distribute to shareholders. In addition, the
market for IPO shares can be speculative and/or inactive for extended periods of
time. The limited number of shares available for trading in some IPOs may make
it more difficult for the Fund to buy or sell significant amounts of shares
without an unfavorable impact on prevailing prices. Holders of IPO shares can be
affected by substantial dilution in the value of their shares, by sales of
additional shares and by concentration of control in existing management and
principal shareholders.
The Fund's investment in IPO shares may include the securities of unseasoned
companies (companies with less than three years of continuous operations), which
presents risks considerably greater than common stocks of more established
companies. These companies may have limited operating histories and their
prospects for profitability may be uncertain. These companies may be involved in
new and evolving businesses and may be vulnerable to competition and changes in
technology, markets and economic conditions. They may be more dependent on key
managers and third parties and may have limited product lines.
S-21
Foreign Securities
Types of Foreign Securities:
Foreign securities are debt and equity securities that are traded in markets
outside of the U.S . The markets in which these securities are located can be
developed or emerging. Investors can invest in foreign securities in a number of
ways:
o They can invest directly in foreign securities denominated in a foreign
currency;
o They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
o They can invest in investment funds.
American Depositary Receipts (ADRs) - ADRs are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the U.S. or elsewhere. A
custodian bank or similar financial institution in the issuer's home country
holds the underlying shares in trust. The depository bank may not have physical
custody of the underlying securities at all times and may charge fees for
various services, including forwarding dividends and interest and corporate
actions. ADRs are alternatives to directly purchasing the underlying foreign
securities in their national markets and currencies. ADRs are subject to many of
the risks associated with investing directly in foreign securities. European
Depositary Receipts are similar to ADRs, except that they are typically issued
by European banks or trust companies.
>
Emerging Markets - An "emerging country" is generally a country that the
International Bank for Reconstruction and Development (World Bank) and the
International Finance Corporation would consider to be an emerging or developing
country. Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more developed
countries. There are currently over 130 countries that the international
financial community generally considers to be emerging or developing countries,
approximately 40 of which currently have stock markets. These countries
generally include every nation in the world except the U.S., Canada, Japan,
Australia, New Zealand and most nations located in Western Europe.
Investment Funds - Some emerging countries currently prohibit direct foreign
investment in the securities of their companies. Certain emerging countries,
however, permit indirect foreign investment in the securities of companies
listed and traded on their stock exchanges through investment funds that they
have specifically authorized. Investments in these investment funds are subject
to the provisions of the 1940 Act. Shareholders of the Fund that invests in such
investment funds will bear not only their proportionate share of the expenses of
the Fund (including operating expenses and the fees of the Adviser), but also
will indirectly bear similar expenses of the underlying investment funds. In
addition, these investment funds may trade at a premium over their net asset
value.
Risks of Foreign Securities:
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition to
the risks inherent in U.S. investments.
Political and Economic Factors - Local political, economic, regulatory, or
social instability, military action or unrest, or adverse diplomatic
developments may affect the value of foreign investments. Listed below are some
of the more important political and economic factors that could negatively
affect an investment in foreign securities:
S-22
o The economies of foreign countries may differ from the economy of the U.S.
in such areas as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, budget deficits and
national debt;
o Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
o The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and
economic conditions;
o The internal policies of a particular foreign country may be less stable
than in the U.S. Other countries face significant external political
risks, such as possible claims of sovereignty by other countries or tense
and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory
taxation and other restrictions on U.S. investment. A country may restrict
or control foreign investments in its securities markets. These
restrictions could limit the Fund's ability to invest in a particular
country or make it very expensive for the Fund to invest in that country.
Some countries require prior governmental approval, limit the types or
amount of securities or companies in which a foreigner can invest. Other
companies may restrict the ability of foreign investors to repatriate
their investment income and capital gains.
Information and Supervision - There is generally less publicly available
information about foreign companies than companies based in the U.S. For
example, there are often no reports and ratings published about foreign
companies comparable to the ones written about U.S. companies. Foreign companies
are typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The lack of comparable information makes investment decisions
concerning foreign companies more difficult and less reliable than domestic
companies.
Stock Exchange and Market Risk - The Adviser anticipates that in most cases an
exchange or over-the-counter ("OTC") market located outside of the U.S. will be
the best available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the U.S. Foreign stock markets tend to differ from those in the U.S.
in a number of ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient as,
those in the U.S.;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and
erratic price movements;
o have generally higher commissions and are subject to set minimum rates, as
opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
o may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
S-23
Foreign markets may offer less protection to shareholders than U.S. markets
because:
o foreign accounting, auditing, and financial reporting requirements may
render a foreign corporate balance sheet more difficult to understand and
interpret than one subject to U.S. law and standards.
o adequate public information on foreign issuers may not be available, and
it may be difficult to secure dividends and information regarding
corporate actions on a timely basis.
o in general, there is less overall governmental supervision and regulation
of securities exchanges, brokers, and listed companies than in the U.S.
o OTC markets tend to be less regulated than stock exchange markets and, in
certain countries, may be totally unregulated.
o economic or political concerns may influence regulatory enforcement and
may make it difficult for shareholders to enforce their legal rights.
o restrictions on transferring securities within the U.S. or to U.S. persons
may make a particular security less liquid than foreign securities of the
same class that are not subject to such restrictions.
Foreign Currency Risk - While the Fund denominates its net asset value in U.S.
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in the value of a foreign currency against
the U.S. dollar will result in a corresponding change in value of securities
denominated in that currency. Some of the factors that may impair the
investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars and
vice versa;
o Complex political and economic factors may significantly affect the values
of various currencies, including U.S. dollars, and their exchange rates;
o Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces;
o There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
o Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes - Certain foreign governments levy withholding taxes on dividend and
interest income. Although in some countries it is possible for the Fund to
recover a portion of these taxes, the portion that cannot be recovered will
reduce the income the Fund receives from its investments. The Fund does not
expect such foreign withholding taxes to have a significant impact on
performance.
S-24
Emerging Markets - Investing in emerging markets may magnify the risks of
foreign investing. Security prices in emerging markets can be significantly more
volatile than those in more developed markets, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries;
and
o Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially making
prompt liquidation of holdings difficult or impossible at times.
Investment Companies
The Fund may buy and sell shares of other investment companies. Such investment
companies may pay management and other fees that are similar to the fees
currently paid by the Fund. Like other shareholders, the Fund would pay its
proportionate share of those fees. Consequently, shareholders of the Fund would
pay not only the management fees of the Fund, but also the management fees of
the investment company in which the Fund invests. The Fund may invest up to 10%
of its total assets in the securities of other investment companies, but may not
invest more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the outstanding securities of any one
investment company, unless it does so in reliance on a statutory exemption under
the 1940 Act or rule or SEC staff interpretations thereunder.
Repurchase Agreements
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest. Repurchase
agreements are generally for a relatively short period (usually not more than
seven days). The Fund normally uses repurchase agreements to earn income on
assets that are not invested.
When the Fund enters into a repurchase agreement it will:
o Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
o Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, the Fund's right to sell the
security may be restricted. In addition, the value of the security might decline
before the Fund can sell it and the Fund might incur expenses in enforcing its
rights.
S-25
Restricted Securities
The Fund may purchase restricted securities that are not registered for sale to
the general public. The Fund may also purchase shares that are not registered
for sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the 1933 Act. Under the supervision
of the Board, the Adviser determines the liquidity of such investments by
considering all relevant factors. Provided that a dealer or institutional
trading market in such securities exists, these restricted securities may not be
treated as illiquid securities for purposes of the Fund' investment limitations.
The price realized from the sales of these securities could be more or less than
those originally paid by the Fund or less than what may be considered the fair
value of such securities.
Securities Lending
The Fund may lend portfolio securities to brokers, dealers and other financial
organizations that meet capital and other credit requirements or other criteria
established by the Fund's Board of Trustees. These loans, if and when made, may
not exceed 33 1/3% of the total asset value of the Fund (including the loan
collateral). The Fund will not lend portfolio securities to its investment
adviser, sub-adviser or their affiliates unless it has applied for and received
specific authority to do so from the SEC. Loans of portfolio securities will be
fully collateralized by cash, letters of credit or U.S. government securities,
and the collateral will be maintained in an amount equal to at least 100% of the
current market value of the loaned securities by marking to market daily. Any
gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of
collateral, or other fee, to an unaffiliated third party for acting as the
Fund's securities lending agent.
By lending its securities, the Fund may increase its income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. The Fund will adhere to the following conditions whenever
its portfolio securities are loaned: (i) the Fund must receive at least 100%
cash collateral or equivalent securities of the type discussed in the preceding
paragraph from the borrower; (ii) the borrower must increase such collateral
whenever the market value of the securities rises above the level of such
collateral; (iii) the Fund must be able to terminate the loan on demand; (iv)
the Fund must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities and any increase in
market value; (v) the Fund may pay only reasonable fees in connection with the
loan (which fees may include fees payable to the lending agent, the borrower,
the Fund's administrator and the custodian); and (vi) voting rights on the
loaned securities may pass to the borrower, provided, however, that if a
material event adversely affecting the investment occurs, the Fund must
terminate the loan and regain the right to vote the securities. The Board has
adopted procedures reasonably designed to ensure that the foregoing criteria
will be met. Loan agreements involve certain risks in the event of default or
insolvency of the borrower, including possible delays or restrictions upon the
Fund's ability to recover the loaned securities or dispose of the collateral for
the loan, which could give rise to loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
S-26
Short Sales
Description of Short Sales:
Selling a security short is when an investor sells a security it does not own.
To sell a security short an investor must borrow the security from someone else
to deliver to the buyer. The investor then replaces the security it borrowed by
purchasing it at the market price at or before the time of replacement. Until it
replaces the security, the investor repays the person that lent it the security
for any interest or dividends that may have accrued during the period of the
loan.
Investors typically sell securities short to:
o Take advantage of an anticipated decline in prices.
o Protect a profit in a security it already owns.
The Fund can lose money if the price of the security it sold short increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. Likewise, the Fund can profit if the price of the security
declines between those dates.
To borrow the security, the Fund may be required to pay a premium, which would
increase the cost of the security sold. The Fund will also incur transaction
costs in effecting short sales. The Fund's gains and losses will be decreased or
increased, as the case may be, by the amount of the premium, dividends,
interest, or expenses the Fund may be required to pay in connection with a short
sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box - In addition, the Fund may engage in short sales
"against the box." In a short sale against the box, the Fund agrees to sell at a
future date a security that it either currently owns or has the right to acquire
at no extra cost. The Fund will incur transaction costs to open, maintain and
close short sales against the box. For tax purposes, a short sale against the
box may be a taxable event to the Fund.
Restrictions on Short Sales:
The Fund will not short sell a security if:
o After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Fund's net
assets.
o The market value of the securities of any single issuer that have been
sold short by the Fund would exceed two percent (2%) of the value of the
Fund's net assets.
o Any security sold short would constitute more than two percent (2%) of any
class of the issuer's securities.
S-27
Whenever the Fund sells a security short, its custodian segregates an amount of
cash or liquid securities equal to the difference between (a) the market value
of the securities sold short at the time they were sold short and (b) any cash
or U.S. government securities the Fund is required to deposit with the broker in
connection with the short sale (not including the proceeds from the short sale).
The segregated assets are marked to market daily in an attempt to ensure that
the amount deposited in the segregated account plus the amount deposited with
the broker is at least equal to the market value of the securities at the time
they were sold short.
When Issued, Delayed - Delivery and Forward Transactions
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, the
Fund contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. "Delayed delivery" refers to securities transactions
on the secondary market where settlement occurs in the future. In each of these
transactions, the parties fix the payment obligation and the interest rate that
they will receive on the securities at the time the parties enter the
commitment; however, they do not pay money or deliver securities until a later
date. Typically, no income accrues on securities the Fund has committed to
purchase before the securities are delivered, although the Fund may earn income
on securities it has in a segregated account to cover its position. The Fund
will only enter into these types of transactions with the intention of actually
acquiring the securities, but may sell them before the settlement date. The Fund
uses when-issued, delayed-delivery and forward delivery transactions to secure
what it considers an advantageous price and yield at the time of purchase. When
the Fund engages in when-issued, delayed-delivery or forward delivery
transactions, it relies on the other party to consummate the sale. If the other
party fails to complete the sale, the Fund may miss the opportunity to obtain
the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes place
also may be higher than those obtained in the transaction itself. Because the
Fund does not pay for the security until the delivery date, these risks are in
addition to the risks associated with its other investments.
The Fund will segregate cash or liquid securities equal in value to commitments
for the when-issued, delayed delivery or forward delivery transactions. The fund
will segregate additional liquid assets daily so that the value of such assets
is equal to the amount of the commitments.
S-28
INVESTMENT POLICIES OF THE FUND
Fundamental Policies
The following investment limitations are fundamental, which means that the Fund
cannot change them without approval by the vote of a majority of the outstanding
voting securities of the Fund, as defined by the 1940 Act. Unless otherwise
noted, the Fund will determine compliance with the investment limitation
percentages below (with the exception of a limitation relating to borrowing) and
other applicable investment requirements in this SAI immediately after and as a
result of its acquisition of such security or other asset. Accordingly, the Fund
generally will not consider changes in values, net assets or other circumstances
when determining whether the investment complies with its investment
limitations. The Fund will not:
o Make any investment inconsistent with its classification as a diversified
series of an open-end investment company under the 1940 Act. This
restriction does not, however, apply to any Fund classified as a
non-diversified series of an open-end investment company under the 1940
Act.
o Borrow money, except to the extent permitted by applicable law, as amended
and interpreted or modified from time to time by any regulatory authority
having jurisdiction and the guidelines set forth in the Fund's prospectus
and SAI as they may be amended from time to time.
o Issue senior securities, except to the extent permitted by applicable law,
as amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
o Underwrite securities of other issuers, except insofar as the Fund may
technically be deemed to be an underwriter under the 1933 Act in
connection with the purchase or sale of its portfolio securities.
o Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities).
o Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time
by any regulatory authority having jurisdiction, (2) that the Fund may
invest in securities of issuers that deal or invest in real estate and (3)
that the Fund may purchase securities secured by real estate or interests
therein.
o Purchase or sell commodities or contracts on commodities except that the
Fund may engage in financial futures contracts and related options and
currency contracts and related options and may otherwise do so in
accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act.
o Make loans to other persons, except that the Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted
or modified from time to time by any regulatory authority having
jurisdiction and the guidelines set forth in the Fund's prospectus and SAI
as they may be amended from time to time. The acquisition of investment
securities or other investment instruments shall not be deemed to be the
making of a loan.
S-29
Non-Fundamental Policies
The following limitations are non-fundamental, which means the Fund may change
them without shareholder approval. The Fund may:
o not borrow money, except that (1) the Fund may borrow from banks (as
defined in the 1940 Act) or enter into reverse repurchase agreements, in
amounts up to 331/3% of its total assets (including the amount borrowed),
(2) the Fund may borrow up to an additional 5% of its total assets for
temporary purposes, (3) the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities, and (4) the Fund may purchase securities on margin and engage
in short sales to the extent permitted by applicable law.
Notwithstanding the investment restrictions above, the Fund may not borrow
amounts in excess of 331/3% of its total assets, taken at market value,
and then only from banks as a temporary measure for extraordinary or
emergency purposes such as the redemption of portfolio shares. The Fund
will not purchase securities while borrowings are outstanding except to
exercise prior commitments and to exercise subscription rights.
o purchase and sell currencies or securities on a when-issued, delayed
delivery or forward-commitment basis.
o purchase and sell foreign currency, purchase options on foreign currency
and foreign currency exchange contracts.
o invest in the securities of foreign issuers.
o purchase shares of other investment companies to the extent permitted by
applicable law. The Fund may, notwithstanding any fundamental policy or
other limitation, invest all of its investable assets in securities of a
single open-end management investment company with substantially the same
investment objectives, policies and limitations.
The 1940 Act currently permits the Fund to invest up to 10% of its total assets
in the securities of other investment companies. However, the Fund may not
invest more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the outstanding securities of any one
investment company.
o invest in illiquid and restricted securities to the extent permitted by
applicable law.
The Fund intends to follow the policies of the SEC as they are adopted from time
to time with respect to illiquid securities, including (1) treating as illiquid
securities that may not be disposed of in the ordinary course of business within
seven days at approximately the value at which the Fund has valued the
investment on its books; and (2) limiting its holdings of such securities to 15%
of net assets.
o write covered call options and may buy and sell put and call options.
o enter into repurchase agreements.
o lend portfolio securities to registered broker-dealers or other
institutional shareholders. These loans may not exceed 33 1/3% of the
Fund's total assets taken at market value. In addition, the Fund must
receive at least 100% collateral.
o sell securities short and engage in short sales "against the box."
o enter into swap transactions.
Further, the Fund may not change its investment strategy to invest at least 80%
of its net assets in equity securities of companies whose market capitalization
is under $2 billion without 60 days' prior notice to shareholders.
S-30
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser. Independence Investment LLC (the "Adviser"), located at 53
State Street, Boston, Massachusetts 02109, is the investment adviser to the
Fund. The Adviser manages and supervises the investment of the Fund's assets on
a discretionary basis. The Adviser is a wholly-owned subsidiary of John Hancock
Financial Services, Inc. and manages approximately $11.5 billion of assets,
primarily for institutions. The Adviser has provided investment management
services to the Fund since February 2, 2001, and to various other corporations,
foundations, endowments, pension and profit sharing plans, trusts, estates and
other institutions and individuals since 1982.
Prior to February 2, 2001 the Fund was advised by Dewey Square Investors
Corporation, which was a subsidiary of Old Mutual (US) Holdings Inc. Old Mutual
(US) Holdings Inc. (formerly named United Asset Management Corporation) is a
wholly-owned subsidiary of Old Mutual plc, a financial services group based in
the United Kingdom.
Advisory Agreement with the Trust. The Trust and the Adviser have entered into
an investment advisory agreement (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser serves as the investment adviser and makes the investment
decisions for the Fund and continuously reviews, supervises and administers the
investment program of the Fund, subject to the supervision of, and policies
established by, the Trustees of the Trust. After the initial two year term, the
continuance of the Advisory Agreement must be specifically approved at least
annually (i) by the vote of the Trustees or by a vote of the shareholders of the
Fund and (ii) by the vote of a majority of the Trustees who are not parties to
the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement will terminate automatically in the event of its assignment,
and is terminable at any time without penalty by the Trustees of the Trust or,
with respect to the Fund, by a majority of the outstanding shares of the Fund,
on not less than 30-days' nor more than 60-days' written notice to the Adviser,
or by the Adviser on 90-days' written notice to the Trust. The Advisory
Agreement provides that the Adviser shall not be protected against any liability
to the Trust or its shareholders by reason of willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from reckless
disregard of its obligations or duties thereunder.
Advisory Fees Paid to the Adviser. For its services, the Fund pays the Adviser a
fee calculated at an annual rate of 0.85% of its average daily net assets. Due
to the effect of fee waivers by the Adviser, the actual percentage of average
net assets that the Fund pays in any given year may be different from the rate
set forth in its contract with the Adviser. The Adviser has voluntarily agreed
to limit the expenses of the Fund to the extent necessary to keep its total
expenses (excluding interest, taxes, brokerage commissions and extraordinary
expenses) from exceeding 1.15%. However, the Adviser does not expect that any
fee waivers will be necessary to keep fund expenses below the cap. The Adviser
may change or cancel this expense limitation at any time. For the last three
fiscal years, the Fund and the Predecessor Fund paid the following in management
fees to the Adviser and Dewey Square Investors Corporation, its former adviser:
S-31
- ------------------------------------------------------------------------------------------------------------
Fund Fees Paid* Fees Waived*
- ------------------------------------------------------------------------------------------------------------
2001 2002 2003 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------
Small Cap $122,250 $100,666 $0 $14,382 $54,391 $120,587
- ------------------------------------------------------------------------------------------------------------
* For periods prior to June 24, 2002, figures relate to the Predecessor Fund.
Portfolio Manager. Charles Glovsky, CFA, is responsible for the day to day
management of the fund. Mr. Glovsky is a Senior Vice President with the adviser.
Prior to that he served as a Senior Portfolio Manager with Dewey Square
Investors Corporation, which he joined in 1998. Prior to joining Dewey Square
Investors Corporation, he was a Managing Partner of Glovsky-Brown Capital
Management, a firm he co-founded that specialized in small and
mid-capitalization stocks. Prior to that position, he was an analyst, a
portfolio manager and Senior Vice President at State Street Research where he
was responsible for that firm's small cap growth stock portfolio. He has also
worked as an analyst for Alex Brown & Sons and Eppler, Gueirn & Turner. He
received a B.A. from Dartmouth College in 1975 and an M.B.A. from Stanford
University. He has 25 years of investment experience and is a member of the
Boston Security Analysts Society.
THE ADMINISTRATOR
General. SEI Investments Global Funds Services (the "Administrator") (formerly
named SEI Investments Mutual Funds Services), a Delaware statutory trust, has
its principal business offices at Oaks, Pennsylvania 19456. SEI Investments
Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments
Company ("SEI Investments"), is the owner of all beneficial interest in the
Administrator. SEI Investments and its subsidiaries and affiliates, including
the Administrator, are leading providers of funds evaluation services, trust
accounting systems, and brokerage and information services to financial
institutions, institutional investors, and money managers. The Administrator and
its affiliates also serve as administrator or sub-administrator to other mutual
funds.
Administration Agreement with the Trust. The Trust and the Administrator have
entered into an administration agreement (the "Administration Agreement"). Under
the Administration Agreement, the Administrator provides the Trust with
administrative services, including regulatory reporting and all necessary office
space, equipment, personnel and facilities. The Administrator also serves as the
shareholder servicing agent for the Fund under a shareholder servicing agreement
with the Trust pursuant to which the Administrator provides certain shareholder
services in addition to those set forth in the Administration Agreement.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Administrator in the performance of its duties or
from reckless disregard by it of its duties and obligations thereunder. The
Administration Agreement shall remain in effect for a period of one-year after
the effective date of the agreement and shall continue in effect for successive
periods of two years unless terminated by either party on not less than 90-days'
prior written notice to the other party.
Administration Fees Paid to the Administrator. For its services under the
Administration Agreement, the Administrator is entitled to a fee, which is
calculated daily and paid monthly, at an annual rate of 0.12% for the first $250
million in assets, 0.10% for the next $250 million in assets, 0.08% for the next
$250 million in assets and 0.04% for all assets greater than $750 million. The
minimum fee is $125,000 for one portfolio, $250,000 for two portfolios, $350,000
for three portfolios, an additional $75,000 for each additional portfolio over
three and $20,000 for each additional class per portfolio after the first class,
apportioned to the Fund as a percentage of average daily net assets. Due to
these minimums, the annual administration fee the Fund pays will exceed the
above percentages at low asset levels. For the fiscal years ended October 31,
2001, 2002 and 2003, the Fund and the Predecessor Fund paid the following
administration fees:
S-32
-----------------------------------------------------------------------------------------------------------
Fund Administration Fee*
-----------------------------------------------------------------------------------------------------------
2001 2002 2003
-----------------------------------------------------------------------------------------------------------
Small Cap $72,831 $85,168 $125,000
-----------------------------------------------------------------------------------------------------------
* UAM Fund Services, Inc. ("UAMFSI") served as the administrator to the
Predecessor Fund until April 1, 2002, at which time SEI Investments Global Funds
Services became administrator. Prior to that date, SEI Investments Global Funds
Services served as sub-administrator to the Predecessor Fund.
THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the "Distributor"), a
wholly-owned subsidiary of SEI Investments and an affiliate of the
Administrator, are parties to a distribution agreement (the "Distribution
Agreement") whereby the Distributor acts as principal underwriter for the
Trust's shares.
The continuance of the Distribution Agreement must be specifically approved at
least annually (i) by the vote of the Trustees or by a vote of the shareholders
of the Fund and (ii) by the vote of a majority of the Trustees who are not
parties to the Distribution Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement will terminate automatically in the event
of its assignment, and is terminable at any time without penalty by the Trustees
of the Trust or, with respect to any Fund, by a majority of the outstanding
shares of that Fund, upon not more than 60 days' written notice by either party.
The Distribution Agreement provides that the Distributor shall not be protected
against any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard of its obligations or duties thereunder.
TRANSFER AGENT
DST Systems, Inc., 330 W. 9th Street, Kansas City, Missouri 64105 serves as the
Fund's transfer agent.
CUSTODIAN
Union Bank of California, 475 Sansome Street, 15th Floor, San Francisco,
California 94111 (the "Custodian") acts as custodian for the Fund. The Custodian
holds cash, securities and other assets of the Fund as required by the 1940 Act.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP serves as independent auditors for the Fund. The
financial statements and notes thereto incorporated by reference have been
audited by PricewaterhouseCoopers LLP, as indicated in their report with respect
thereto, and are incorporated by reference in reliance upon the authority of
said firm as experts in giving said reports.
S-33
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
Board Responsibilities. The management and affairs of the Trust and the Fund are
supervised by the Trustees under the laws of the Commonwealth of Massachusetts.
Each Trustee is responsible for overseeing the Fund and each of the Trust's
additional 45 funds, which includes funds not described in this SAI. The
Trustees have approved contracts, as described above, under which certain
companies provide essential management services to the Trust.
Members of the Board. Set forth below are the names, dates of birth, position
with the Trust, length of term of office, and the principal occupations for the
last five years of each of the persons currently serving as Trustees of the
Trust. Unless otherwise noted, the business address of each Trustee is SEI
Investments Company, Oaks, Pennsylvania 19456.
ROBERT A. NESHER (DOB 08/17/46) -- Chairman of the Board of Trustees* (since
1991) -- Currently performs various services on behalf of SEI Investments for
which Mr. Nesher is compensated. Executive Vice President of SEI Investments,
1986-1994. Director and Executive Vice President of the Administrator and the
Distributor, 1981-1994. Trustee of The Arbor Fund, Bishop Street Funds, The
Expedition Funds, The MDL Funds, SEI Asset Allocation Trust, SEI Daily Income
Trust, SEI Global Assets Fund, plc, SEI Global Investments Fund, LP, SEI Global
Master Fund, plc, SEI Index Funds, SEI Institutional International Trust, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI Liquid
Asset Trust and SEI Tax Exempt Trust.
JOHN T. COONEY (DOB 01/20/27) -- Trustee (since 1993)-- Vice Chairman of
Ameritrust Texas N.A., 1989-1992, and MTrust Corp., 1985-1989. Trustee of The
Arbor Fund, The MDL Funds, and The Expedition Funds.
WILLIAM M. DORAN (DOB 05/26/40) -- Trustee* (since 1992) -- 1701 Market Street,
Philadelphia, PA 19103. Self-employed Consultant since 2003. Partner, Morgan,
Lewis & Bockius LLP (law firm) from 1976 to 2003, counsel to the Trust, SEI
Investments, the Administrator and the Distributor. Director of the Distributor
since 2003. Director of SEI Investments since 1974; Secretary of SEI Investments
since 1978. Trustee of The Arbor Fund, The MDL Funds, The Expedition Funds, SEI
Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust and SEI Tax Exempt Trust.
ROBERT A. PATTERSON (DOB 11/05/27) -- Trustee (Since 1993) -- Pennsylvania State
University, Senior Vice President, Treasurer (Emeritus); Financial and
Investment Consultant, Professor of Transportation since 1984; Vice
President-Investments, Treasurer, Senior Vice President (Emeritus), 1982-1984.
Director, Pennsylvania Research Corp.; Member and Treasurer (Emeritus), Board of
Trustees of Grove City College. Trustee of The Arbor Fund, The MDL Funds, and
The Expedition Funds.
EUGENE B. PETERS (DOB 06/03/29) -- Trustee (Since 1993) -- Private investor from
1987 to present. Vice President and Chief Financial Officer, Western Company of
North America (petroleum service company), 1980-1986. President of Gene Peters
and Associates (import company), 1978-1980. President and Chief Executive
Officer of Jos Schlitz Brewing Company before 1978. Trustee of The Arbor Fund,
The MDL Funds, and The Expedition Funds.
S-34
JAMES M. STOREY (DOB 04/12/31) -- Trustee (Since 1994) -- Attorney, Solo
Practitioner since 1994. Trustee of The Arbor Fund, The MDL Funds, The
Expedition Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional International Trust, SEI Institutional Investments
Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust and SEI Tax
Exempt Trust.
GEORGE J. SULLIVAN, JR. (DOB 11/13/42) -- Trustee (Since 1999) -- Chief
Executive Officer, Newfound Consultants Inc. since April 1997. General Partner,
Teton Partners, L.P., June 1991- December 1996; Chief Financial Officer, Noble
Partners, L.P., March 1991-December 1996; Treasurer and Clerk, Peak Asset
Management, Inc., since 1991; Trustee, Navigator Securities Lending Trust, since
1995. Trustee of The Arbor Fund, The MDL Funds, The Expedition Funds, SEI
Absolute Return Master Fund, LP, SEI Asset Allocation Trust, SEI Daily Income
Trust, SEI Index Funds, SEI Institutional International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI
Opportunity Master Fund and SEI Tax Exempt Trust.
* Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the Fund as that term is defined in the 1940 Act by virtue of their
affiliation with the Trust's Distributor.
Board Standing Committees. The Board has established the following standing
committees:
o Audit Committee. The Board has a standing Audit Committee that is composed
of each of the independent Trustees of the Trust. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: recommending which firm
to engage as the Fund's independent auditor and whether to terminate this
relationship; reviewing the independent auditors' compensation, the
proposed scope and terms of its engagement, and the firm's independence;
pre-approving audit and non-audit services provided by the Fund's
independent auditor to the Trust and certain other affiliated entities;
serving as a channel of communication between the independent auditor and
the Trustees; reviewing the results of each external audit, including any
qualifications in the independent auditors' opinion, any related
management letter, management's responses to recommendations made by the
independent auditors in connection with the audit, reports submitted to
the Committee by the internal auditing department of the Trust's
Administrator that are material to the Trust as a whole, if any, and
management's responses to any such reports; reviewing the Fund's audited
financial statements and considering any significant disputes between the
Trust's management and the independent auditor that arose in connection
with the preparation of those financial statements; considering, in
consultation with the independent auditors and the Trust's senior internal
accounting executive, if any, the independent auditors' report on the
adequacy of the Trust's internal financial controls; reviewing, in
consultation with the Fund's independent auditors, major changes regarding
auditing and accounting principles and practices to be followed when
preparing the Fund's financial statements; and other audit related
matters. Messrs. Cooney, Patterson, Peters, Storey and Sullivan currently
serve as members of the Audit Committee. The Audit Committee meets
periodically, as necessary, and met four times in the most recently
completed Trust fiscal year.
S-35
o Fair Value Pricing Committee. The Board has a standing Fair Value Pricing
Committee that is composed of at least one Trustee and various
representatives of the Trust's service providers, as appointed by the
Board. The Fair Value Pricing Committee operates under procedures approved
by the Board. The principal responsibilities of the Fair Value Pricing
Committee are to determine the fair value of securities for which current
market quotations are not readily available. The Fair Value Pricing
Committee's determinations are reviewed by the Board. Mr. Nesher currently
serves as the Board's delegate on the Fair Value Pricing Committee. The
Fair Value Pricing Committee meets periodically, as necessary, and met
nineteen times in the most recently completed Trust fiscal year.
o Nominating Committee. The Board has a standing Nominating Committee that
is composed of each of the independent Trustees of the Trust. The
principal responsibility of the Nominating Committee is to consider,
recommend and nominate candidates to fill vacancies on the Trust's Board,
if any. The Nominating Committee does not have specific procedures in
place to consider nominees recommended by shareholders, but would consider
such nominees if submitted in accordance with Rule 14a-8 of the 1934 Act
in conjunction with a shareholder meeting to consider the election of
Trustees. Messrs. Cooney, Patterson, Peters, Storey and Sullivan currently
serve as members of the Nominating Committee. The Nominating Committee
meets periodically, as necessary, and did not meet during the most
recently completed Trust fiscal year.
Board Considerations in Approving the Advisory Agreement. As discussed in the
section of this SAI entitled "The Adviser," the Board continuance of the
Advisory Agreement, after the initial two year term, must be specifically
approved at least annually (i) by the vote of the Trustees or by a vote of the
shareholders of the Fund and (ii) by the vote of a majority of the Trustees who
are not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. Each year, the Board of Trustees calls and holds a meeting to decide
whether to renew the Advisory Agreement for an additional one-year term. In
preparation for the meeting, the Board requests and reviews a wide variety of
information from the Adviser. The Trustees use this information, as well as
other information that the Adviser and other Fund service providers may submit
to the Board, to help them decide whether to renew the Advisory Agreement for
another year.
Before approving the Advisory Agreement, the Board requested and received
written materials from the Adviser about: (a) the quality of the Adviser's
investment management and other services; (b) the Adviser's investment
management personnel; (c) the Adviser's operations and financial condition; (d)
the Adviser's brokerage practices (including any soft dollar arrangements) and
investment strategies; (e) the level of the advisory fees that the Adviser
charges the Fund compared with the fees it charges to comparable mutual funds or
accounts (if any); (f) the Fund's overall fees and operating expenses compared
with similar mutual funds; (g) the level of the Adviser's profitability from its
Fund-related operations; (h) the Adviser's compliance systems; (i) the Adviser's
policies on and compliance procedures for personal securities transactions; (j)
the Adviser' reputation, expertise and resources in domestic financial markets;
and (k) the Fund's performance compared with similar mutual funds.
At the meeting, representatives from the Adviser presented additional oral and
written information to the Board to help the Board evaluate the Adviser's fee
and other aspects of the Agreement. Other Fund service providers also provided
the Board with additional information at the meeting. The Trustees then
discussed the written materials that the Board received before the meeting and
the Adviser's oral presentation and any other information that the Board
received or discussed at the meeting, and deliberated on the renewal of the
Advisory Agreement in light of this information. In its deliberations, the Board
did not identify any single piece of information that was all-important,
controlling or determinative of its decision.
S-36
Based on the Board's deliberations and its evaluation of the information
described above, the Board, including all of the independent Trustees,
unanimously: (a) concluded that terms of the Agreement are fair and reasonable;
(b) concluded that the Adviser's fees are reasonable in light of the services
that the Adviser provides to the Fund; and (c) agreed to approve the Agreement
for an initial two-year term.
Fund Shares Owned by Board Members. The following table shows the dollar amount
range of each Trustee's "beneficial ownership" of shares of the Fund as of the
end of the most recently completed calendar year. Dollar amount ranges disclosed
are established by the SEC. "Beneficial ownership" is determined in accordance
with Rule 16a-1(a)(2) under the 1934 Act. The Trustees and officers of the Trust
own less than 1% of the outstanding shares of the Trust.
- -------------------------------------------------------------------------------------------------------------------
Name Dollar Range of Fund Shares* Aggregate Dollar Range of Shares (Fund)*
- -------------------------------------------------------------------------------------------------------------------
Nesher None None
- -------------------------------------------------------------------------------------------------------------------
Cooney None
- -------------------------------------------------------------------------------------------------------------------
Doran None
- -------------------------------------------------------------------------------------------------------------------
Patterson None
- -------------------------------------------------------------------------------------------------------------------
Peters None
- -------------------------------------------------------------------------------------------------------------------
Storey None
- -------------------------------------------------------------------------------------------------------------------
Sullivan None
- -------------------------------------------------------------------------------------------------------------------
* Valuation date is December 31, 2003.
Board Compensation. The Trust paid the following fees to the Trustees during its
most recently completed fiscal year.
- --------------------------------------------------------------------------------------------------------------------
Name Aggregate Pension or Retirement Estimated Annual Total Compensation from
Compensation Benefits Accrued as Part of Benefits Upon the Trust and Fund
Fund Expenses Retirement Complex*
- --------------------------------------------------------------------------------------------------------------------
Nesher $0 N/A N/A $0
- --------------------------------------------------------------------------------------------------------------------
Cooney $36,354 N/A N/A $36,354
- --------------------------------------------------------------------------------------------------------------------
Doran $0 N/A N/A $0
- --------------------------------------------------------------------------------------------------------------------
Patterson $36,354 N/A N/A $36,354
- --------------------------------------------------------------------------------------------------------------------
Peters $36,354 N/A N/A $36,354
- --------------------------------------------------------------------------------------------------------------------
Storey $36,354 N/A N/A $36,354
- --------------------------------------------------------------------------------------------------------------------
Sullivan $36,354 N/A N/A $36,354
- --------------------------------------------------------------------------------------------------------------------
* The Trust is the only investment company in the "Fund Complex."
S-37
Trust Officers. Set forth below are the names, dates of birth, position with the
Trust, length of term of office, and the principal occupations for the last five
years of each of the persons currently serving as Executive Officers of the
Trust. Unless otherwise noted, the business address of each Officer is SEI
Investments Company, Oaks, Pennsylvania 19456. None of the Officers receive
compensation from the Trust for their services.
Certain officers of the Trust also serve as officers of one or more mutual funds
for which SEI Investments Company or its affiliates act as investment manager,
administrator or distributor.
JAMES F. VOLK (DOB 08/28/62)-- President (since 2003) -- Senior Operations
Officer, SEI Funds Accounting and Administration since 1996. Assistant Chief
Accountant for the U.S. Securities and Exchange Commission, 1993-1996. Audit
Manager, Coopers & Lybrand LLP, 1985-1993.
JENNIFER SPRATLEY (DOB 02/13/69) -- Controller and Chief Financial Officer
(since 2001) -- Director, SEI Funds Accounting since November 1999. Audit
Manager, Ernst & Young LLP, 1991-1999.
PETER GOLDEN (DOB 06/27/64) -- Co-Controller and Co-Chief Financial Officer
(since 2003) -- Director of Global Fund Services since June 2001. Vice President
of Funds Administration for J.P. Morgan Chase & Co., 2000-2001. Vice President
of Pension and Mutual Fund Accounting for Chase Manhattan Bank, 1997-2000.
TIMOTHY D. BARTO (DOB 03/28/68) -- Vice President and Assistant Secretary (since
1999) -- Employed by SEI Investments since October 1999. General Counsel, Vice
President and Secretary of the Administrator and Assistant Secretary of the
Distributor since December 1999. Associate at Dechert Price & Rhoads (law firm),
1997-1999. Associate, at Richter, Miller & Finn (law firm), 1994-1997.
CORI DAGGETT (DOB 10/03/61) -- Vice President and Assistant Secretary (since
2003) -- Employed by SEI Investments since 2003. Associate at Drinker, Biddle &
Reath, 1998-2003.
LYDIA A. GAVALIS (DOB 06/05/64) -- Vice President and Assistant Secretary (since
1998) -- Assistant Secretary of the Administrator and the Distributor since
1998. Assistant General Counsel and Director of Arbitration, Philadelphia Stock
Exchange, 1989-1998.
CHRISTINE M. McCULLOUGH (DOB 12/02/60) -- Vice President and Assistant Secretary
(since 2000) -- Employed by SEI Investments since November 1, 1999. Associate at
White and Williams LLP (law firm), 1991-1999. Associate at Montgomery,
McCracken, Walker & Rhoads (law firm), 1990-1991.
S-38
WILLIAM E. ZITELLI, JR. (DOB 6/14/68) -- Vice President and Secretary (since
2000) -- Assistant Secretary of the Administrator and Distributor since August
2000. Vice President, Merrill Lynch & Co. Asset Management Group 1998-2000.
Associate at Pepper Hamilton LLP (law firm), 1997-1998. Associate at Reboul,
MacMurray, Hewitt, Maynard & Kristol (law firm), 1994-1997.
JOHN C. MUNCH (DOB 05/07/71) - Vice President and Assistant Secretary (since
2002) - Assistant Secretary of the Administrator, and General Counsel, Vice
President and Secretary of the Distributor since November 2001. Associate at
Howard Rice Nemorvoski Canady Falk & Rabkin (law firm), 1998-2001. Associate at
Seward & Kissel (law firm), 1996-1998.
JOHN MUNERA (DOB 01/14/63) - Vice President and Assistant Secretary (since
2002)- Middle Office Compliance Officer at SEI Investments since 2000.
Supervising Examiner at Federal Reserve Bank of Philadelphia 1998-2000.
PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the
NYSE is open for business. Shares of the Fund are offered and redeemed on a
continuous basis. Currently, the Trust is closed for business when the following
holidays are observed: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Shareholders may incur brokerage charges on the sale of any such
securities so received in payment of redemptions. A Shareholder will at all
times be entitled to aggregate cash redemptions from the Fund up to the lesser
of $250,000 or 1% of the Trust's net assets during any 90-day period. The Trust
has obtained an exemptive order from the SEC that permits the Trust to make
in-kind redemptions to those shareholders of the Trust that are affiliated with
the Trust solely by their ownership of a certain percentage of the Trust's
investment portfolios.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the NYSE is restricted, or during the existence of an emergency (as determined
by the SEC by rule or regulation) as a result of which disposal or valuation of
the Fund's securities is not reasonably practicable, or for such other periods
as the SEC has by order permitted. The Trust also reserves the right to suspend
sales of shares of any Fund for any period during which the NYSE, the Adviser,
the Administrator, the Transfer Agent and/or the custodian are not open for
business.
S-39
DETERMINATION OF NET ASSET VALUE
General Policy. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder,
of the 1940 Act with respect to the valuation of portfolio securities. In
general, securities for which market quotations are readily available are valued
at current market value, and all other securities are valued at fair value as
determined in good faith by the Trusts' Board of Trustees. In complying with the
1940 Act, the Trust relies on guidance provided by the SEC and by the SEC staff
in various interpretive letters and other guidance.
Equity Securities. Securities listed on a securities exchange, market or
automated quotation system for which quotations are readily available (except
for securities traded on NASDAQ), including securities traded over the counter,
are valued at the last quoted sale price on the primary exchange or market
(foreign or domestic) on which they are traded on valuation date (or at
approximately 4:00 p.m. ET if a security's primary exchange is normally open at
that time), or, if there is no such reported sale on the valuation date, at the
most recent quoted bid price. For securities traded on NASDAQ, the NASDAQ
Official Closing Price will be used. If such prices are not available or
determined to not represent the fair value of the security as of the Fund's
pricing time, the security will be valued at fair value as determined in good
faith by the Trust's Board of Trustees.
Money Market Securities and other Debt Securities. If available, money market
securities and other debt securities are priced based upon valuations provided
by recognized independent, third-party pricing agents. Such values generally
reflect the last reported sales price if the security is actively traded. The
third-party pricing agents may also value debt securities by employing
methodologies that utilize actual market transactions, broker-supplied
valuations, or other methodologies designed to identify the market value for
such securities. Such methodologies generally consider such factors as security
prices, yields, maturities, call features, ratings and developments relating to
specific securities in arriving at valuations. Money market securities and other
debt securities with remaining maturities of 60 days or less may be valued at
their amortized cost, which approximates market value. If such prices are not
available, the security will be valued at fair value as determined in good faith
by the Trust's Board of Trustees.
Use of Third-Party Independent Pricing Agents. Pursuant to contracts with the
Trust's Administrator, prices for most securities held by the Fund are provided
daily by third-party independent pricing agents that are approved by the Board
of Trustees of the Trust. The valuations provided by third-party independent
pricing agents are reviewed daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that is
intended to supplement the discussion contained in the Fund's prospectus. No
attempt is made to present a detailed explanation of the tax treatment of the
Fund or its shareholders, and the discussion here and in the Fund's prospectus
is not intended as a substitute for careful tax planning. Shareholders are urged
to consult with their tax advisors with specific reference to their own tax
situations, including their state, local, and foreign tax liabilities.
S-40
The following general discussion of certain federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this SAI. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Qualifications as a RIC. The Fund intends to qualify and elects to be treated as
a "regulated investment company" ("RIC") under Subchapter M of the Code. By
following such a policy, the Fund expects to eliminate or reduce to a nominal
amount the federal taxes to which it may be subject. The board reserves the
right not to maintain the qualification of the Fund as a regulated investment
company if it determines such course of action to be beneficial to shareholders.
In order to be taxable as a RIC, the Fund must distribute annually to its
shareholders at least 90% of its net investment income (generally net investment
income plus the excess of net short-term capital gains over net long-term
capital losses, less operating expenses) and at least 90% of its net tax exempt
interest income, for each tax year, if any, to its shareholders ("Distribution
Requirement") and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of the Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures, and forward contracts derived
with respect to its business of investing in such stock, securities or
currencies, or certain other income; (ii) at the end of each fiscal quarter of
the Fund's taxable year, at least 50% of the market value of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets or more than 10% of the outstanding voting
securities of such issuer, and (iii) at the end of each fiscal quarter of the
Fund's taxable year, not more than 25% of the value of its total assets is
invested in the securities (other than U.S. government securities or securities
of other RICs) of any one issuer or two or more issuers that the Fund controls
and which are engaged in the same, or similar, or related trades or businesses.
If the Fund fails to qualify as a RIC for any year, all of its income will be
subject to federal income tax at regular corporate rates without any deduction
for distributions to shareholders. In such case, its shareholders would be taxed
as if they received ordinary dividends, although corporate shareholders could be
eligible for the dividends received deduction and individuals may be able to
benefit from the lower tax rates available to qualified dividend income.
Federal Excise Tax. Notwithstanding the Distribution Requirement described
above, which only requires the Fund to distribute at least 90% of its annual
investment company income and does not require any minimum distribution of net
capital gain, the Fund will be subject to a nondeductible 4% federal excise tax
to the extent it fails to distribute, by the end of any calendar year, at least
98% of its ordinary income for that year and 98% of its capital gain net income
(the excess of short- and long-term capital gain over short- and long-term
capital loss) for the one-year period ending on October 31 of that year, plus
certain other amounts. The Fund intends to make sufficient distributions to
avoid liability for federal excise tax, but can make no assurances that such tax
will be completely eliminated. The Fund may in certain circumstances be required
to liquidate Fund investments in order to make sufficient distributions to avoid
federal excise tax liability at a time when the investment adviser might not
otherwise have chosen to do so, and liquidation of investments in such
circumstances may affect the ability of the Fund to satisfy the requirement for
qualification as a RIC. If the Fund's distributions exceed its taxable income
and capital gains realized during a taxable year, all or a portion of the
distributions made in the same taxable year may be recharacterized as a return
of capital to the shareholders. A return of capital distribution will generally
not be taxable, but will reduce each shareholder's cost basis in the Fund and
result in a higher reported capital gain or lower reported capital loss when
those shares on which the distribution was received are sold.
S-41
Shareholder Treatment. The Fund's dividends that are paid to their corporate
shareholders and are attributable to qualifying dividends it received from U.S.
domestic corporations may be eligible, in the hands of such shareholders, for
the corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations. Generally, and subject to certain
limitations (including certain holding period limitations), a dividend will be
treated as a qualifying dividend if it has been received from a domestic
corporation. All dividends (including the deducted portion) must be included in
your alternative minimum taxable income calculation.
The Fund receives income generally in the form of dividends and interest on
investments. This income, plus net short-term capital gains, if any, less
expenses incurred in the operation of the Fund, constitutes the Fund's net
investment income from which dividends may be paid to you. Any distributions by
the Fund from such income will be taxable to you as ordinary income or at the
lower capital gains rates that apply to individuals receiving qualified dividend
income, whether you take them in cash or in additional shares.
Distributions by the Fund will be eligible for the reduced maximum tax rate to
individuals of 15% (5% for individuals in lower tax brackets) to the extent that
the Fund receives qualified dividend income on the securities it holds.
Qualified dividend income is, in general, dividend income from taxable domestic
corporations and certain qualified foreign corporations. Qualified dividend
income treatment requires that both the Fund and the shareholder satisfy certain
holding period requirements and that the shareholder satisfy certain other
conditions.
Any gain or loss recognized on a sale, exchange, or redemption of shares of the
Fund by a shareholder who is not a dealer in securities will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise will be treated
as a short-term capital gain or loss. However, if shares on which a shareholder
has received a net capital gain distribution are subsequently sold, exchanged,
or redeemed and such shares have been held for six months or less, any loss
recognized will be treated as a long-term capital loss to the extent of the net
capital gain distribution. In addition, the loss realized on a sale or other
disposition of shares will be disallowed to the extent a shareholder repurchases
(or enters into a contract to or option to repurchase) shares within a period of
61 days (beginning 30 days before and ending 30 days after the disposition of
the shares). This loss disallowance rule will apply to shares received through
the reinvestment of dividends during the 61-day period.
S-42
Foreign Taxes. If more than 50% of the value of a Fund's total assets at the
close of its taxable year consists of stocks or securities of foreign
corporations, the Fund will be eligible to, and will, file an election with the
Internal Revenue Service that may enable shareholders, in effect, to receive
either the benefit of a foreign tax credit, or a deduction from such taxes, with
respect to any foreign and U.S. possessions income taxes paid by the Fund,
subject to certain limitations. Pursuant to the election, the Fund will treat
those taxes as dividends paid to its shareholders. Each such shareholder will be
required to include a proportionate share of those taxes in gross income as
income received from a foreign source and must treat the amount so included as
if the shareholder had paid the foreign tax directly. The shareholder may then
either deduct the taxes deemed paid by him or her in computing his or her
taxable income or, alternatively, use the foregoing information in calculating
any foreign tax credit they may be entitled to use against the shareholders'
federal income tax. If a Fund makes the election, such Fund will report annually
to its shareholders the respective amounts per share of the Fund's income from
sources within, and taxes paid to, foreign countries and U.S. possessions.
State Taxes. Depending upon state and local law, distributions by the Fund to
its shareholders and the ownership of such shares may be subject to state and
local taxes. Rules of state and local taxation of dividend and capital gains
distributions from RICs often differ from rules for federal income taxation
described above. No Fund is liable for any income or franchise tax in
Massachusetts if it qualifies as a RIC for federal income tax purposes.
Shareholders are urged to consult their tax advisors regarding state and local
taxes applicable to an investment in the Fund.
Many states grant tax-free status to dividends paid to you from interest earned
on direct obligations of the U.S. government, subject in some states to minimum
investment requirements that must be met by the Fund. Investment in Government
National Mortgage Association ("Ginnie Mae") or Federal National Mortgage
Association ("Fannie Mae") securities, banker's acceptances, commercial paper,
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for such tax-free treatment. The rules on exclusion of this
income are different for corporate shareholders.
Tax Treatment of Complex Securities. The Fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the Fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the Fund and/or defer the Fund's ability to recognize losses, and, in limited
cases, subject the Fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the Fund.
S-43
Most foreign exchange gains realized on the sale of debt securities are treated
as ordinary income by the Fund. Similarly, foreign exchange losses realized by
the Fund on the sale of debt securities are generally treated as ordinary losses
by the Fund. These gains when distributed will be taxable to you as ordinary
dividends, and any losses will reduce the Fund's ordinary income otherwise
available for distribution to you. This treatment could increase or reduce the
Fund's ordinary income distributions to you, and may cause some or all of the
Fund's previously distributed income to be classified as a return of capital.
Other Tax Policies. In certain cases, the Fund will be required to withhold at
the applicable withholding rate, and remit to the United States Treasury, such
withheld amounts on any distributions paid to a shareholder who (1) has failed
to provide a correct taxpayer identification number, (2) is subject to backup
withholding by the Internal Revenue Service, (3) has not certified to that Fund
that such shareholder is not subject to backup withholding, or (4) has not
certified that such shareholder is a U.S. person or U.S. resident alien.
Non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax
and are encouraged to consult their tax advisors prior to investing in the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Brokerage Transactions. Generally, equity securities are bought and sold through
brokerage transactions for which commissions are payable. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Money Market Securities and other debt
securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, the Fund will not pay
brokerage commissions for such purchases. When a debt security is bought from an
underwriter, the purchase price will usually include an underwriting commission
or concession. The purchase price for securities bought from dealers serving as
market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When the Fund executes transactions in the over-the-counter market,
it will generally deal with primary market makers unless prices that are more
favorable are otherwise obtainable.
S-44
In addition, the Adviser may place a combined order for two or more accounts it
manages, including the Fund, engaged in the purchase or sale of the same
security if, in its judgment, joint execution is in the best interest of each
participant and will result in best price and execution. Transactions involving
commingled orders are allocated in a manner deemed equitable to each account or
fund. Although it is recognized that, in some cases, the joint execution of
orders could adversely affect the price or volume of the security that a
particular account or the Fund may obtain, it is the opinion of the Adviser and
the Trust's Board of Trustees that the advantages of combined orders outweigh
the possible disadvantages of separate transactions. Nonetheless, the Adviser
believes that the ability of the Fund to participate in higher volume
transactions will generally be beneficial to the Fund.
For the fiscal years ended October 31, 2001, 2002 and 2003, the Fund and the
Predecessor Fund paid the following aggregate brokerage commissions on portfolio
transactions:
- ----------------------------------------------------------------------------------------------------
Fund Aggregate Dollar Amount of Brokerage Commissions Paid*
- ----------------------------------------------------------------------------------------------------
2001 2002 2003
- ----------------------------------------------------------------------------------------------------
Small Cap Fund $28,214 $38,297 $53,992
- ----------------------------------------------------------------------------------------------------
* For the periods prior to June 24, 2002, figures relate to the Predecessor
Fund.
Brokerage Selection. The Trust does not expect to use one particular broker or
dealer, and when one or more brokers is believed capable of providing the best
combination of price and execution, the Fund's Adviser may select a broker based
upon brokerage or research services provided to the Adviser. The Adviser may pay
a higher commission than otherwise obtainable from other brokers in return for
such services only if a good faith determination is made that the commission is
reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances,
to cause the Fund to pay a broker or dealer a commission for effecting a
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting the transaction in recognition of the value of
brokerage and research services provided by the broker or dealer. In addition to
agency transactions, the Adviser may receive brokerage and research services in
connection with certain riskless principal transactions, in accordance with
applicable SEC guidance. Brokerage and research services include: (1) furnishing
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (2) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). In the case of research services, the
Adviser believes that access to independent investment research is beneficial to
their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information which assists in the
valuation and pricing of investments. Examples of research-oriented services for
which the adviser might utilize Fund commissions include research reports and
other information on the economy, industries, sectors, groups of securities,
individual companies, statistical information, political developments, technical
market action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. The Adviser may use research services
furnished by brokers in servicing all client accounts and not all services may
necessarily be used in connection with the account that paid commissions to the
broker providing such services. Information so received by the Adviser will be
in addition to and not in lieu of the services required to be performed by the
Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to
the Adviser are not reduced as a result of the receipt of research services.
S-45
In some cases the Adviser may receive a service from a broker that has both a
"research" and a "non-research" use. When this occurs, the Adviser makes a good
faith allocation, under all the circumstances, between the research and
non-research uses of the service. The percentage of the service that is used for
research purposes may be paid for with client commissions, while the Adviser
will use its own funds to pay for the percentage of the service that is used for
non-research purposes. In making this good faith allocation, the Adviser faces a
potential conflict of interest, but the Adviser believes that its allocation
procedures are reasonably designed to ensure that it appropriately allocates the
anticipated use of such services to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients in
a fixed price offering. In these situations, the seller may be a member of the
selling group that will, in addition to selling securities, provide the adviser
with research services. The NASD has adopted rules expressly permitting these
types of arrangements under certain circumstances. Generally, the seller will
provide research "credits" in these situations at a rate that is higher than
that which is available for typical secondary market transactions. These
arrangements may not fall within the safe harbor of Section 28(e).
For the Trust's most recently completed fiscal year ended October 31, 2003, the
Fund and the Predecessor Fund paid the following commissions on brokerage
transactions directed to brokers pursuant to an agreement or understanding
whereby the broker provides research or other brokerage services to the Adviser:
-------------------------------------------------------------------------------------------------------------------
Fund Total Dollar Amount of Brokerage Total Dollar Amount of Transactions
Commissions for Research Services* Involving Brokerage Commissions for
Research Services*
-------------------------------------------------------------------------------------------------------------------
Small Cap Fund $0 $0
-------------------------------------------------------------------------------------------------------------------
* For periods prior to June 24, 2002, figures relate to the Predecessor Fund.
Brokerage with Fund Affiliates. The Fund may execute brokerage or other agency
transactions through registered broker-dealer affiliates of either the Fund, the
Adviser or the Distributor for a commission in conformity with the 1940 Act, the
1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act,
affiliated broker-dealers are permitted to receive and retain compensation for
effecting portfolio transactions for the Fund on an exchange if a written
contract is in effect between the affiliate and the Fund expressly permitting
the affiliate to receive and retain such compensation. These rules further
require that commissions paid to the affiliate by the Fund for exchange
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Trustees, including
those who are not "interested persons" of the Fund, have adopted procedures for
evaluating the reasonableness of commissions paid to affiliates and review these
procedures periodically.
S-46
For the fiscal years ended October 31, 2001, 2002 and 2003, neither the
Predecessor Fund nor the Fund paid any commissions on portfolio transactions
effected by affiliated brokers.
Securities of "Regular Broker-Dealers." The Fund is required to identify any
securities of its "regular brokers and dealers" (as such term is defined in the
1940 Act) which the Fund may hold at the close of its most recent fiscal year.
As of October 31, 2003, the Fund did not hold any securities of regular brokers
and dealers.
Portfolio Turnover Rate. Portfolio turnover rate is defined under SEC rules as
the value of the securities purchased or securities sold, excluding all
securities whose maturities at the time of acquisition were one-year or less,
divided by the average monthly value of such securities owned during the year.
Based on this definition, instruments with remaining maturities of less than
one-year are excluded from the calculation of the portfolio turnover rate. The
Fund may at times hold investments in short-term instruments, which are excluded
for purposes of computing portfolio turnover. For the Fund's two most recently
completed fiscal years ended October 31, 2002 and 2003, the portfolio turnover
rate for the Fund and the Predecessor Fund was as follows:
- ----------------------------------------------------------------------------------------------------------
Fund Portfolio Turnover Rate*
- ----------------------------------------------------------------------------------------------------------
2002 2003
- ----------------------------------------------------------------------------------------------------------
Small Cap Fund 92% 79%
- ----------------------------------------------------------------------------------------------------------
* For periods prior to June 24, 2002, figures relate to the Predecessor Fund.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
portfolios and shares of each portfolio. Each share of a portfolio represents an
equal proportionate interest in that portfolio with each other share. Shares are
entitled upon liquidation to a pro rata share in the net assets of the
portfolio. Shareholders have no preemptive rights. All consideration received by
the Fund for shares of any portfolio and all assets in which such consideration
is invested would belong to that portfolio and would be subject to the
liabilities related thereto. Share certificates representing shares will not be
issued.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust could, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. Even if, however, the Trust were held to be a partnership, the
possibility of the shareholders incurring financial loss for that reason appears
remote because the Trust's Declaration of Trust contains an express disclaimer
of shareholder liability for obligations of the Trust and requires that notice
of such disclaimer be given in each agreement, obligation or instrument entered
into or executed by or on behalf of the Trust or the Trustees, and because the
Declaration of Trust provides for indemnification out of the Trust property for
any shareholder held personally liable for the obligations of the Trust.
S-47
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or
her own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with actual or
threatened litigation in which they may be involved because of their offices
with the Trust unless it is determined in the manner provided in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. Nothing contained in this section attempts to
disclaim a Trustee's individual liability in any manner inconsistent with the
Federal Securities laws.
PROXY VOTING
The Board of Trustees of the Trust has delegated responsibility for decisions
regarding proxy voting for securities held by the Fund to the Adviser. The
Adviser will vote such proxies in accordance with its proxy policies and
procedures, which are included in Appendix B to this SAI. The Board of Trustees
will periodically review the Fund's proxy voting record.
Beginning in 2004, the Trust will be required to disclose annually the Fund's
complete proxy voting record on new Form N-PX. The first filing of Form N-PX
will cover the period from July 1, 2003 through June 30, 2004, and will be filed
no later than August 31, 2004. Once filed, Form N-PX for the Fund will be
available upon request by calling (800) 791-4226. The Fund's Form N-PX will also
be available on the SEC's website at www.sec.gov.
CODES OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics pursuant to Rule
17j-1 under the 1940 Act. In addition, the Adviser and Distributor have adopted
Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics (each a "Code" and
together the "Codes") apply to the personal investing activities of trustees,
officers and certain employees ("access persons"). Rule 17j-1 and the Codes are
designed to prevent unlawful practices in connection with the purchase or sale
of securities by access persons. Under each Code, access persons are permitted
to engage in personal securities transactions, but are required to report their
personal securities transactions for monitoring purposes. The Codes further
require certain access persons to obtain approval before investing in initial
public offerings and limited offerings. Copies of these Codes of Ethics are on
file with the Securities and Exchange Commission, and are available to the
public.
5% AND 25% SHAREHOLDERS
As of February 2, 2004, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% to 25%
or more of the shares of the Fund. Persons who owned of record or beneficially
more than 25% of the Fund's outstanding shares may be deemed to control the Fund
within the meaning of the Act.
S-48
Independence Small Cap Portfolio
Shareholder Number of Shares %
- ----------- ---------------- -
Jupiter & Co. 898,004.1740 60.97%
C/O Investors Bank & Trust
PO Box 9130
Boston, MA 02117-9130
Fleet National Bank Cust 214,341.2690 14.55%
FBO Didcesan Investment Trust
Episcopal Diocese of RI AC0009203100
PO Box 92750
Rochester, NY 14692-9950
Boston Biomedical Research 99,273.8510 6.74%
Institute Inc.
Charitable Organization
64 Grove Street
Watertown, MA 02472-2829
Charles Schwab & Co. Inc. 89,751.0600 6.09%
Reinvest Account
Attn Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
The Fund believes that most of the shares referred to above were held by the
persons indicated in accounts for their fiduciary, agency or custodial
customers. Any shareholder listed above as owning 25% or more of the outstanding
shares of the Fund may be presumed to "control" (as that term is defined in the
1940 Act) the Fund. Shareholders controlling the Fund could have the ability to
vote a majority of the shares of the Fund on any matter requiring the approval
of shareholders of the Fund.
S-49
APPENDIX A - RATINGS
Moody's Investors Service, Inc.
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a
top-quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within
the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection will
remain relatively well-maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-
medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classification,
earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
baa An issue that which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate
at present but may be questionable over any great length of
time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not
well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue
over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree
and is likely to be in arrears on dividends with little
likelihood of eventual payments.
c This is the lowest rated class of preferred or preference
stock. Issues so rated can thus be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
plus (+) or minus (-): Moody's applies numerical modifiers 1, 2, and 3
in each rating classification: the modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking and the modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
A-1
Debt Ratings - Taxable Debt & Deposits Globally
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-edged." 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 fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
A-2
This rating applies only to U.S. Tax-Exempt Municipals Bonds
for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in
each generic rating classification from Aa through
Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates a ranking in the lower
end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1 Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics:
o Leading market positions in well-established industries.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligation. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is
maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
A-3
Standard & Poor's Rating Services
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior
obligations are typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy, as noted above. Accordingly,
in the case of junior debt, the rating may not conform exactly to the
category definition.
AAA An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
AA An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very
strong.
A An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories.
However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the
obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposures to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
A-4
CCC An obligation rated "CCC" is currently vulnerable to non-
payment, and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial
commitment on the obligations.
CC An obligation rated "CC" is currently highly vulnerable to
nonpayment.
C A subordinated debt or preferred stock obligation rated "C" is
currently highly vulnerable to non-payment. The "C" rating may
be used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but payments on this
obligation are being continued. A "C" will also be assigned to
a preferred stock issue in arrears on dividends or sinking
portfolio payments, but that is currently paying.
D An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are
jeopardized.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal
or volatility of expected returns which are not addressed in
the credit rating. Examples include: obligation linked or
indexed to equities, currencies, or commodities; obligations
exposed to severe prepayment risk- such as interest-only or
principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
N.R. This indicates that no rating has been requested, that there
is insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated "A-1" is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet
its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet
its financial commitment on these obligations is extremely
strong.
A-2 A short-term obligation rated "A-2" is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
A-5
A-3 A short-term obligation rated "A-3" exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on
the obligation.
B A short-term obligation rated "B" is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties that
could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
D A short-term obligation rated "D" is in payment default. The
"D" rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period
has not expired, unless Standard & Poors' believes that such
payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation
are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign currency obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished from local currency issuer ratings to identity those
instances where sovereign risks make them different for the same issuer.
Fitch Inc. Ratings
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. "AAA" ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low
expectation of credit risk. They indicate very strong capacity
for timely payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A High credit quality. "A" ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
A-6
BBB Good credit quality. "BBB" ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
Speculative Grade
BB Speculative. "BB" ratings indicate that there is a possibility
of credit risk developing, particularly as the result of
adverse economic change over time; however, business or
financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are
not investment grade.
B Highly speculative. "B" ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC,CC,C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or
economic developments. A "CC" rating indicates that
default of some kind appears probable. "C" ratings
signal imminent default.
DDD,DD,D Default. The ratings of obligations in this category
are based on their prospects for achieving partial or
full recovery in a reorganization or liquidation of
the obligor. While expected recovery values are
highly speculative and cannot be estimated with any
precision, the following serve as general guidelines.
"DDD" obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and
accrued interest. "D" indicates potential recoveries
in the range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on
some or all of their obligations. Entities rated
"DDD" have the highest prospect for resumption of
performance or continued operation with or without a
formal reorganization process. Entities rated "DD"
and "D" are generally undergoing a formal
reorganization or liquidation process; those rated
"DD" are likely to satisfy a higher portion of their
outstanding obligations, while entities rated "D"
have a poor prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for timely
payment of financial commitments; may have an added "+" to
denote any exceptionally strong credit feature.
A-7
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety is
not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse
changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes
in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA" long-term rating
category, to categories below "CCC," or to short-term ratings other than "F1".
"NR" indicates that Fitch Inc. does not rate the issuer or issue in question.
"Withdrawn:" A rating is withdrawn when Fitch Inc. deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there is
a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for a potential downgrade, or "Evolving," if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
A-8
APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES
Independence Investment LLC
Proxy Voting Policy and Procedures
At Independence we recognize that many decisions regarding proxy voting may
affect the value of a client's account, and, therefore, should be resolved based
on in-depth analysis and careful consideration. The following proxy voting
policy sets forth both our principles and our process for voting proxies on
securities held in client accounts where Independence has discretion to vote the
proxies.
I. General Principles
In order to set a framework within which proxy questions should be considered
and voted, the following general principles should be applied:
1) As a fiduciary under ERISA or otherwise, the discretion to vote proxies
for a client's account should be exercised keeping in mind a
fiduciary's duty to use its best efforts to preserve or enhance the
value of the client's account. We should vote on proxy questions with
the goal of fostering the interests of the client (or the participants
and beneficiaries in the case of an ERISA account).
2) Proxy questions should be considered within the individual
circumstances of the issuer. It is possible that individual
circumstances might mean that a given proxy question could be voted
differently than what is generally done in other cases.
3) If a proxy question clearly has the capability of affecting the
economic value of the issuer's stock, the question should be voted in a
way that attempts to preserve, or give the opportunity for enhancement
of, the stock's economic value.
4) In certain circumstances, even though a proposal might appear to be
beneficial or detrimental in the short term, our analysis will conclude
that over the long term greater value may be realized by voting in a
different manner.
5) It is our general policy that when we are given authority to vote
proxies for a client's account, we must be authorized to vote all
proxies for the account in our discretion. We do not generally accept
partial voting authority nor do we generally accept instructions from
clients on how to vote on specific issues, except in the case of
registered investment companies and, in limited instances, certain
clients such as labor unions may direct us to vote proxies in
accordance with a specific set of guidelines or recommendations
appropriate to their circumstances, in which case we will not have
voting discretion but will vote in accordance with the client's
direction. Other clients may wish to retain proxy voting authority and
vote their own proxies if necessary in order to satisfy their
individual social, environmental or other goals.
We maintain a set of proxy voting guidelines that describe in greater detail how
we generally vote specific issues for our clients. While it is not an exhaustive
list, it is intended to serve as the foundation on which we make most of our
proxy voting decisions. The guidelines are available to clients upon request. We
will from time to time review this proxy voting policy and our guidelines and
may adopt changes from time to time. Clients may contact the Compliance Office
by calling 617-228-8603 or via e-mail at compliance@independence.com for a copy
of our current guidelines or to obtain a record of how we voted the proxies for
their account.
B-1
II. Process
At Independence, the fundamental analysts are responsible for performing
research on the companies in which we invest. The same analysts are generally
responsible for decisions regarding proxy voting, as they are the most familiar
with company-specific issues. Portfolio managers also provide input when
appropriate.
We currently use Institutional Shareholders Services, Inc. ("ISS") to monitor
and complete the proxy voting process for our equity portfolio holdings. ISS is
responsible for ascertaining that proxies are received, voted and sent back on a
timely basis, as well as maintaining all of the proxy voting records with
respect to our clients' holdings. Each day our proxy administrator sends ISS our
complete list of portfolio holdings. ISS notifies us of shareholder meetings and
provides us with an electronic platform on which to vote the proxies. ISS also
provides us with an analysis of proxy issues and recommendations for voting,
based on criteria that we have approved. Our analysts will consider ISS's
recommendations, but voting will be based upon our own analysis. Our analysts
direct the manner in which proxies are to be voted, and ISS completes the voting
process.
We may abstain from voting a client proxy if we conclude that the effect on the
client's economic interests or the value of the portfolio holding is
indeterminable or insignificant. We may also abstain from voting a client proxy
for cost reasons (e.g., costs associated with voting proxies of non-U.S.
securities). In accordance with our fiduciary duties, we weigh the costs and
benefits of voting proxy proposals relating to foreign securities and make an
informed decision with respect to whether voting a given proxy proposal is
prudent. Our decision takes into account the effect that the vote of our client,
either by itself or together with other votes, is expected to have on the value
of our client's investment and whether this expected effect would outweigh the
cost of voting.
III. Conflicts of Interest
We manage the assets of various public and private company clients, and invest
in the equity securities of certain public companies on behalf of our clients. 1
We recognize that the potential for conflicts of interest could arise in
situations where we have discretion to vote client proxies and where we have
material business relationships 2 or material personal/family relationships 3
with these issuers (or with a potential target or acquirer, in the case of proxy
vote in connection with a takeover). To address these potential conflicts we
have established a Proxy Voting Committee ("the Committee"). The Committee
consists of the Head of US Equities, the Head of Fundamental Research and the
members of the Compliance Office. The Committee will use reasonable efforts to
determine whether a potential conflict may exist, including maintaining a list
of clients with whom we have a material business relationship, and requiring
analysts to screen the proxies identified by ISS against such list and to bring
such conflicts, and any other conflicts of which they are aware, to the
attention of the Committee. However, a potential conflict shall be deemed to
exist only if one or more of the members of the Committee, or the analyst
responsible for voting the proxy, actually knows of the potential conflict. The
Committee will work with the analyst assigned to the specific security to
oversee the proxy voting process for securities where we believe we may have
potential conflicts.
1 It is Independence's general policy not to invest in private securities
such as Rule 144A securities. If a portfolio were to hold a private
security, however, and a proxy needed to be voted, we would vote in
accordance with our established proxy voting policy including our process
for voting securities where a conflict of interest was present.
2 For purposes of this proxy voting policy, a "material business
relationship" is considered to arise in the event a client has contributed
more than 5% of Independence's annual revenues for the most recent fiscal
year or is reasonably expected to contribute this amount for the current
fiscal year.
B-2
The Committee will meet to decide how to vote the proxy of any security with
respect to which we have identified a potential conflict. The Committee will
consider the analyst's recommendation, make a decision on how to vote the proxy
and document the Committee's rationale for its decision.
Independence is a wholly owned subsidiary of John Hancock Life Insurance
Company, which is a wholly owned subsidiary of John Hancock Financial Services,
Inc. ("JHFS"), a public company. It is our general policy not to acquire or hold
JHFS stock on behalf of our clients. However, in the event that a client were to
hold JHFS stock in a portfolio which we manage, and we were responsible for
voting a JHFS proxy on behalf of the client, the Committee would decide on how
to vote the JHFS proxy. The Committee would, in most cases, base its proxy
voting decision according to the guidance provided by ISS. The Committee will
document the rationale for its decision.
It is Independence's policy not to accept any input from any other person or
entity, including its affiliates when voting proxies for any security. In the
event that an Independence employee was contacted by any affiliate, or any other
person or entity, other than ISS or through standard materials available to all
shareholders, with a recommendation on how to vote a specific proxy, the event
would be reported to the Compliance Office and would be documented. The
Committee would then decide how to vote the proxy in question and would document
the rationale for its decision.
If there is controversy or uncertainty about how any particular proxy question
should be voted, or if an analyst or a Committee member believes that he or she
has been pressured to vote in a certain way, he or she will consult with the
Committee or with a member of the Compliance Office, and a decision will be made
whether to refer the proxy to the Committee for voting. Final decisions on proxy
voting will ultimately be made with the goal of enhancing the value of our
clients' investments.
3 For purposes of this proxy voting policy, a "material personal/family
relationship" is one that would be reasonably likely to influence how we
vote proxies. To identify any such relationships, the Proxy Voting
Committee will obtain information on a regular basis about (i) personal
and/or family relationships between any Independence employee who is
involved in the proxy voting process (e.g., analyst, portfolio manager,
and/or members of the Proxy Voting Committee, as applicable) or senior
executives, and directors or senior executives of issuers for which the
adviser may vote proxies, and (ii) personal and/or immediate family
investments of such employees in issuers which exceed 5% of the
outstanding stock of the issuers.
Adopted 8/03
B-3
THE ADVISORS' INNER CIRCLE FUND
INDEPENDENCE SMALL CAP PORTFOLIO
ANNUAL REPORT OCTOBER 31, 2003
[LOGO OMITTED]
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Shareholders' Letter ..................................................... 1
Statement of Net Assets .................................................. 4
Statement of Operations .................................................. 8
Statement of Changes in Net Assets ....................................... 9
Financial Highlights ..................................................... 10
Notes to Financial Statements ............................................ 11
Report of Independent Auditors ........................................... 15
Trustees and Officers of The Advisors' Inner Circle Fund ................. 16
Notice to Shareholders ................................................... 24
- --------------------------------------------------------------------------------
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 2003
Dear Shareholders:
The past year has been an unusual period for the stock market. After two and a
half years of decline, stocks began to pick up at the beginning of October, 2002
and over the following 12 months, all the major indexes moved higher. The gains,
however, were uneven. The NASDAQ Composite Index was up 45.98% for the year
ended October 31, 2003 while the small cap Russell 2000 Index rose 43.36% and
the S&P 500 Index increased 20.80%. The disparity in index performance reflects,
in part, the types of stocks that led the market higher. In the small cap
sector, some of the more speculative names turned in the best results. In
general, these tended to be the stocks of companies with the lowest market
capitalizations and companies that were unprofitable as well as the lowest
priced stocks. With an emphasis on quality, profitable companies, the Portfolio
underperformed the Russell 2000, with a return of 27.41%, but beat the S&P 500.
While the absence of stocks with more speculative characteristics certainly had
an impact on our performance, there were both positive and negative contributors
among the stocks that we did own. On the plus side were Select Medical, a health
care facilities operator, Trimble Navigation, a supplier of equipment based on
global positioning technology, and Doral Financial, the leading mortgage banker
in Puerto Rico. All three reported strong earnings gains. On the other side of
the slate were Network Associates, a security software company facing the threat
of heightened competition, Scholastic, a publisher of books for children that
reported disappointing sales, and Duane Reade, an operator of drugstores that
was hurt by weakness in the New York City economy.
Investors continue to debate the direction of the U.S. economy. We think that
the economy is on solid ground. As we move into 2004 and overall growth remains
strong, we would expect market leadership to broaden. As that happens, we
believe that we are well positioned to benefit.
Sincerely,
/s/ CHARLES S. GLOVSKY
Charles S. Glovsky, CFA
Senior Vice President
1
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
(AS A PERCENTAGE OF THE PORTFOLIO)
1. Cubic (3.14%) 6. Penn National Gaming (2.71%)
2. Doral Financial (2.89%) 7. Waste Connections (2.62%)
3. Excel Technology (2.88%) 8. Progress Software (2.58%)
4. Gaylord Entertainment (2.74%) 9. John H. Harland (2.56%)
5. Philadelphia Consolidated Holding (2.73%) 10. FMC (2.55%)
DEFINITION OF THE COMPARATIVE INDICES
-------------------------------------
NASDAQ COMPOSITE INDEX is a market capitalization price-only index that tracks
the performance of domestic common stocks traded on the regular NASDAQ market,
as well as National market system traded foreign common stocks and ADRs.
RUSSELL 2000 INDEX is an unmanaged index composed of the 2,000 smallest stocks
in the Russell 3000 Index.
RUSSELL 2000 VALUE INDEX is an unmanaged index composed of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
S&P SMALL CAP 600 INDEX is an unmanaged capitalization-weighted index
representing all major industries in the Small Cap segment of the U.S. stock
market.
S&P 500 INDEX is an unmanaged capitalization-weighted index of 500 stocks
designed to measure performance of the broad domestic economy through changes in
the aggregate market value of 500 stocks representing all major industries.
2
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- ----------------------------------
AVERAGE ANNUAL TOTAL RETURN**
FOR PERIOD ENDED OCTOBER 31, 2003
- ----------------------------------
One Year 3 Year Inception to
Return Return Date
- ----------------------------------
27.41% 3.43% 10.40%
- ----------------------------------
[LINE GRAPH OMITTED]
PLOT POINTS FOR EDGAR PURPOSES AS FOLLOWS:
INDEPENDENCE S&P SMALL
SMALL CAP RUSSELL RUSSELL 2000 CAP 600
PORTFOLIO 2000 INDEX VALUE INDEX INDEX
12/16/98* $10,000 $10,000 $10,000 $10,000
Oct 99 $ 9,439 $10,278 $ 9,508 $ 9,969
Oct 00 $14,638 $12,068 $11,153 $12,489
Oct 01 $13,186 $10,535 $12,129 $11,686
Oct 02 $12,713 $ 9,316 $11,822 $11,244
Oct 03 $16,198 $13,356 $16,585 $15,019
* Beginning of operations. Index comparisons began on 11/30/98.
** If the Adviser had not limited certain expenses, the Portfolio's total return
would have been lower. Returns shown do not reflect the deduction of taxes
that a shareholder would pay on portfolio distributions or the redemption of
portfolio shares.
THE PERFORMANCE DATA QUOTED HEREIN REPRESENTS PAST PERFORMANCE AND THE RETURN
AND VALUE OF AN INVESTMENT IN THE PORTFOLIO WILL FLUCTUATE SO THAT, WHEN
REDEEMED, MAY BE WORTH LESS THAN THEIR ORIGINAL COST. THE PORTFOLIO'S
PERFORMANCE ASSUMES THE REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. INDEX
RETURNS ASSUME REINVESTMENT OF DIVIDENDS AND, UNLIKE A PORTFOLIO'S RETURNS, DO
NOT REFLECT ANY FEES OR EXPENSES. IF SUCH FEES AND EXPENSES WERE INCLUDED IN THE
INDEX RETURNS, THE PERFORMANCE WOULD HAVE BEEN LOWER. PLEASE NOTE THAT
ONE CANNOT INVEST DIRECTLY IN AN UNMANAGED INDEX.
SEE DEFINITION OF COMPARATIVE INDICES ON PAGE 2.
3
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
COMMON STOCK -- 98.6%
- --------------------------------------------------------------------------------
SHARES VALUE
------ ------------
AEROSPACE/DEFENSE EQUIPMENT -- 1.7%
Triumph Group* ........................................ 8,100 $ 264,465
-----------
BANKING -- 13.3%
Boston Private Financial Holdings ..................... 13,600 346,392
Doral Financial ....................................... 9,000 454,500
Fidelity Southern ..................................... 18,600 241,800
First Community Bancorp ............................... 10,600 371,000
Unizan Financial ...................................... 15,500 316,510
W Holding ............................................. 15,300 356,337
-----------
2,086,539
-----------
BROADCASTING, NEWSPAPERS & ADVERTISING -- 1.9%
Lin TV, Cl A* ......................................... 13,500 304,425
-----------
CHEMICALS -- 5.9%
Chattem* .............................................. 17,200 252,324
FMC* .................................................. 14,300 400,543
RPM International ..................................... 18,800 271,660
-----------
924,527
-----------
COAL MINING -- 1.5%
Consol Energy ......................................... 10,600 230,020
-----------
COMPUTERS & SERVICES -- 9.4%
Actuate* .............................................. 52,500 186,900
Avocent* .............................................. 5,400 204,120
Hyperion Solutions* ................................... 10,000 334,900
MSC.Software* ......................................... 32,900 338,870
Progress Software* .................................... 18,400 406,088
-----------
1,470,878
-----------
ELECTRONICS -- 6.0%
Cubic ................................................. 17,400 494,160
Excel Technology* ..................................... 16,100 453,215
-----------
947,375
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
COMMON STOCK -- CONTINUED
- --------------------------------------------------------------------------------
SHARES VALUE
------ ------------
ENTERTAINMENT -- 5.5%
Gaylord Entertainment* ................................ 16,000 $ 431,200
Penn National Gaming* ................................. 18,000 426,420
-----------
857,620
-----------
ENVIRONMENTAL SERVICES -- 2.6%
Waste Connections* .................................... 11,900 412,692
-----------
INSURANCE -- 2.7%
Philadelphia Consolidated Holding* .................... 9,100 429,065
-----------
MACHINERY -- 5.0%
Clarcor ............................................... 5,400 219,510
Cooper Cameron* ....................................... 5,200 222,664
Terex* ................................................ 15,500 349,680
-----------
791,854
-----------
MEASURING DEVICES -- 4.4%
FEI* .................................................. 16,200 384,750
Trimble Navigation .................................... 10,900 301,385
-----------
686,135
-----------
MEDICAL PRODUCTS & SERVICES -- 15.3%
America Service Group* ................................ 7,500 193,500
Cantel Medical* ....................................... 11,500 166,750
DaVita* ............................................... 4,700 164,970
Enzon* ................................................ 27,400 305,784
Hologic ............................................... 23,900 325,040
Inverness Medical Innovations* ........................ 13,400 359,120
LifePoint Hospitals* .................................. 13,600 349,656
Respironics* .......................................... 3,700 154,253
Select Medical* ....................................... 11,600 389,412
-----------
2,408,485
-----------
OFFICE FURNITURE & FIXTURES -- 1.0%
General Binding* ...................................... 11,400 158,004
-----------
PETROLEUM & FUEL PRODUCTS -- 1.7%
Newfield Exploration* ................................. 6,500 258,245
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCK -- CONTINUED
- --------------------------------------------------------------------------------
SHARES VALUE
------ ------------
PRINTING & PUBLISHING -- 4.0%
Courier ............................................... 4,200 $ 230,244
John H. Harland ....................................... 14,800 403,004
-----------
633,248
-----------
PROFESSIONAL SERVICES -- 1.9%
Jacobs Engineering Group* ............................. 6,500 301,080
-----------
RAILROADS -- 2.5%
Genesee & Wyoming, Cl A* .............................. 16,000 388,960
-----------
RETAIL -- 7.3%
BJ's Wholesale Club* .................................. 15,100 387,919
Cost Plus* ............................................ 7,600 348,612
Duane Reade* .......................................... 17,800 244,750
Linens `N Things* ..................................... 5,700 168,264
-----------
1,149,545
-----------
TRUCKING -- 2.5%
Overnite .............................................. 9,000 199,440
Yellow* ............................................... 6,000 197,100
-----------
396,540
-----------
WATER UTILITIES -- 2.5%
Philadelphia Suburban ................................. 16,800 396,816
-----------
TOTAL COMMON STOCK
(Cost $12,454,367).................................. 15,496,518
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT -- 2.8%
- --------------------------------------------------------------------------------
SHARES VALUE
------ ------------
HighMark Diversified Money Market Fund
(Cost $431,813)..................................... 431,813 $ 431,813
-----------
TOTAL INVESTMENTS -- 101.4%
(Cost $12,886,180).................................. 15,928,331
-----------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (1.4)%
- --------------------------------------------------------------------------------
Investment Advisory Fees Receivable.................... 2,222
Administration Fees Payable............................ (10,617)
Other Assets and Liabilities, Net...................... (211,062)
-----------
TOTAL OTHER ASSETS AND LIABILITIES..................... (219,457)
-----------
- --------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid in Capital........................................ 12,483,376
Accumulated Net Realized Gain on Investments........... 183,347
Net Unrealized Appreciation on Investments............. 3,042,151
-----------
TOTAL NET ASSETS -- 100.0%............................. $15,708,874
===========
INSTITUTIONAL CLASS SHARES
Outstanding Shares of Beneficial Interest
(unlimited authorization -- no par value)........... 1,561,000
Net Asset Value, Offering and Redemption
Price Per Share..................................... $10.06
======
* NON-INCOME PRODUCING SECURITY
CL CLASS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
FOR THE YEAR ENDED
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends .......................................................... $ 79,972
Interest ........................................................... 7,025
Less: Foreign Taxes Withheld ....................................... (857)
----------
TOTAL INCOME .................................................... 86,140
----------
EXPENSES
Administration Fees ................................................ 125,000
Investment Advisory Fees ........................................... 120,587
Transfer Agent Fees ................................................ 44,008
Printing Fees ...................................................... 20,739
Audit Fees ......................................................... 14,538
Registration and Filing Fees ....................................... 12,856
Shareholder Servicing Fees ......................................... 12,274
Legal Fees ......................................................... 11,965
Trustees' Fees ..................................................... 3,875
Custodian Fees ..................................................... 2,280
Other Expenses ..................................................... 384
----------
TOTAL EXPENSES .................................................. 368,506
Less:
Waiver of Investment Advisory Fees ................................. (120,587)
Reimbursement of Expenses by Investment Advisor .................... (80,890)
----------
NET EXPENSES .................................................... 167,029
----------
NET INVESTMENT LOSS ................................................ (80,889)
----------
NET REALIZED GAIN ON INVESTMENTS ................................... 220,016
NET CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS ............... 3,502,346
----------
NET GAIN ON INVESTMENTS ............................................ 3,722,362
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $3,641,473
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
2003 2002
----------- -----------
OPERATIONS:
Net Investment Loss ................................. $ (80,889) $ (226,885)
Net Realized Gain on Investments .................... 220,016 726,619
Net Change in Unrealized Appreciation
(Depreciation) on Investments ..................... 3,502,346 (1,276,705)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ......................... 3,641,473 (776,971)
----------- -----------
DISTRIBUTIONS:
Net Realized Gain ................................... (523,000) (3,744,417)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Institutional Class:
Issued .............................................. 14,056,679 4,400,433
In Lieu of Cash Distributions ....................... 522,986 3,730,529
Redeemed ............................................ (13,166,296) (2,310,035)
----------- -----------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS: ....... 1,413,369 5,820,927
----------- -----------
TOTAL INCREASE IN NET ASSETS .................. 4,531,842 1,299,539
----------- -----------
NET ASSETS:
Beginning of Period ................................. 11,177,032 9,877,493
----------- -----------
End of Period ....................................... $15,708,874 $11,177,032
=========== ===========
SHARE TRANSACTIONS:
Shares Issued ....................................... 1,750,693 443,027
In Lieu of Cash Distributions ....................... 65,784 393,101
Redeemed ............................................ (1,615,949) (235,826)
----------- -----------
NET INCREASE IN SHARES OUTSTANDING FROM
SHARE TRANSACTIONS: ............................... 200,528 600,302
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
INSTITUTIONAL CLASS SHARES
----------------------------------------------------------------------------
DECEMBER 16
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1998*** TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2003 2002(2) 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Net Asset Value,
Beginning of Period ......................... $ 8.22 $ 12.99 $14.64 $ 9.44 $ 10.00
------- ------- ------ ------- -------
Income from Investment
Operations:
Net Investment Loss ........................ (0.05) (0.16) (0.29) (0.12) (0.09)
Net Realized and Unrealized
Gain (Loss) .............................. 2.22 0.36(1) (1.17) 5.32 (0.47)
------- ------- ------ ------- -------
Total from Investment
Operations .................................. 2.17 0.20 (1.46) 5.20 (0.56)
------- ------- ------ ------- -------
Distributions:
Net Realized Gain .............................. (0.33) (4.97) (0.19) -- --
------- ------- ------ ------- -------
Total Distributions ............................ (0.33) (4.97) (0.19) -- --
------- ------- ------ ------- -------
Net Asset Value, End of Period ................. $ 10.06 $ 8.22 $12.99 $ 14.64 $ 9.44
======= ======= ====== ======= =======
TOTAL RETURN+ .................................. 27.41% (3.59)% (9.92)% 55.08% (5.60)%**
======= ======= ====== ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(Thousands) ................................. $15,709 $11,177 $9,877 $24,219 $15,893
Ratio of Expenses to Average
Net Assets .................................. 1.18% 2.28% 1.97% 1.39% 1.85%*
Ratio of Expenses to Average Net
Assets (Excluding Waivers
and/or Reimbursements) ...................... 2.60% 2.69% 2.07% 1.49% 1.95%*
Ratio of Net Investment Loss to
Average Net Assets .......................... (0.57)% (1.92)% (1.54)% (0.95)% (1.11)%*
Portfolio Turnover Rate ........................ 79% 92% 65% 84% 91%
* ANNUALIZED
** NOT ANNUALIZED
*** COMMENCEMENT OF OPERATIONS
+ RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER
WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE THE REDEMPTION OF PORTFOLIO
SHARES. TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
WAIVED BY THE ADVISER DURING THE PERIODS INDICATED.
(1) THE AMOUNT SHOWN FOR THE YEAR ENDED OCTOBER 31, 2002 FOR A SHARE
OUTSTANDING THROUGHOUT THE PERIOD DOES NOT ACCORD WITH THE AGGREGATE NET
LOSSES ON INVESTMENTS FOR THAT PERIOD BECAUSE OF THE SALES AND REPURCHASE
OF PORTFOLIO SHARES IN RELATION TO FLUCTUATING MARKET VALUE OF THE
INVESTMENTS OF THE PORTFOLIO.
(2) ON JUNE 24, 2002, THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE SMALL CAP
PORTFOLIO ACQUIRED THE ASSETS AND LIABILITIES OF THE UAM INDEPENDENCE SMALL
CAP PORTFOLIO, A SERIES OF THE UAM FUNDS, INC. THE OPERATIONS OF THE
ADVISORS' INNER CIRCLE FUND INDEPENDENCE SMALL CAP PORTFOLIO PRIOR TO THE
ACQUISITION WERE THOSE OF THE PREDECESSOR FUND, THE UAM INDEPENDENCE SMALL
CAP PORTFOLIO. SEE NOTE 1 IN NOTES TO THE FINANCIAL STATEMENTS.
AMOUNTS DESIGNATED AS "--" ARE $0 OR HAVE BEEN ROUNDED TO $0.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION:
THE ADVISORS' INNER CIRCLE FUND (the "Trust") is organized as a Massachusetts
business trust under an Amended and Restated Agreement and Declaration of Trust
dated February 18, 1997. The Trust is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company with 45
portfolios. The financial statements herein are those of the Independence Small
Cap Portfolio (the "Portfolio"). The financial statements of the remaining
portfolios are presented separately. The assets of each portfolio are
segregated, and a shareholder's interest is limited to the portfolio in which
shares are held. The Portfolio's prospectus provides a description of the
Portfolio's investment objectives, policies and strategies.
On June 7, 2002, the shareholders of the UAM Independence Small Cap Portfolio
(the "UAM Portfolio"), a series of the UAM Funds, Inc., (the "UAM Funds"), voted
to approve a tax-free reorganization of the UAM Portfolio through a transfer of
all assets and liabilities to The Advisors' Inner Circle Fund Independence Small
Cap Portfolio (the "Reorganization"). The Reorganization took place on June 24,
2002.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following significant accounting policies are in conformity with accounting
principles generally accepted in the United States of America.
USE OF ESTIMATES -- Such policies are consistently followed by the
Portfolio in the preparation of its financial statements. Accounting
principles generally accepted in the United States of America require
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
SECURITY VALUATION -- Securities listed on a securities exchange, and for
which quotations are readily available are valued at the last quoted sale
price on the principal exchange or market (foreign or domestic) on which
they are traded on valuation date or, if there is no such reported sale on
the valuation date, at the most recent quoted bid price. Securities that
are quoted on a National Market System are valued at the official closing
price. Money Market Securities and other debt securities with remaining
maturities of 60 days or less may be valued at their amortized cost, which
approximates market value. Securities for which prices are not available,
of which there were none as of October 31, 2003, will be valued at fair
value as determined in good faith by the Trust's Board of Trustees.
SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on trade date. Costs used in determining realized gains and
losses
11
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
on the sale of investment securities are based on the specific
identification method. Dividend income is recorded on the ex-dividend date.
Interest income is recognized on the accrual basis.
REPURCHASE AGREEMENTS -- In connection with transactions involving
repurchase agreements, a third party custodian bank takes possession of the
underlying securities ("collateral"), the value of which exceeds the
principal amount of the repurchase transaction, including accrued interest.
In the event of default on the obligation to repurchase, the Portfolio has
the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. In the event of default or bankruptcy by
the counterparty to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings. As of October
31, 2003, no repurchase agreements were held by the Portfolio.
EXPENSES -- Most expenses of the Trust can be directly attributed to a
particular portfolio. Expenses which cannot be directly attributed to a
portfolio or share class are apportioned among the portfolios of the Trust
based on the number of portfolios and/or relative net assets.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Portfolio will
distribute substantially all of its net investment income quarterly. Any
realized net capital gains will be distributed at least annually. All
distributions are recorded on ex-dividend date.
3. TRANSACTIONS WITH AFFILIATES:
Certain officers of the Trust are also officers of SEI Investments Global Funds
Services (the "Administrator") and/or SEI Investments Distribution Co. (the
"Distributor"). Such officers are paid no fees by the Trust for serving as
officers of the Trust.
The Portfolio had entered into an agreement effective June 24, 2002 with the
Distributor to act as an agent in placing repurchase agreements for the
Portfolio. The Distributor received no fees for the year ended October 31, 2003.
As of October 24, 2003, this agreement was discontinued.
4. ADMINISTRATION, DISTRIBUTION AND TRANSFER AGENT AGREEMENTS:
The Portfolio and the Administrator are parties to an Administration Agreement
under which the Administrator provides management and administrative services
for an annual fee equal to the higher of $125,000 for one portfolio, $250,000
for two portfolios, $350,000 for three portfolios, plus $75,000 per additional
portfolio, plus $20,000 per additional class or 0.12% of the first $250 million,
0.10% of the next $250 million, 0.08% of the next $250 million and 0.04% of any
amount above $750 million of the Portfolio's average daily net assets. For the
year ended October 31, 2003, the Administrator was paid 0.88% of the average
daily net assets.
12
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
The Trust and the Distributor are parties to a Distribution Agreement. The
Distributor receives no fees under the Agreement.
Certain brokers, dealers, banks, trust companies and other financial
representatives receive compensation from the Portfolio for providing a variety
of services, including record keeping and transaction processing. Such fees are
based on the assets of the Portfolio that are serviced by the financial
representative.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent for
the Portfolio under a transfer agency agreement with the Trust.
5. INVESTMENT ADVISORY AND CUSTODIAN AGREEMENTS:
Under the terms of an investment advisory agreement, Independence Investment LLC
(the "Adviser"), an affiliate of John Hancock Financial Services, Inc., provides
investment advisory services to the Portfolio at a fee calculated at an annual
rate of 0.85% of average daily net assets of the Portfolio. Effective June 24,
2002, the Adviser contractually agreed to waive and/or reimburse fees in order
to limit total expenses at 1.85% of average daily net assets. In addition,
effective November 19, 2002, the Adviser voluntarily agreed to further limit
total expenses at 1.15% of average daily net assets. The Adviser may discontinue
all or part of their voluntary waiver at any time. Previously, total expenses
were not limited.
Union Bank of California, N.A. acts as custodian (the "Custodian") for the
Portfolio. The Custodian plays no role in determining the investment policies of
the Portfolio or which securities are to be purchased or sold by the Portfolio.
6. INVESTMENT TRANSACTIONS:
For the the year ended October 31, 2003, the Portfolio made purchases of
$11,737,591 and sales of $10,585,471 of investment securities other than
long-term U.S. Government and short-term securities. There were no purchases or
sales of long-term U.S. Government securities.
7. FEDERAL TAX INFORMATION:
It is the Portfolio's intention to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code and to distribute all of
its taxable income. Accordingly, no provision for Federal income taxes is
required in the financial statements.
The amount and character of income and capital gain distributions to be paid are
determined in accordance with Federal income tax regulations, which may differ
from accounting principles generally accepted in the United States of America.
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassifications to undistributed net investment income (loss),
accumulated net realized gain (loss) and paid in capital. Permanent book and tax
differences resulted in
13
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
reclassification of a $80,889 increase to undistributed net investment income
and a $80,889 decrease to paid in capital. These book and tax differences were
solely attributable to net operating losses which can not be carried forward for
Federal income tax purposes. These reclassifications had no effect on net assets
or net asset value.
Permanent book-tax differences, if any, are not included in ending undistributed
net investment income (loss) for the purposes of calculating net investment
income (loss) per share in the financial highlights.
The tax character of dividends and distributions paid during the last two years
were as follows:
ORDINARY LONG-TERM
INCOME CAPITAL GAIN TOTAL
---------- ------------ ----------
2003 $309,169 $ 213,831 $ 523,000
2002 277,590 3,466,827 3,744,417
As of October 31, 2003, the components of Distributable Earnings were as
follows:
Long Term Capital Gain $ 204,988
Net Unrealized Appreciation 3,020,510
----------
Total Distributable Earnings $3,225,498
==========
For Federal income tax purposes, capital loss carryforwards represent realized
losses of the Portfolio that may be carried forward for a maximum period of
eight years and applied against future capital gains. As of October 31, 2003,
there were no capital loss carryforwards.
For Federal income tax purposes, the cost of securities owned at October 31,
2003, and the net realized gains or losses on securities sold for the period
were different from amounts reported for financial reporting purposes, primarily
due to wash sales which cannot be used for Federal income tax purposes in the
current year and have been deferred for use in future years. The Federal tax
cost and aggregate gross unrealized appreciation and depreciation on
investments, held by the Portfolio at October 31, 2003, were as follows:
FEDERAL APPRECIATED DEPRECIATED NET UNREALIZED
TAX COST SECURITIES SECURITIES APPRECIATION
--------------- --------------- --------------- ---------------
$12,907,821 $3,346,499 $(325,989) $3,020,510
8. OTHER:
At October 31, 2003, 71% of total shares outstanding were held by two record
shareholders, each owning 10% or greater of the aggregate total shares
outstanding.
In the normal course of business, the Portfolio enters into contracts that
provide general indemnifications. The Portfolio's maximum exposure under these
arrangements is dependent on future claims that may be made against the
Portfolio and, therefore, cannot be estimated; however, based on experience, the
risk of loss from such claims is considered remote.
14
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Trustees of
The Advisors' Inner Circle Fund and Shareholders of
Independence Small Cap Portfolio
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Independence Small Cap Portfolio (one of the portfolios constituting the
Advisors' Inner Circle Fund, hereafter referred to as the "Trust") at October
31, 2003, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended and the
financial highlights for each of the periods then ended, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at October 31, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 19, 2003
15
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS OF THE ADVISORS' INNER CIRCLE FUND (UNAUDITED)
- --------------------------------------------------------------------------------
Set forth below are the names, age, position with the Trust, length of term of
office, and the principal occupations for the last five years of each of the
persons currently serving as Trustees and Officers of the Trust. Trustees who
are deemed not to be "interested persons" of the Trust are referred to as
"Independent Board Members." Messrs. Nesher and Doran are Trustees who may be
deemed to be "interested" persons of the Trust as that term is defined in the
1940 Act by virtue of their affiliation with the Trust's Distributor. The
following chart lists Trustees and Officers as of November 11, 2003.
NUMBER OF
PORTFOLIOS
TERM OF IN THE ADVISORS'
POSITION(S) OFFICE AND INNER CIRCLE FUND
NAME, ADDRESS, HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY BOARD OTHER DIRECTORSHIPS
AGE 1 THE TRUST TIME SERVED 2 DURING PAST 5 YEARS MEMBER HELD BY BOARD MEMBER 3
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT
BOARD MEMBERS
- -------------
JOHN T. COONEY Trustee (Since 1993) Vice Chairman of Ameritrust 45 Trustee of The Arbor Funds,
76 yrs. old Texas N.A., 1989-1992, and The MDL Funds, and The Expedition
MTrust Corp., 1985-1989. Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT A. PATTERSON Trustee (Since 1993) Pennsylvania State University, 45 Member and Treasurer, Board of
76 yrs. old Senior Vice President, Treasurer Trustees of Grove City College.
(Emeritus); Financial and Trustee of The Arbor Funds,
Investment Consultant, Professor The MDL Funds, and The
of Transportation since 1984; Expedition Funds.
Treasurer, Senior Vice President
(Emeritus), 1982-1984. Director,
Pennsylvania Research Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
EUGENE B. PETERS Trustee (Since 1993) Private investor from 1987 to 45 Trustee of The Arbor Funds,
74 yrs. old present. Vice President and The MDL Funds, and The
Chief Financial officer, Western Expedition Funds.
Company of North America
(petroleum service company),
1980-1986. President of Gene
Peters and Associates (import
company), 1978-1980. President
and Chief Executive Officer
of Jos. Schlitz Brewing
Company before 1978.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. STOREY Trustee (Since 1994) Partner, Dechert (law firm) 45 Trustee of The Arbor Funds,
72 yrs. old September 1987-December 1993. The MDL Funds, The Expedition
Funds, SEI Asset Allocation Trust,
SEI Daily Income Trust, SEI Index
Funds, SEI Institutional
International Trust, SEI
Institutional Investments Trust,
SEI Institutional Managed Trust,
SEI Liquid Asset Trust. SEI Tax
Exempt Trust, State Street
Research Funds and Massachusetts
Education Tax-Exempt Fund.
- ------------------------------------------------------------------------------------------------------------------------------------
1 Unless otherwise noted, the business address of each Trustee is SEI
Investments Company, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456.
2 Each trustee shall hold office during the lifetime of this Trust until the
election and qualification of his or her successor, or until he or she sooner
dies, resigns or is removed in accordance with the Trust's Declaration of
Trust.
3 Directorships of companies required to report to the Securities and Exchange
Commission under the Securities Exchange Act of 1934 (i.e., "public
companies") or other investment companies registered under the 1940 Act.
16 & 17
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS OF THE ADVISORS' INNER CIRCLE FUND (UNAUDITED)
- --------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS
TERM OF IN THE ADVISORS'
POSITION(S) OFFICE AND INNER CIRCLE FUND
NAME, ADDRESS, HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY BOARD OTHER DIRECTORSHIPS
AGE 1 THE TRUST TIME SERVED 2 DURING PAST 5 YEARS MEMBER HELD BY BOARD MEMBER 3
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT
BOARD MEMBERS (CONTINUED)
- ------------------------
GEORGE J. Trustee (Since 1999) Chief Executive Officer, 45 Trustee, Navigator Securities
SULLIVAN, JR. Newfound Consultants Inc. Lending Trust, since 1995. Trustee
61 yrs. old since April 1997. General of The Arbor Funds, The MDL Funds,
Partner, Teton Partners, The Expedition Funds, SEI Asset
L.P., June 1991-December 1996; Allocation Trust, SEI Daily Income
Chief Financial Officer, Trust, SEI Index Funds,
Nobel partners, L.P., March SEI Institutional International
1991-December 1996; Treasurer Trust, SEI Institutional
and Clerk, Peak Asset Investments Trust, SEI
Management, Inc., since 1991. Institutional Managed Trust,
SEI Liquid Asset Trust and
SEI Tax Exempt Trust.
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED
BOARD MEMBERS
- --------------
ROBERT A. NESHER Chairman (Since 1991) Currently performs various 45 Trustee of The Arbor Funds, Bishop
57 yrs. old of the Board services on behalf of SEI Street Funds, The Expedition
of Trustees Investments for which Mr. Nesher Funds, The MDL Funds, SEI Asset
is compensated. Executive Vice Allocation Trust, SEI Daily Income
President of SEI Investments, Trust, SEI Index Funds, SEI
1986-1994. Director and Institutional International Trust,
Executive Vice President of SEI Institutional Investments
the Administrator and the Trust, SEI Institutional Managed
Distributor, 1981-1994. Trust, SEI Liquid Asset Trust,
SEI Tax Exempt Trust. SEI
Opportunity Master Fund, L.P.,
SEI Opportunity Fund, L.P., SEI
Absolute Return Master Fund, L.P.
and SEI Absolute Return Fund, L.P.
- ------------------------------------------------------------------------------------------------------------------------------------
WILLIAM M. DORAN Trustee (Since 1992) Partner, Morgan, Lewis 45 Trustee of The Arbor Funds, The
1701 Market Street, & Bockius LLP (law firm), MDL Funds, The Expedition Funds,
Philadelphia, PA 19103 counsel to the Trust, SEI Asset Allocation Trust, SEI Daily
63 yrs. old Investments, the Administrator Income Trust, SEI Index Funds, SEI
and the Distributor; Institutional International
Director of SEI Investments Trust, SEI Institutional
since 1974; Secretary of Investments Trust, SEI
SEI Investments since 1978. Institutional Managed Trust, SEI
Liquid Asset Trust and SEI Tax
Exempt Trust.
- ------------------------------------------------------------------------------------------------------------------------------------
1 Unless otherwise noted, the business address of each Trustee is SEI
Investments Company, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456.
2 Each trustee shall hold office during the lifetime of this Trust until the
election and qualification of his or her successor, or until he or she sooner
dies, resigns or is removed in accordance with the Trust's Declaration of
Trust.
3 Directorships of companies required to report to the Securities and Exchange
Commission under the Securities Exchange Act of 1934 (i.e., "public
companies") or other investment companies registered under the 1940 Act.
18 & 19
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS OF THE ADVISORS' INNER CIRCLE FUND (UNAUDITED)
- --------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS
TERM OF IN THE ADVISORS'
POSITION(S) OFFICE AND INNER CIRCLE FUND
NAME, ADDRESS, HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY BOARD OTHER DIRECTORSHIPS
AGE 1 THE TRUST TIME SERVED DURING PAST 5 YEARS MEMBER HELD BY BOARD MEMBER
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS
- ---------
JAMES F. VOLK, CPA President (Since 2003) Senior Operations Officer, N/A N/A
41 yrs.old SEI Investments, Fund
Accounting and Administration
since 1996. From 1993-1996,
Mr. Volk served as Assistant
Chief Accountant for the U.S.
Securities and Exchange Commission.
- ------------------------------------------------------------------------------------------------------------------------------------
JENNIFER Controller (Since 2001) Director, SEI Investments, N/A N/A
SPRATLEY, CPA and Chief Fund Accounting and
34 yrs. old Financial Officer Administration since November
1999; Audit Manager, Ernst &
Young LLP from 1991-1999.
- ------------------------------------------------------------------------------------------------------------------------------------
PETER GOLDEN Co-Controller (Since 2003) Director, SEI Investments, N/A N/A
39 yrs. old and Co-Chief Fund Accounting and Administration
Financial Officer since June 2001. From March 2000
to 2001, Vice President of Funds
Administration for J.P. Morgan
Chase & Co. From 1997 to 2000,
Vice President of Pension and
Mutual Fund Accounting for Chase
Manhattan Bank.
- ------------------------------------------------------------------------------------------------------------------------------------
SHERRY K. VETTERLEIN Vice (Since 2001) Vice President and Assistant N/A N/A
41 yrs. old President Secretary of SEI Investments
and Secretary Global Funds Services and
SEI Investments Distribution
January 2001; Shareholder/Partner,
Co. since January 2001;
Shareholder/Partner, Buchanan
Ingersoll Professional
Corporation from 1992-2000.
- ------------------------------------------------------------------------------------------------------------------------------------
LYDIA A. GAVALIS Vice (Since 1998) Vice President and Assistant N/A N/A
39 yrs. old President Secretary of SEI Investments,
and SEI Investments Global Funds
Assistant Services and SEI Investments
Secretary Distribution Co. since 1998;
Assistant General Counsel and
Director of Arbitration,
Philadelphia Stock Exchange
from 1989-1998.
- ------------------------------------------------------------------------------------------------------------------------------------
1 The business address of each officer is SEI Investments Company, 1 Freedom
Valley Drive, Oaks, Pennsylvania 19456.
20 & 21
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS OF THE ADVISORS' INNER CIRCLE FUND (UNAUDITED)
- --------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS
TERM OF IN THE ADVISORS'
POSITION(S) OFFICE AND INNER CIRCLE FUND
NAME, ADDRESS, HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY BOARD OTHER DIRECTORSHIPS
AGE 1 THE TRUST TIME SERVED DURING PAST 5 YEARS MEMBER HELD BY BOARD MEMBER
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS (CONTINUED)
- --------------------
TIMOTHY D. BARTO Assistant (Since 2000) Vice President and Assistant N/A N/A
35 yrs. old Vice Secretary of SEI Investments
President Global Funds Services and SEI
and Investments Distribution Co.
Assistant since 1999; Associate, Dechert
Secretary (law firm) from 1997-1999;
Associate, Richter, Miller &
Finn (law firm) from 1994-1997.
- ------------------------------------------------------------------------------------------------------------------------------------
WILLIAM E. ZITELLI Assistant (Since 2000) Vice President and Assistant N/A N/A
35 yrs. old Vice Secretary of SEI Investments
President Global Funds Services and SEI
and Investments Distribution Co.
Secretary since 2000; Vice President,
Merrill Lynch & Co. Asset
Management Group from 1998 -
2000; Associate at Pepper
Hamilton LLP from 1997-1998.
- ------------------------------------------------------------------------------------------------------------------------------------
CHRISTINE M. MCCULLOUGH Vice (Since 2000) Vice President and Assistant N/A N/A
43 yrs. old President Secretary of SEI Investments
and Global Funds Services and SEI
Assistant Investments Distribution Co.
Secretary since 1999; Associate at White
and Williams LLP from 1991-1999.
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN C. MUNCH Vice (Since 2001) Vice President and Assistant N/A N/A
32 yrs. old President Secretary of SEI Investments
and Global Funds Services and SEI
Assistant Investments Distribution Co.
Secretary since 2001; Associate at Howard
Rice Nemorvoski Canady Falk &
Rabkin from 1998-2001; Associate
at Seward & Kissel from
1996-1998.
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN MUNERA Vice (Since 2002) Middle Office Compliance Officer N/A N/A
40 yrs. old President at SEI Investments since 2000;
and Supervising Examiner at Federal
Assistant Reserve Bank of Philadelphia
Secretary from 1998-2000.
- ------------------------------------------------------------------------------------------------------------------------------------
CORI DAGGETT Vice (Since 2003) Employed by SEI Investments N/A N/A
42 yrs. old President Company since 2003. Associate
and at Drinker Biddle & Reath from
Assistant 1998-2003.
Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
1 The business address of each officer is SEI Investments Company, 1 Freedom
Valley Drive, Oaks, Pennsylvania 19456.
22 & 23
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTICE TO SHAREHOLDERS (UNAUDITED)
- --------------------------------------------------------------------------------
For shareholders that do not have an October 31, 2003 tax year end, this notice
is for informational purposes only. For shareholders with an October 31, 2003
tax year end, please consult your tax advisor as to the pertinence of this
notice. For the fiscal year ended October 31, 2003, the Portfolio is designating
the following items with regard to distributions paid during the year.
DIVIDEND
LONG TERM QUALIFIED QUALIFYING FOR QUALIFYING
(20% RATE) 5 YEAR ORDINARY CORPORATE DIVIDENDS DIVIDEND INCOME
CAPITAL GAIN GAIN INCOME TOTAL RECEIVABLE (15% TAX RATE
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS DEDUCTION (1) FOR QDI) (2)
------------- ------------- ------------- ------------- ------------------- ---------------
Independence
Small Cap
Portfolio 39.72% 0.00% 60.28% 100.00% 22.19% 0.00%
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction and are reflected as a percentage of "Ordinary
Income Distributions."
(2) The percentage in this column represents the amount of "Qualifying Dividend
Income" as created by the Jobs and Growth Tax Relief Reconciliation Act of
2003 and is reflected as a percentage of "Ordinary Income Distributions." It
is the intention of the Portfolio to designate the maximum amount permitted
by the law.
The information reported herein may differ from the information and
distributions taxable to the shareholders for the calendar year ending
December 31, 2003. Complete information will be computed and reported in
conjunction with your 2003 Form 1099-DIV.
24
NOTES
- --------------------------------------------------------------------------------
INDEPENDENCE SMALL CAP PORTFOLIO
P.O. Box 219009
Kansas City, MO 64121
800-791-4226
ADVISER:
Independence Investment LLC
Exchange Place
53 State Street
Boston, MA 02109
DISTRIBUTOR:
SEI Investments Distribution Co.
Oaks, PA 19456
ADMINISTRATOR:
SEI Investments Global Funds Services
Oaks, PA 19456
LEGAL COUNSEL:
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave., N.W.
Washington, DC 20004
This information must be preceded or accompanied by a current
prospectus for the Portfolio described.
THE ADVISORS' INNER CIRCLE FUND
INDEPENDENCE SMALL CAP PORTFOLIO
SEMI-ANNUAL REPORT APRIL 30, 2004
[Independence Logo omitted]
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
APRIL 30, 2004
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Shareholders' Letter ..................................................... 1
Statement of Net Assets .................................................. 3
Statement of Operations .................................................. 7
Statement of Changes in Net Assets ....................................... 8
Financial Highlights ..................................................... 9
Notes to Financial Statements ............................................ 10
- --------------------------------------------------------------------------------
A description of the policies and procedures that The Advisors' Inner Circle
Fund uses to determine how to vote proxies (if any) relating to portfolio
securities is available without charge (i) upon request, by calling
800-791-4226; and (ii) on the Commission's website at http://www.sec.gov.; and
beginning no later than August 31, 2004, information (if any) regarding how the
Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge (i) by calling
800-791-4226; and (ii) on the Commission's website at http://www.sec.gov.
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
April 30, 2004
Dear Shareholders:
The six months ended April 30, 2004 was a mixed period for stocks. The S&P 500
and the Russell 2000 Indices both turned in solid performances. In contrast, the
NASDAQ Composite Index declined slightly. This disparity reflected the
underlying crosscurrents that were influencing the markets. Investors in general
remained upbeat about the prospects for the economy and corporate earnings.
However, there was a noticeable shift in market leadership. For most of calendar
year 2003, more speculative issues were the top performers. These were the lower
priced, more volatile, stocks of smaller companies, quite a few of which are
unprofitable. In the last quarter of the year, better quality, more
fundamentally sound, companies performed the best. That trend continued into the
first part of calendar year 2004.
Since we tend to focus on strong fundamental situations, we were well positioned
when the change in leadership developed and outperformed the major indices. As
usual, we did well mostly on the strength of our individual stock selections.
Several of our holdings appreciated significantly in the most recent half-year.
These included CHATTEM, a consumer products company with some exciting new
products, GENESEE & WYOMING, a railroad operator that is experiencing an
improvement in shipments, and HOLOGIC, a provider of medical imaging equipment
that recently introduced a promising new machine. Stocks that detracted from
results included INVERNESS MEDICAL INNOVATIONS, a supplier of health care
diagnostic products that is seeing some margin compression, as well as CRAY and
WHITE ELECTRONIC DESIGNS, two technology companies that were affected by general
weakness in that sector.
Investors are currently wrestling with the prospect of higher interest rates and
what impact they may have on the market. Consequently, stocks have been volatile
with no clear direction. For our part, we believe that our relatively
concentrated portfolio of fundamentally sound companies that sell at attractive
valuations will fare well, even in an uncertain environment.
Sincerely,
/s/Charles S. Glovsky
Charles S. Glovsky, CFA
Senior Vice President
1
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
(AS A PERCENTAGE OF THE PORTFOLIO)
1. Gaylord Entertainment (2.78%) 6. Warnaco Group (2.68%)
2. Hologic (2.74%) 7. Kroll (2.58%)
3. Philadelphia Consolidated Holding (2.73%) 8. Genesee & Wyoming (2.48%)
4. Trimble Navigation (2.68%) 9. USI Holdings (2.47%)
5. Chattem (2.68%) 10. Kronos (2.33%)
DEFINITION OF THE COMPARATIVE INDICES
--------------------------------------
NASDAQ COMPOSITE INDEX is a market capitalization price-only index that tracks
the performance of domestic common stocks traded on the regular NASDAQ market,
as well as National market system traded foreign common stocks and ADRs.
RUSSELL 2000 INDEX is an unmanaged index composed of the 2,000 smallest stocks
in the Russell 3000 Index.
RUSSELL 2000 VALUE INDEX is an unmanaged index composed of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
S&P SMALL CAP 600 INDEX is an unmanaged capitalization-weighted index
representing all major industries in the Small Cap segment of the U.S. stock
market.
S&P 500 INDEX is an unmanaged capitalization-weighted index of 500 stocks
designed to measure performance of the broad domestic economy through changes in
the aggregate market value of 500 stocks representing all major industries.
2
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
APRIL 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
COMMON STOCK -- 94.0%
- --------------------------------------------------------------------------------
SHARES VALUE
--------- ------------
AEROSPACE/DEFENSE EQUIPMENT -- 1.4%
Triumph Group* ...................................... 7,500 $ 241,125
-----------
APPAREL/TEXTILES -- 2.7%
Warnaco Group* ...................................... 24,300 464,859
-----------
BANKING -- 9.0%
Boston Private Financial Holdings ................... 14,700 342,510
Doral Financial ..................................... 7,800 255,762
Fidelity Southern ................................... 16,700 227,955
First Community Bancorp ............................. 11,400 389,310
W Holding ........................................... 19,200 327,168
-----------
1,542,705
-----------
BROADCASTING, NEWSPAPERS & ADVERTISING -- 1.6%
Lin TV, Cl A* ....................................... 12,100 272,129
-----------
BUSINESS SERVICES -- 5.7%
eFunds* ............................................. 18,400 295,504
Jacobs Engineering Group* ........................... 5,700 237,747
Kroll* .............................................. 15,100 447,564
-----------
980,815
-----------
CHEMICALS -- 3.8%
Arch Chemicals ...................................... 12,500 365,125
Cytec Industries* ................................... 7,400 290,968
-----------
656,093
-----------
COAL MINING -- 1.7%
Arch Coal ........................................... 9,300 284,673
-----------
COMPUTERS & SERVICES -- 12.7%
Avocent* ............................................ 8,900 285,601
Borland Software* ................................... 27,800 229,350
Cray* ............................................... 50,600 313,720
Hyperion Solutions* ................................. 9,600 368,448
Kronos* ............................................. 11,100 404,928
MSC.Software* ....................................... 30,000 279,600
Progress Software* .................................. 14,400 295,200
-----------
2,176,847
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
APRIL 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
COMMON STOCK -- CONTINUED
SHARES VALUE
--------- ------------
CONSUMER DISCRETIONARY -- 2.7%
Chattem* ............................................ 17,200 $ 465,621
-----------
ELECTRONICS -- 5.7%
Cubic ............................................... 14,200 335,120
Daktronics* ......................................... 12,600 267,498
Excel Technology* ................................... 11,200 379,008
-----------
981,626
-----------
ENTERTAINMENT -- 2.8%
Gaylord Entertainment* .............................. 15,400 482,636
-----------
ENVIRONMENTAL SERVICES -- 1.8%
Waste Connections* .................................. 7,600 306,052
-----------
INSURANCE -- 7.5%
Philadelphia Consolidated Holding* .................. 8,200 473,468
Scottish Re Group ................................... 17,900 391,652
USI Holdings* ....................................... 28,300 428,745
-----------
1,293,865
-----------
MACHINERY -- 2.4%
Clarcor ............................................. 5,400 237,708
Grant Prideco* ...................................... 11,600 176,900
-----------
414,608
-----------
MEASURING DEVICES -- 4.4%
Trimble Navigation* ................................. 18,600 465,930
White Electronic Designs* ........................... 38,500 279,125
-----------
745,055
-----------
MEDICAL PRODUCTS & SERVICES -- 12.3%
Candela* ............................................ 34,600 366,414
Cantel Medical* ..................................... 19,800 326,700
Hologic* ............................................ 23,700 475,185
Inverness Medical Innovations* ...................... 15,100 284,635
LifePoint Hospitals* ................................ 8,000 286,080
Select Medical ...................................... 15,900 301,305
Synovis Life Technologies* .......................... 3,900 62,400
-----------
2,102,719
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
APRIL 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
COMMON STOCK -- CONTINUED
- --------------------------------------------------------------------------------
SHARES VALUE
--------- ------------
OFFICE FURNITURE & FIXTURES -- 0.9%
General Binding* .................................... 11,300 $ 158,200
-----------
PETROLEUM & FUEL PRODUCTS -- 3.7%
Forest Oil* ......................................... 9,300 244,125
Newfield Exploration* ............................... 7,500 395,100
-----------
639,225
-----------
PRINTING & PUBLISHING -- 1.4%
Courier ............................................. 6,000 244,500
-----------
RAILROADS -- 2.5%
Genesee & Wyoming* .................................. 18,700 431,035
-----------
RETAIL -- 3.2%
Cache* .............................................. 14,300 400,400
Galyan's Trading* ................................... 3,200 30,368
Kirkland's* ......................................... 4,600 83,030
ShopKo Stores* ...................................... 2,200 29,172
-----------
542,970
-----------
TRUCKING -- 2.1%
Overnite ............................................ 15,100 362,400
-----------
WATER UTILITIES -- 2.0%
Aqua America ........................................ 17,100 349,695
-----------
Total Common Stock
(Cost $13,359,751) ............................... 16,139,453
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
APRIL 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 7.2%
- --------------------------------------------------------------------------------
SHARES VALUE
--------- ------------
HighMark Diversified Money Market Fund .............. 692,579 $ 692,579
HighMark U.S. Government Money Market Fund .......... 541,018 541,018
-----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $1,233,597) ................................ 1,233,597
-----------
TOTAL INVESTMENTS -- 101.2%
(Cost $14,593,348) ............................... 17,373,050
-----------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (1.2)%
- --------------------------------------------------------------------------------
Receivable due from Investment Adviser .............. 5,458
Administration Fees Payable ......................... (10,274)
Trustees' Fees Payable .............................. (1,629)
Other Assets and Liabilities, Net ................... (193,074)
-----------
TOTAL OTHER ASSETS AND LIABILITIES .................. (199,519)
-----------
- --------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid-in Capital ..................................... 12,412,558
Accumulated net investment loss ..................... (56,090)
Accumulated net realized gain on investments ........ 2,037,361
Net unrealized appreciation on investments .......... 2,779,702
-----------
TOTAL NET ASSETS-- 100.0% ........................... $17,173,531
===========
INSTITUTIONAL CLASS SHARES
Outstanding Shares of beneficial interest
(unlimited authorization-- no par value) 1,545,225
Net Asset Value, Offering and Redemption
Price Per Share $11.11
======
* NON-INCOME PRODUCING SECURITY
CL CLASS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
FOR THE SIX MONTHS ENDED
APRIL 30, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends ....................................................... $ 36,439
Interest ........................................................ 611
Less: Foreign Taxes Withheld .................................... (443)
----------
TOTAL INCOME ................................................. 36,607
----------
EXPENSES
Investment Advisory Fees ........................................ 68,514
Administration Fees ............................................. 62,330
Trustees' Fees .................................................. 2,230
Transfer Agent Fees ............................................. 25,986
Printing Fees ................................................... 10,470
Audit Fees ...................................................... 7,748
Registration and Filing Fees .................................... 7,628
Legal Fees ...................................................... 6,962
Shareholder Servicing Fees ...................................... 5,980
Custodian Fees .................................................. 856
Other Expenses .................................................. 1,136
----------
TOTAL EXPENSES ............................................... 199,840
Less:
Waiver of Investment Advisory Fees .............................. (68,514)
Reimbursement of Expenses by Investment Adviser ................. (38,629)
----------
NET EXPENSES ................................................. 92,697
----------
NET INVESTMENT LOSS ............................................. (56,090)
----------
NET REALIZED GAIN ON INVESTMENTS ................................ 2,059,047
NET CHANGE IN UNREALIZED DEPRECIATION ON INVESTMENTS ............ (262,449)
----------
NET GAIN ON INVESTMENTS ......................................... 1,796,598
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $1,740,508
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED
2004 OCTOBER 31,
(UNAUDITED) 2003
---------- ----------
OPERATIONS:
Net Investment Loss .............................. $ (56,090) $ (80,889)
Net Realized Gain on Investments ................. 2,059,047 220,016
Net Change in Unrealized Appreciation
(Depreciation) on Investments .................. (262,449) 3,502,346
----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................... 1,740,508 3,641,473
----------- ----------
DISTRIBUTIONS:
Net Realized Gain ................................ (205,033) (523,000)
----------- ----------
CAPITAL SHARE TRANSACTIONS:
Institutional Class:
Issued ........................................... 1,680,873 14,056,679
In Lieu of Cash Distributions .................... 204,967 522,986
Redemption Fees -- Note 2 ........................ 59 --
Redeemed ......................................... (1,956,717) (13,166,296)
----------- ----------
NET INCREASE (DECREASE) FROM CAPITAL SHARE
TRANSACTIONS ................................... (70,818) 1,413,369
----------- ----------
TOTAL INCREASE IN NET ASSETS ............... 1,464,657 4,531,842
----------- ----------
NET ASSETS:
Beginning of Period .............................. 15,708,874 11,177,032
----------- ----------
End of Period (including accumulated net
investment loss of $56,090 and $0, respectively) $17,173,531 $15,708,874
=========== ==========
SHARE TRANSACTIONS:
Shares Issued .................................... 148,575 1,750,693
In Lieu of Cash Distributions .................... 20,274 65,784
Redeemed ......................................... (184,624) (1,615,949)
----------- ----------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING FROM
SHARE TRANSACTIONS ............................. (15,775) 200,528
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
INSTITUTIONAL CLASS SHARES
-----------------------------------------------------------------------------------
SIX MONTHS
ENDED DECEMBER 16
APRIL 30, YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1998*** TO
2004 OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
(UNAUDITED) 2003 2002(2) 2001 2000 1999
--------- ------- ------- ------ ------- -------
Net Asset Value,
Beginning of Period ...... $ 10.06 $ 8.22 $ 12.99 $14.64 $ 9.44 $ 10.00
------- ------- ------- ------ ------- -------
Income from Operations:
Net Investment Loss ..... (0.04) (0.05) (0.16) (0.29) (0.12) (0.09)
Net Realized and
Unrealized
Gain (Loss) ........... 1.23 2.22 0.36(1) (1.17) 5.32 (0.47)
------- ------- ------- ------ ------- -------
Total from
Operations ............... 1.19 2.17 0.20 (1.46) 5.20 (0.56)
------- ------- ------- ------ ------- -------
Distributions:
Net Realized Gain ........... (0.14) (0.33) (4.97) (0.19) -- --
------- ------- ------- ------ ------- -------
Total Distributions ......... (0.14) (0.33) (4.97) (0.19) -- --
------- ------- ------- ------ ------- -------
Net Asset Value,
End of Period ............ $ 11.11 $ 10.06 $ 8.22 $12.99 $ 14.64 $ 9.44
======= ======= ======= ====== ======= =======
TOTAL RETURN+ ............... 11.92%** 27.41% (3.59)% (9.92)% 55.08% (5.60)%**
======= ======= ======= ====== ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(Thousands) .............. $17,174 $15,709 $11,177 $9,877 $24,219 $15,893
Ratio of Expenses to
Average Net Assets ....... 1.15%* 1.18% 2.28% 1.97% 1.39% 1.85%*
Ratio of Expenses to
Average Net Assets
(Excluding Waivers
and/or Reimbursements) ... 2.48%* 2.60% 2.69% 2.07% 1.49% 1.95%*
Ratio of Net Investment
Loss to Average
Net Assets ............... (0.70)%* (0.57)% (1.92)% (1.54)% (0.95)% (1.11)%*
Portfolio Turnover Rate ..... 47% 79% 92% 65% 84% 91%
* ANNUALIZED
** NOT ANNUALIZED
*** COMMENCEMENT OF OPERATIONS
+ RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER
WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE THE REDEMPTION OF PORTFOLIO
SHARES. TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
WAIVED BY THE ADVISER DURING THE PERIODS INDICATED.
(1) THE AMOUNT SHOWN FOR THE YEAR ENDED OCTOBER 31, 2002 FOR A SHARE
OUTSTANDING THROUGHOUT THE PERIOD DOES NOT ACCORD WITH THE AGGREGATE NET
LOSSES ON INVESTMENTS FOR THAT PERIOD BECAUSE OF THE SALES AND REPURCHASE
OF PORTFOLIO SHARES IN RELATION TO FLUCTUATING MARKET VALUE OF THE
INVESTMENTS OF THE PORTFOLIO.
(2) ON JUNE 24, 2002, THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE SMALL CAP
PORTFOLIO ACQUIRED THE ASSETS AND LIABILITIES OF THE UAM INDEPENDENCE SMALL
CAP PORTFOLIO, A SERIES OF THE UAM FUNDS, INC. THE OPERATIONS OF THE
ADVISORS' INNER CIRCLE FUND INDEPENDENCE SMALL CAP PORTFOLIO PRIOR TO THE
ACQUISITION WERE THOSE OF THE PREDECESSOR FUND, THE UAM INDEPENDENCE SMALL
CAP PORTFOLIO.
AMOUNTS DESIGNATED AS "--" ARE $0 OR HAVE BEEN ROUNDED TO $0.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION:
THE ADVISORS' INNER CIRCLE FUND (the "Trust") is organized as a Massachusetts
business trust under an Amended and Restated Agreement and Declaration of Trust
dated February 18, 1997. The Trust is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company with 45
portfolios. The financial statements herein are those of the Independence Small
Cap Portfolio (the "Portfolio"). The financial statements of the remaining
portfolios are presented separately. The assets of each portfolio are
segregated, and a shareholder's interest is limited to the portfolio in which
shares are held. The Portfolio's prospectus provides a description of the
Portfolio's investment objectives, policies and strategies.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following significant accounting policies are in conformity with accounting
principles generally accepted in the United States of America.
USE OF ESTIMATES -- Such policies are consistently followed by the
Portfolio in the preparation of its financial statements. Accounting
principles generally accepted in the United States of America require
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
SECURITY VALUATION -- Securities listed on a securities exchange, and for
which quotations are readily available are valued at the last quoted sale
price on the principal exchange or market (foreign or domestic) on which
they are traded on valuation date or, if there is no such reported sale on
the valuation date, at the most recent quoted bid price. Securities that
are quoted on a National Market System are valued at the official closing
price. Money Market Securities and other debt securities with remaining
maturities of 60 days or less may be valued at their amortized cost, which
approximates market value. Redeemable securities issued by open-end
investment companies are valued at the investment company's applicable net
asset value, with the exception of exchange-traded open-end investment
companies which are priced as equity securities. Securities for which
prices are not available, of which there were none as of April 30, 2004,
will be valued at fair value as determined in good faith in accordance with
procedures approved by the Trust's Board of Trustees.
10
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on trade date. Costs used in determining realized gains and
losses on the sale of investment securities are based on the specific
identification method. Dividend income is recorded on the ex-dividend date.
Interest income is recognized on the accrual basis.
EXPENSES -- Most expenses of the Trust can be directly attributed to a
particular portfolio. Expenses which cannot be directly attributed to a
portfolio or share class are apportioned among the portfolios of the Trust
based on the number of portfolios and/or relative net assets.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Portfolio will
distribute substantially all of its net investment income quarterly. Any
realized net capital gains will be distributed at least annually. All
distributions are recorded on ex-dividend date.
REDEMPTION FEES -- The Portfolio retains a redemption fee of 2% on
redemptions of capital shares held for less than 90 days. For the six
months ended April 30, 2004 there were $59 in redemption fees retained by
the Portfolio.
3. TRANSACTIONS WITH AFFILIATES:
Certain officers of the Trust are also officers of SEI Investments Global Funds
Services (the "Administrator") and/or SEI Investments Distribution Co. (the
"Distributor"). Such officers are paid no fees by the Trust for serving as
officers of the Trust.
4. ADMINISTRATION, DISTRIBUTION, SHAREHOLDER SERVICING AND TRANSFER AGENT
AGREEMENTS:
The Portfolio and the Administrator are parties to an Administration Agreement
under which the Administrator provides management and administrative services
for an annual fee equal to the higher of $125,000 for one portfolio, $250,000
for two portfolios, $350,000 for three portfolios, plus $75,000 per additional
portfolio, plus $20,000 per additional class or 0.12% of the first $250 million,
0.10% of the next $250 million, 0.08% of the next $250 million and 0.04% of any
amount above $750 million of the Portfolio's average daily net assets. For the
six months ended April 30, 2004, the Administrator was paid 0.77% of the average
daily net assets.
The Trust and the Distributor are parties to a Distribution Agreement. The
Distributor receives no fees under the Agreement.
11
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
Certain brokers, dealers, banks, trust companies and other financial
representatives receive compensation from the Portfolio for providing a variety
of services, including record keeping and transaction processing. Such fees are
based on the assets of the Portfolio that are serviced by the financial
representative. Such fees are paid by the Portfolio to the extent that the
number of accounts serviced by the financial representative multiplied by the
account fee charged by the Portfolio's transfer agent would not exceed the
amount that would have been charged had the accounts serviced by the financial
representative been registered directly through the transfer agent. All fees in
excess of this calculated amount are paid by the Adviser.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent for
the Portfolio under a transfer agency agreement with the Trust.
5. INVESTMENT ADVISORY AND CUSTODIAN AGREEMENTS:
Under the terms of an investment advisory agreement, Independence Investment LLC
(the "Adviser"), an affiliate of John Hancock Financial Services, Inc., provides
investment advisory services to the Portfolio at a fee calculated at an annual
rate of 0.85% of average daily net assets of the Portfolio. The Adviser
voluntarily agreed to waive and/or reimburse fees in order to limit total
expenses at 1.15% of average daily net assets. The Adviser may discontinue all
or part of their voluntary waiver at any time.
Union Bank of California, N.A. acts as custodian (the "Custodian") for the
Portfolio. The Custodian plays no role in determining the investment policies of
the Portfolio or which securities are to be purchased or sold by the Portfolio.
6. INVESTMENT TRANSACTIONS:
For the the six months ended April 30, 2004 the Portfolio made purchases of
$7,513,664 and sales of $8,496,327 of investment securities other than long-term
U.S. Government and short-term securities. There were no purchases or sales of
long-term U.S. Government securities.
7. FEDERAL TAX INFORMATION:
It is the Portfolio's intention to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code and to distribute all of
its taxable income. Accordingly, no provision for Federal income taxes is
required in the financial statements.
The amount and character of income and capital gain distributions to be paid are
determined in accordance with Federal income tax regulations, which may differ
from accounting principles generally accepted in the United States of America.
Permanent book and tax basis differences relating to shareholder distributions
may result in
12
THE ADVISORS' INNER CIRCLE FUND INDEPENDENCE
SMALL CAP PORTFOLIO
- --------------------------------------------------------------------------------
reclassifications to undistributed net investment income (loss), accumulated net
realized gain (loss) and paid in capital.
Permanent book-tax differences, if any, are not included in ending undistributed
net investment income (loss) for the purposes of calculating net investment
income (loss) per share in the financial highlights.
The tax character of dividends and distributions paid during the years ended
October 31, 2003 and October 31, 2002 were as follows:
ORDINARY LONG-TERM
INCOME CAPITAL GAIN TOTAL
-------- ------------ -----------
2003 $309,169 $ 213,831 $ 523,000
2002 277,590 3,466,827 3,744,417
As of October 31, 2003, the components of Distributable Earnings were as
follows:
Long Term Capital Gain $ 204,988
Net Unrealized Appreciation 3,020,510
----------
Total Distributable Earnings $3,225,498
==========
For Federal income tax purposes, capital loss carryforwards represent realized
losses of the Portfolio that may be carried forward for a maximum period of
eight years and applied against future capital gains. As of October 31, 2003,
there were no capital loss carryforwards.
For Federal income tax purposes, the cost of securities owned at April 30, 2004,
and the net realized gains or losses on securities sold for the period were not
materially different from amounts reported for financial reporting purposes. The
Federal tax cost and aggregate gross unrealized appreciation and depreciation on
investments, held by the Portfolio at April 30, 2004, were as follows:
FEDERAL APPRECIATED DEPRECIATED NET UNREALIZED
TAX COST SECURITIES SECURITIES APPRECIATION
----------- ---------- --------- --------------
$14,593,348 $3,145,814 $(366,112) $2,779,702
8. OTHER:
At April 30, 2004, 71% of total shares outstanding were held by two record
shareholders, each owning 10% or greater of the aggregate total shares
outstanding.
In the normal course of business, the Portfolio enters into contracts that
provide general indemnifications. The Portfolio's maximum exposure under these
arrangements is dependent on future claims that may be made against the
Portfolio and, therefore, cannot be estimated; however, based on experience, the
risk of loss from such claims is considered remote.
13
INDEPENDENCE SMALL CAP PORTFOLIO
P.O. Box 219009
Kansas City, MO 64121
800-791-4226
ADVISER:
Independence Investment LLC
Exchange Place
53 State Street
Boston, MA 02109
DISTRIBUTOR:
SEI Investments Distribution Co.
Oaks, PA 19456
ADMINISTRATOR:
SEI Investments Global Funds Services
Oaks, PA 19456
LEGAL COUNSEL:
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave., N.W.
Washington, DC 20004
This information must be preceded or accompanied by a current
prospectus for the Portfolio described.
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Equity Trust (the "Registrant") on Form N-1A under the
Securities Act of 1933 and the Investment company Act of 1940 (File Nos. 2-92548
and 811-4079), which information is incorporated herein by reference.
ITEM 16. EXHIBITS
1 Registrant's Amended and Filed as Exhibit 99.a to Registrant's Registration
Restated Declaration of Trust. Statement on Form N-1A and incorporated herein by
reference to post-effective amendment no. 19 (file
nos. 811-4079 and 2-92548 on August 14, 2000;
accession no. 0001010521-00-000383) ("PEA 19").
1.1 Amendment to Declaration of Filed as Exhibit 99.a.1 to PEA 19 and incorporated
Trust. herein by reference.
1.2 Amendment to Declaration of Filed as Exhibit 99.a.2 to Registrant's Registration
Trust. Statement on Form N-1A and incorporated herein by
reference to post-effective amendment no. 23 (file
nos. 811- 4079 and 2-92548 on October 1, 2001;
accession no. 0001010521-01-500181) ("PEA 23").
1.3 Amendment to Declaration of Filed as Exhibit 99.a.3 to Registrant's Registration
Trust. Statement on Form N-1A and incorporated herein by
reference to post-effective amendment no. 24 (file
nos. 811-4079 and 2-92548 on December 27, 2001;
accession no. 0001010521-01-500303) ("PEA 24").
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. 27 (file
nos. 811-4079 and 2-92548 on December 10, 2003;
accession no. 0001010521-04-000072("PEA 27").
1.5 Amendment to Declaration of Trust Filed as Exhibit 99.95 to Registrant's Registration
Statement on Form N-1A and incorporated herein by
reference to post-effective amendment no. 28
(file nos. 811-4079 and 2-92548 on September 15, 2004;
accession no.0001010521-04-000216 ) ("PEA 28").
2 Amended and Restated By-Laws of Filed as Exhibit 99.b to Registrant's Registration
Registrant. Statement on Form N-1A and incorporated herein by
reference to post-effective amendment no. 14 (file
nos. 811-4079 and 2-92548 on February 25, 1997;
accession no. 0001010521-97-000214)
("PEA 14").
2.1 Amendment to Amended and Filed as Exhibit 99.b.1 to Registrant's Registration
Restated By-Laws of Registrant. Statement on Form N-1A and incorporated herein by
reference to post-effective amendment no. 26 (file
nos. 811-4079 and 2-92548 on February 28, 2003;
accession no. 0001010521-03-000098) ("PEA 26").
3 Not applicable
4 Form of Agreement and Plan of Filed herewith as Exhibit A to the Proxy Statement
reorganization. and Prospectus included as Part A of this
Registration Statement.
5 Not applicable
6 Investment Management Contract Filed as Exhibit 99.d to PEA 19 and incorporated
between the Growth Trends Fund herein by reference.
and John Hancock Advisers, LLC.
6.1 Sub-Investment Advisory Contract Filed as Exhibit 99.d.1 to Registrant's Registration
between Growth Trends Fund, Statement on Form N-1A and incorporated herein by
American Fund Advisors, Inc. and reference to post-effective amendment no. 22 (file
John Hancock Advisers, LLC. nos. 811-4079 and 2-92548 on July 6, 2001; accession
no. 0001010521-01-500085) ("PEA 22").
6.2 Sub-Investment Advisory Contract Filed as Exhibit 99.d.2 to PEA 22 and incorporated
between Growth Trends Fund, herein by reference.
Mercury Asset Management US and
John Hancock Advisers, LLC.
6.3 Amendment to Sub-Investment Filed as Exhibit 99.d.4 to PEA 28 and incorporated
Advisory Contract between Growth herein by reference.
Trends Fund, Mercury Asset
Management US and John Hancock
Advisers, LLC.
6.4 Form of Investment Advisory Filed as Exhibit 99.d.5 to PEA 28 and incorporated
Contract between Small Cap Fund herein by reference.
and John Hancock Advisers, LLC.
6.5 Form of Sub-Investment Advisory Filed as Exhibit 99.d.5 to PEA 28 and incorporated
Contract between Small Cap Fund, herein by reference.
Independence Investment LLC and
John Hancock Advisers, LLC.
7 Distribution Agreement between Filed as Exhibit 99.e to Registrant's Registration
the Registrant and John Hancock Statement on Form N-1A and incorporated herein by
Funds, Inc. (formerly named John reference to post-effective amendment no. 11 (file
Hancock Broker Distribution nos. 811-4079 and 2-92548 on February 23, 1995;
Services, Inc.) accession no. 0001010521-95-000048)
("PEA 11").
7.1 Amendment to Distribution Filed as Exhibit 99.e.1 to PEA 19 and incorporated
Agreement between the Registrant herein by reference.
and John Hancock Funds, Inc.
(formerly named John Hancock
Broker Distribution Services,
Inc.)
7.2 Form of Soliciting Dealer Filed as Exhibit 99.e.2 to PEA 28 and incorporated
Agreement between John Hancock herein by reference.
Funds, Inc. and Selected Dealers.
7.3 Form of Financial Institution Filed as Exhibit 99.e.3 to Registrant's Registration
Sales and Services Agreement Statement on Form N-1A and incorporated herein by
reference to post-effective amendment no. 18 (file
nos. 811-4079 and 2-92548 on June 7, 2000; accession
no. 0001010521-00-000317) ("PEA 18").
8 Not applicable.
9 Master Custodian Agreement Filed as Exhibit 99.g to PEA 24 and incorporated
between John Hancock Mutual herein by reference.
Funds (including Registrant)
and The Bank of New York.
10 Amended and Restated Master Filed as Exhibit 99.h to Registrant's Registration
Transfer Agency and Service Statement on Form N-1A and incorporated herein by
Agreement Between John Hancock reference to post-effective amendment no. 16 (file
funds and John Hancock Funds, nos. 811-4079 and 2-92548 on December 21, 1998;
LLC. accession no. 0001010521-98-000400)
("PEA 16").
10.1 Accounting and Legal Services Filed as Exhibit 99.h.1 to Registrant's Registration
Agreement between John Hancock Statement on Form N-1A and incorporated herein by
Advisers, LLC and Registrant. reference to post-effective amendment no. 13 (file
nos. 811-4079 and 2-9548
on April 23, 1996;
accession no.
0001010521-96-000041)
("PEA 13").
10.2 Amendment to Amended and Filed as Exhibit 99.h.2 to PEA 19 and incorporated
Restated Master Transfer Agency herein by reference.
and Service Agreement.
10.3 Amendment to Amended and Filed as Exhibit 99.h.3 to PEA 23 and incorporated
Restated Master Transfer Agency herein by reference.
and Service Agreement.
10.4 Amendment to Amended and Filed as Exhibit 99.h.4 to PEA 27 and incorporated
Restated Master Transfer Agency herein by reference.
and Service Agreement
10.5 Amendment to Amended and Filed as Exhibit 99.h.5 to PEA 28 and incorporated
Restated Master Transfer Agency herein by reference.
and Service Agreement
11 Initial Capital Agreements Filed as Exhibit 99.l to PEA 19 and incorporated
herein by reference.
12 Class A Distribution Plans Filed as Exhibit 99.m to PEA 19 and incorporated
between Growth Trends Fund and herein by reference.
John Hancock Funds, LLC.
12.1 Class B Distribution Plans Filed as Exhibit 99.m.1 to PEA 19 and incorporated
between Growth Trends Fund and herein by reference.
John Hancock Funds, LLC.
12.2 Class C Distribution Plans Filed as Exhibit 99.m.2 to PEA 19 and incorporated
between Growth Trends Fund and herein by reference.
John Hancock Funds, LLC.
13 John Hancock Funds Class A, Filed as Exhibit 99.o to PEA 19 and incorporated
Class B and Class C Amended and herein by reference. restated
Multiple Class Plan pursuant to
Rule 18f-3.
13.1 John Hancock Funds Class A, Filed as Exhibit 99.o.1 to Registrant's Registration
Class B, Class C and Class I Statement on Form N-1A and incorporated herein by
Amended and restated Multiple reference to post-effective amendment no. 25 (file
Class Plan pursuant to nos. 811-4079 and 2-92548 on February 27, 2002;
Rule 18f-3. accession no. 0001010521-02-000108) ("PEA 25").
14 Opinion as to legality of shares Filed herewith as Exhibit 15.
and consent.
15 Form of opinion as to tax Filed herewith as Exhibit 16
matters and consent.
16 Consent of Filed herewith as Exhibit 17
PricewaterhouseCoopers LLP
regarding the audited financial
statements of Independence Small
Cap Portfolio
17 Not applicable
18 Powers of Attorney Filed as addendum to signature pages and incorporated
herein by reference.
19 Code of Ethics-John Hancock Filed as Exhibit 99.p to PEA 28 and incorporated
Advisers, John Hancock Funds LLC herein by reference.
and each of the John Hancock
Funds.
19.1 Code of Ethics-Independence Filed as Exhibit 99.p.1 to PEA 28 and incorporated
Investments LLC herein by reference.
ITEM 17
(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 responsible time after receipt of such opinion.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston, and The Commonwealth of Massachusetts on the 15th day of
September, 2004.
JOHN HANCOCK EQUITY TRUST
By: *
--------------------------
James A. Shepherdson
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, President
- ------------------------- and Chief Executive Officer
James A. Shepherdson
* Senior Vice President and
- ------------------------- Chief Financial Officer
Richard A. Brown
/s/William H. King Vice President, Treasurer September 15, 2004
- ------------------------- (Chief Accounting Officer)
William H. King
_________*_______________ Trustee
Dennis S. Aronowitz
_________*_______________ Trustee
Richard P. Chapman, Jr.
_________*_______________ Trustee
William J. Cosgrove
________*________________ Trustee
Richard A. Farrell
________*________________ Trustee
William F. Glavin
________*________________ Chairman and Trustee
Charles L. Ladner
________*________________ Trustee
John A. Moore
________*________________ Trustee
Patti McGill Peterson
________*________________ Trustee
John W. Pratt
By: /s/Susan S. Newton September 15, 2004
------------------
Susan S. Newton,
Attorney-in-Fact, under
Powers of Attorney
dated September 12, 2001,
May 12, 2004 and June 15, 2004.
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
POWER OF ATTORNEY
The undersigned Trustee of each of the above listed Trusts, each a
Massachusetts business trust, does hereby severally constitute and appoint
WILLIAM H. KING, AVERY P. MAHER AND SUSAN S. NEWTON, 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 15th day of June, 2004.
/s/Charles L. Ladner
Charles L. Ladner
Trustee
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 Gail D. Fosler
and Chief 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. Chapman, 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. Farrell
- ---------------------
Richard A. Farrell
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 Premium Dividend Fund I
John Hancock Bond Trust John Hancock Patriot Premium Dividend Fund II
John Hancock California Tax-Free Income Fund John Hancock Patriot Select Dividend Trust
John Hancock Current Interest John Hancock Series Trust
John Hancock Institutional Series Trust John Hancock Tax-Free Bond Trust
John Hancock Investment Trust John Hancock Preferred Income Fund
John Hancock Cash Reserve, Inc. John Hancock Preferred Income Fund II
John Hancock Patriot Global Dividend Fund John Hancock Preferred Income Fund III
John Hancock Preferred Dividend Fund John Hancock Tax-Advantaged Dividend Income Fund
John Hancock Premium Dividend Fund
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 May 12, 2004.
By: /s/Richard A. Brown
-------------------
Name: Richard A. Brown
Title: Chief Financial Officer
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 Premium Dividend Fund I
John Hancock Bond Trust John Hancock Patriot Premium Dividend Fund II
John Hancock California Tax-Free Income Fund John Hancock Patriot Select Dividend Trust
John Hancock Current Interest John Hancock Series Trust
John Hancock Institutional Series Trust John Hancock Tax-Free Bond Trust
John Hancock Investment Trust John Hancock Preferred Income Fund
John Hancock Cash Reserve, Inc. John Hancock Preferred Income Fund II
John Hancock Patriot Global Dividend Fund John Hancock Preferred Income Fund III
John Hancock Preferred Dividend Fund John Hancock Tax-Advantaged Dividend Income Fund
John Hancock Premium Dividend Fund
POWER OF ATTORNEY
-----------------
The undersigned Trustee and Officer of each of the above listed Trusts,
each a Massachusetts business trust, does hereby severally constitute and
appoint SUSAN S. NEWTON 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 May, 2004
By: /s/James A. Shepherdson
-----------------------
Name: James A. Shepherdson, as
Title: Trustee, President and
Chief Executive Officer
EXHIBIT INDEX
The following exhibits are filed as part of this Registration Statement:
Exhibit No. Description
4 Form of Agreement and Plan of Reorganization between the John Hancock
Small Cap Fund (the "Acquiring Fund") and Independence Small Cap
Portfolio (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 PricewaterhouseCoopers LLP regarding the audited financial
statements and highlights of the Independence Small Cap Portfolio.