JOHN HANCOCK INSTITUTIONAL SERIES TRUST
Supplements to Prospectus dated July 1, 1997
John Hancock Active Bond Fund
Currently, the Fund has a policy allowing 25% of total assets to be invested in
junk bonds but also has a policy requiring 75% of the fund's debt securities
(other than commercial paper) to consist of investment grade debt securities and
their unrated equivalent. These two policies imperfectly overlap therefore
creating a conflicting measure of debt ratings. The change set forth below will
eliminate this conflict.
Replace the second sentence of the second paragraph on page 8 of the Prospectus
with the following:
At least 75% of the Fund's total assets will consist of investment grade debt
securities (i.e. within the four highest grades as determined by Standard &
Poor's Ratings Group ("S&P"), AAA, AA, A or BBB, or by Moody's Investors
Service, Inc. ("Moody's"), Aaa, Aa, A or Baa); or debt securities of banks, the
U.S. Government, its agencies or instrumentalities and other issuers not rated
as a matter of policy by S&P or Moody's that are the unrated equivalent of
investment grade; or cash and cash-equivalents.
John Hancock Fundamental Value Fund
On December 3, 1997, the Trustees of John Hancock Fundamental Value Fund (the
"Fund") voted to change the Fund's name to John Hancock Small Capitalization
Value Fund effective January 1, 1998. This change more accurately reflects the
Fund's investment strategy. To add further clarity, the investment policy is
amended to reflect a high level of investment in securities of small
capitalization issuers.
Replace the first three paragraphs on page 11 of the Prospectus with the
following:
Under normal circumstances, the Fund will invest at least 80% of its total
assets in common stocks and other equity securities, including convertible
securities, preferred stocks and warrants, of domestic and foreign issuers of
small-sized companies with a total market capitalization of $1 billion or less
("small capitalization companies"). Higher risks are often associated with
investments in companies with small market capitalizations.
See "Smaller Capitalization Companies."
The Fund's investment policy reflects the Adviser's belief that while the
securities markets tend to be efficient, sufficiently persistent price anomalies
exist which the disciplined active equity manager seeks to exploit to achieve an
above-average rate of return.
John Hancock Small Capitalization Equity Fund
On December 3, 1997, the Trustees of John Hancock Small Capitalization Equity
Fund (the "Fund") voted to change the Fund's name to John Hancock Small
Capitalization Growth Fund effective January 1, 1998. The change more accurately
reflects the Fund's strategy to invest in common stocks of rapidly growing
smaller capitalization companies offering above average growth potential. This
strategy has been in place since inception.
John Hancock Multi-Sector Growth Fund
The discussion of who is responsible for the day-to-day management of the Fund
contained in the "Organization and Management of the Fund" section is replaced
with the following:
Effective January 5, 1998, Barbara C. Friedman, CFA and James M. Boyd lead the
portfolio management team. Ms. Friedman, a senior vice president of the Adviser,
joined John Hancock Funds in January 1998 and has been in the investment
business since 1973. Mr. Boyd, an assistant portfolio manager, has been with
John Hancock Funds since 1992.
KB0PS 1/98
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JOHN HANCOCK INSTITUTIONAL SERIES TRUST
101 Huntington Avenue
Boston, Massachusetts 02199
consisting of twelve series,
John Hancock Active Bond Fund
John Hancock Global Bond Fund
John Hancock Small Capitalization Value Fund
John Hancock Dividend Performers Fund
John Hancock Multi-Sector Growth Fund
John Hancock Small Capitalization Growth Fund
John Hancock International Equity Fund
John Hancock Independence Balanced Fund
John Hancock Independence Value Fund
John Hancock Independence Diversified Core Equity Fund II
John Hancock Independence Growth Fund
John Hancock Independence Medium Capitalization Fund
(each, a "Fund" and collectively, the "Funds")
Statement of Additional Information
July 1, 1997 as revised January 1, 1998
This Statement of Additional Information ("SAI") provides information about the
Funds in addition to the information that is contained in the John Hancock
Series Funds' Prospectus and in the Independence Funds' Prospectus dated July 1,
1997 (together, the "Prospectuses").
This SAI is not a prospectus. It should be read in conjunction with the Funds'
Prospectuses, copies of which can be obtained free of charge by writing or
telephoning:
John Hancock Signature Services, Inc.
P.O. Box 9296
Boston, Massachusetts 02205-9296
1-800-755-4371
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TABLE OF CONTENTS
Statement of Additional
Information
Page
Organization of the Trust 2
Investment Objectives and Policies 3
-John Hancock Series Funds 3
-Independence Funds 6
Investment Restrictions 23
Those Responsible for Management 25
Investment Advisory and Other Services 40
Distribution Agreement 43
Net Asset Value 43
Special Redemptions 44
Tax Status 44
Description of the Trust's Shares 48
Calculation of Performance 50
Brokerage Allocation 52
Transfer Agent Services 54
Custody of Portfolio 54
Independent Auditors 55
Appendix A--Description of Securities Ratings A-1
Financial Statements
ORGANIZATION OF THE TRUST
John Hancock Institutional Series Trust (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust under a
Declaration of Trust dated October 31, 1994, as amended from time to time. The
Trust currently has twelve series of shares designated as: John Hancock Small
Capitalization Growth Fund ("Small Capitalization Growth Fund")(formerly John
Hancock Small Capitalization Equity Fund), John Hancock Dividend Performers Fund
("Dividend Performers Fund") (formerly John Hancock Berkeley Dividend Performers
Fund), John Hancock Active Bond Fund ("Active Bond Fund") (formerly John Hancock
Berkeley Bond Fund), John Hancock Global Bond Fund ("Global Bond Fund")
(formerly John Hancock Berkeley Global Bond Fund), John Hancock Multi-Sector
Growth Fund ("Multi-Sector Growth Fund") (formerly John Hancock Berkeley Sector
Opportunity Fund), John Hancock Small Capitalization Value Fund ("Small
Capitalization Fund") (formerly John Hancock Fundamental Value Fund and John
Hancock Berkeley Fundamental Value Fund), John Hancock International Equity Fund
("International Equity Fund") (formerly John Hancock Berkeley Overseas Growth
Fund), John Hancock Independence Diversified Core Equity Fund II ("Diversified
Core Equity Fund II"), John Hancock Independence Value Fund ("Value Fund"), John
Hancock Independence Growth Fund ("Growth Fund"), John Hancock Independence
Medium Capitalization Fund ("Medium Capitalization Fund") and John Hancock
Independence Balanced Fund ("Balanced Fund").
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Small Capitalization Growth Fund, Dividend Performers Fund, Active Bond Fund,
Global Bond Fund, Multi-Sector Growth Fund, Small Capitalization Value Fund and
International Equity Fund are sometimes referred to herein collectively as the
"John Hancock Series Funds." Diversified Core Equity Fund II, Value Fund, Growth
Fund, Medium Capitalization Fund and Balanced Fund are sometimes referred to
herein collectively as the "Independence Funds."
The investment adviser of each Fund is John Hancock Advisers, Inc. (the
"Adviser"), a wholly-owned indirect subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"). The investment subadviser of Dividend
Performers Fund is Sovereign Asset Management Corp. ("SAMCorp"). The subadviser
of International Equity Fund is John Hancock Advisers International Limited
("JHAI"). The investment subadviser of each Independence Fund is Independence
Investment Associates, Inc. ("IIA"). Together, SAMCorp, JHAI, and IIA are
sometimes referred to herein collectively as the "Subadvisers" or, individually,
as the "Subadviser." Each Subadviser is an affiliate of the Life Company.
INVESTMENT OBJECTIVES AND POLICIES
See "Investment Objectives and Policies" in the Prospectuses. There can be no
assurance that the objective of any Fund will be realized.
Each Fund has adopted certain investment restrictions that are detailed under
"Investment Restrictions" in this SAI where they are classified as fundamental
or nonfundamental. Those restrictions designated as fundamental may not be
changed without shareholder approval. Each Fund's investment objective,
investment policies and nonfundamental restrictions, however, may be changed by
a vote of the Board of Trustees of the Trust (the "Board") without shareholder
approval. If there is a change in a Fund's investment objective, shareholders
should consider whether the Fund remains an appropriate investment in light of
their then current financial position and needs.
A. The John Hancock Series Funds.
For a further description of the John Hancock Series Funds' investment
objectives, policies and restrictions see "Investment Objectives and Policies"
in the John Hancock Series Funds' Prospectus and "Investment Restrictions" in
this SAI. See Appendix A to this SAI for a description of the quality categories
of corporate bonds in which certain of the John Hancock Series Funds may invest.
Active Bond Fund
Active Bond Fund's investment objective is a high rate of total return,
consistent with prudent investment risk. The Fund invests primarily in a
diversified portfolio of freely marketable investment grade debt securities of
U.S. and foreign issuers. The Fund will invest primarily in debt securities
within the four highest investment ratings and unrated securities considered by
the Adviser to be of comparable investment quality. The Fund will, when
feasible, purchase debt securities which are non-callable.
The Fund may purchase corporate debt securities bearing fixed, floating or
variable interest as well as those which carry certain equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
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same or a different issuer, or participations based on revenues, sales or
profits. The Fund will not exercise any such conversion, exchange or purchase
rights if, at the time, the value of all equity interests so owned would exceed
10% of the Fund's total assets taken at market value.
The market value of debt securities which carry no equity participation usually
reflects yields generally available on securities of similar quality and type.
When such yields decline, the market value of a portfolio already invested at
higher yields can be expected to rise if such securities are protected against
early call. Similarly, when such yields increase, the market value of a
portfolio already invested can be expected to decline. The Fund's portfolio may
include debt securities which sell at substantial discounts from par. These
securities are low coupon bonds which, during periods of high interest rates,
because of their lower acquisition cost tend to sell on a yield basis
approximating current interest rates.
Global Bond Fund
Global Bond Fund's investment objective is a competitive total investment
return, consisting of current income and capital appreciation. The Fund invests
primarily in a global portfolio of high grade, fixed income securities.
Normally, the Fund will invest in fixed income securities denominated in at
least three currencies or multi-currency units, including the U.S. Dollar.
Under normal circumstances, Global Bond Fund invests primarily (at least 65% of
total assets) in fixed income securities issued or guaranteed by: (i) the U.S.
Government, its agencies or instrumentalities; (ii) foreign governments
(including foreign states, provinces and municipalities) or their political
subdivisions, authorities, agencies or instrumentalities; (iii) international
organizations backed or jointly owned by more than one national government, such
as the International Bank for Reconstruction and Development, European
Investment Bank, Asian Development Bank, and European Coal and Steel Community;
and (iv) foreign corporations or financial institutions. The term "fixed income
securities" encompasses debt obligations of all types, including bonds,
debentures, notes and stocks, such as preferred stocks. A fixed income security
may itself be convertible into or exchangeable for equity securities, or may
carry with it the right to acquire equity securities evidenced by warrants
attached to the security or acquired as part of a unit with a security.
Small Capitalization Value Fund
Small Capitalization Value Fund's investment objective is capital appreciation,
with income as a secondary consideration. The Fund will seek to achieve its
objective by investing primarily in equity securities that are undervalued
relative to alternative equity investments.
Under normal circumstances, the Fund will invest at least 80% of its total
assets in common stocks and other equity securities, including convertible
securities, preferred stocks and warrants, of domestic and foreign issuers of
small-size companies with a total market capitalization of $1 billion or less
("small capitalization companies").
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The Fund's investment policy reflects the Adviser's belief that while the
securities markets tend to be efficient, sufficiently persistent price anomalies
exit which the disciplined active equity manager seeks to exploit to achieve an
above-average rate of return.
Dividend Performers Fund
Dividend Performers Fund's investment objective is long-term growth of capital
and income without assuming undue market risk. At times, however, because of
market conditions, the Fund may invest primarily for current income. The Fund
will make investments in different types and classes of securities in accordance
with the Board's and the Adviser's appraisal of economic and market conditions.
The securities held by the Fund are under continuous study by the Adviser.
Securities are selected for the Fund's portfolio if they are considered by the
Adviser to contribute to the possible achievement of the Fund's objective. They
are held or disposed of in accordance with the results of a continuing
examination of their investment merit.
The Fund may invest 100% of its total assets in common stocks or, for defensive
purposes, may temporarily hold cash or liquid, high grade short-term debt
securities. In addition, temporary investments in short-term debt securities may
be made to receive a return on excess cash.
The Fund endeavors to achieve its objectives by utilizing experienced management
and generally investing in securities of seasoned companies in sound financial
condition.
Multi-Sector Growth Fund
Multi-Sector Growth Fund's investment objective is long-term capital
appreciation. The Fund seeks to achieve its objective by emphasizing investments
in equity securities of issuers in various economic sectors.
The equity securities in which the Fund invests consist primarily of common
stocks of U.S. and foreign issuers but may also include preferred stocks,
convertible debt securities and warrants. The Fund seeks to achieve its
investment objective by varying the relative weighting of its portfolio
securities among various economic sectors based upon both macroeconomic factors
and the outlook for each particular sector. The Adviser selects equity
securities for the Fund from various economic sectors, including, but not
limited to, the following: basic material, energy, capital equipment,
technology, consumer cyclical, retail, consumer staple, health care,
transportation, financial and utility. The Fund may modify these sectors if the
Adviser believes that they no longer represent appropriate investments for the
Fund, or if other sectors offer better opportunities for investment.
Small Capitalization Growth Fund
Small Capitalization Growth Fund's investment objective is long-term growth of
capital. The Fund invests primarily in domestic and foreign rapidly growing
"smaller capitalization companies" (those with market capitalizations of $1
billion or less) that tend to be in an emerging growth stage of development and
where the Adviser believes there is growth potential higher than the average for
all companies. Under normal circumstances, the Fund will invest at least 65% of
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its total assets in smaller capitalization companies. The potential for growth
of capital will be the sole basis for selection of portfolio securities. Current
income will not be a factor in this selection. The Fund may also invest in
equity securities of established companies that the Adviser believes to offer
superior growth potential.
International Equity Fund
International Equity Fund's investment objective is long-term growth of capital.
The Fund seeks to achieve its investment objective by investing primarily in
foreign equity securities.
Under normal circumstances, at least 65% of the Fund's total assets will be
invested in equity securities of issuers located outside the United States in
various countries around the world. Generally, the Fund's portfolio will contain
securities of issuers from at least three countries other than the United
States. The Fund normally invests substantially all of its assets in equity
securities, such as common stock, preferred stock and securities convertible
into common and preferred stock. However, if deemed advisable by the Adviser or
the Fund's investment subadviser, JHAI, the Fund may invest in any other types
of securities including warrants, bonds, notes and other debt securities
(including Euro-dollar securities) or obligations of domestic or foreign
governments and their political subdivisions, or domestic or foreign
corporations.
B. The Independence Funds.
For a further description of the Independence Funds' investment objectives,
policies and restrictions see "Investment Objectives and Policies" in the
Independence Funds' Prospectus and "Investment Restrictions" in this SAI.
IIA serves as the investment subadviser to each of the Independence Funds. In
selecting common stocks for the Funds' portfolios, IIA uses an investment
strategy it calls "NIXDEX." To produce a NIXDEX portfolio, IIA excludes
("nixes") from consideration stocks contained in the bottom two quintiles of its
ranked stock universe and optimizes the remaining stocks to produce a portfolio
whose risk exposure is similar to that of each of the Independence Fund's
respective performance and risk profile benchmark portfolio. By avoiding stocks
which are not ranked favorably in IIA's ranked stock universe, IIA seeks to
construct a NIXDEX portfolio whose performance will exceed, under all market
environments, the performance of the respective Independence Fund's performance
and risk profile benchmark portfolio.
IIA uses a quantitative, multifactor proprietary stock-ranking model called
"Cybercode" to produce a list of stocks for consideration which are ranked from
most to least attractive. IIA's in-house team of professional securities
analysts generate the data necessary to produce a Cybercode ranked list. For
each Fund, IIA's analysts concentrate their research and analysis on those
stocks from IIA's unbiased universe of 500 stocks which satisfy the Fund's
performance and risk profile benchmark. The analysts focus on fundamental
research such as: projecting current year and next year's earnings and cash
flows; developing five-year growth forecasts; and understanding the strategic
plan of the companies they follow, and how this plan might affect capital
expenditures and stock dividends. IIA's most senior investment professionals
determine the macroeconomic assumptions needed to forecast an individual
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company's progress. These macroeconomic assumptions are integrated into the
analysts' research and analysis. IIA's investment process is distinguished by
its focus on evaluation of risk and, in particular, its avoidance of stocks that
do not score above a certain benchmark with respect to price and fundamentals.
Using the analysts' research and analysis, Cybercode evaluates each stock in the
stock selection universe on several discrete criteria and scores each stock
based on its inherent value relative to its cost (price) and the stock's
fundamental prospects for improvement. Cybercode produces a list of the
selection universe ranked from most to least attractive. The top stock on the
ranked list exhibits the most favorable combination of inherent value and
fundamental prospects for improvement; the bottom stock is the least favorable.
Through this process, IIA seeks to construct a NIXDEX portfolio whose
performance will exceed, under all market environments, the performance of the
respective Independence Fund's performance and risk profile benchmark portfolio.
For a further description of each Fund's performance and risk profile benchmark
portfolio, see "Investment Objectives and Policies" in the Independence Funds'
Prospectus.
Balanced Fund
Balanced Fund's investment objective is above-average total return through
capital appreciation and income. The Fund will invest in a balanced portfolio
allocated between equity securities and fixed-income securities. The Fund's
performance and risk profile benchmark is a composite of the S&P 500 Index and
the Lehman Brothers Government/Corporate Bond Index.
Value Fund
Value Fund's investment objective is above-average total return. The Fund will
emphasize relatively undervalued securities and seek higher dividend yield than
Diversified Core Equity Fund II. The Fund's performance and risk profile
benchmark is the Russell 1000 Value Index(R).
Diversified Core Equity Fund II
Diversified Core Equity Fund II's investment objective is above-average total
return, consisting of capital appreciation and income. The Fund's performance
and risk profile benchmark is the capitalization weighted Standard and Poor's
500 Composite Stock Index(R) (the "S&P 500 Index").
Growth Fund
Growth Fund's investment objective is above-average total return. The Fund will
emphasize investments in companies whose securities show potential for
relatively high long-term earnings growth rather than current dividend yield.
The Fund's performance and risk profile benchmark is the Russell 1000 Growth
Index(R).
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Medium Capitalization Fund
Medium Capitalization Fund's investment objective is above-average total return.
The Fund will emphasize investment in securities of faster growing, medium sized
companies than those companies included in the other Independence Funds. The
Fund's performance and risk profile benchmark is the Callan Medium
Capitalization Index.
Investments in Foreign Securities and Emerging Countries. Small Capitalization
Growth Fund, Active Bond Fund, Multi-Sector Growth Fund and Small Captialization
Value Fund may invest in U.S. dollar and foreign currency denominated securities
of foreign issuers. International Equity Fund and Global Bond Fund will invest
primarily in U.S. dollar and foreign currency denominated securities of foreign
issuers. International Equity Fund and Global Bond Fund may also invest in debt
and equity securities of corporate and governmental issuers of countries with
emerging economies or securities markets.
Risks of Foreign Securities. Investments in foreign securities may involve a
greater degree of risk than those in domestic securities. There is generally
less publicly available information about foreign companies in the form of
reports and ratings similar to those that are published about issuers in the
United States. Also, foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting requirements comparable to those
applicable to United States issuers.
Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market, whether
through over-the-counter markets or exchanges located in the countries where
principal offices of the issuers are located. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States' economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
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The dividends, in some cases capital gains and interest payable on certain of
the Fund's foreign portfolio securities, may be subject to foreign withholding
or other foreign taxes, thus reducing the net amount of income or gains
available for distribution to the Fund's shareholders.
These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. The Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate.
The Fund's ability and decisions to purchase or sell portfolio securities may be
affected by laws or regulations relating to the convertibility and repatriation
of assets. Because the shares of the Fund are redeemable on a daily basis in
U.S. dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars. Under present conditions,
it is not believed that these considerations will have any significant effect on
its portfolio strategy.
Forward Foreign Currency Transactions. Each John Hancock Series Fund, other than
Dividend Performers Fund, may engage in forward foreign currency transactions.
Foreign currency exchange transactions may be conducted on a spot (i.e., cash)
basis at the spot rate for purchasing or selling currency prevailing in the
foreign exchange market. The Funds may also deal in forward foreign currency
exchange contracts involving currencies of the different countries in which they
may invest as a hedge against possible variations in the foreign exchange rate
between these currencies. Forward contracts are agreements to purchase or sell a
specified currency at a specified future date and price set at the time of the
contract. Transaction hedging is the purchase or sale of forward foreign
currency contracts with respect to specific receivables or payables of a Fund
accruing in connection with the purchase and sale of its portfolio securities
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denominated in foreign currencies. Portfolio hedging is the use of forward
foreign currency contracts to offset portfolio security positions denominated or
quoted in such foreign currencies. The Funds' dealings in forward foreign
currency exchange contracts will be limited to hedging either specified
transactions or portfolio positions. A Fund will not attempt to hedge all of its
foreign portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by the Adviser or Subadviser. The Funds will
not engage in speculative forward foreign currency exchange transactions.
If a Fund purchases a forward contract to purchase foreign currency, its
custodian will segregate cash or liquid securities, of any type or maturity, in
a separate account of the Fund in an amount necessary to complete the forward
contract. These assets will be marked to market daily and if the value of the
assets in the separate account declines, additional cash or liquid assets will
be added so that the value of the account will equal the amount of the Fund's
commitment in purchased forward contracts.
Hedging against a decline in the value of currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. These transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Funds to hedge against a devaluation that is so
generally anticipated that the Funds are not able to contract to sell the
currency at a price above the devaluation level they anticipate.
The cost to the Funds of engaging in foreign currency transactions varies with
such factors as the currency involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency are
usually conducted on a principal basis, no fees or commissions are involved.
Repurchase Agreements. Each Fund may enter into repurchase agreements. In a
repurchase agreement the Fund buys a security for a relatively short period
(usually not more than 7 days) subject to the obligation to sell it back to the
issuer at a fixed time and price plus accrued interest. The Fund will enter into
repurchase agreements only with member banks of the Federal Reserve System and
with "primary dealers" in U.S. Government securities. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, decline in
value of the underlying securities or lack of access to income during this
period as well as the expense of enforcing its rights.
Reverse Repurchase Agreements. Each Fund may also enter into reverse repurchase
agreements which involve the sale of U.S. Government securities held in its
portfolio to a bank with an agreement that a Fund will buy back the securities
at a fixed future date at a fixed price plus an agreed amount of "interest"
which may be reflected in the repurchase price. Reverse repurchase agreements
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are considered to be borrowings by a Fund. Reverse repurchase agreements involve
the risk that the market value of securities purchased by each Fund with
proceeds of the transaction may decline below the repurchase price of the
securities sold by a Fund which it is obligated to repurchase. Each Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting its repurchase. To minimize various risks associated with reverse
repurchase agreements, a Fund will establish and maintain with each Fund's
custodian a separate account consisting of liquid securities, of any type or
maturity, in an amount at least equal to the repurchase prices of the securities
(plus any accrued interest thereon) under such agreements. In addition, a Fund
will not enter into reverse repurchase agreements or borrow money, except from
banks temporarily for extraordinary or emergency purposes (not for leveraging)
in amounts not to exceed 33 1/3% of a Fund's total assets (including the amount
borrowed) taken at market value. Each Fund will not use leverage to attempt to
increase income. Each Fund will not purchase securities while outstanding
borrowings exceed 5% of that Fund's total assets. Each Fund will enter into
reverse repurchase agreements only with federally insured banks which are
approved in advance as being creditworthy by the Trustees. Under the procedures
established by the of Board of Trustees, the Adviser will monitor the
creditworthiness of the banks involved.
Restricted Securities. Each Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. However, the Fund will not invest more than 15% of its
net assets in illiquid investments. If the Trustees determine, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Options on Securities, Securities Indices and Currency. Each John Hancock Series
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. Each Fund may
write covered put and call options and purchase put and call options to enhance
total return, as a substitute for the purchase or sale of securities or
currency, or to protect against declines in the value of portfolio securities
and against increases in the cost of securities to be acquired.
Writing Covered Options. A call option on securities or currency written by a
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by a Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
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securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive a Fund of the opportunity to profit from an increase in the market price
of the securities or foreign currency assets in its portfolio. Writing covered
put options may deprive a Fund of the opportunity to profit from a decrease in
the market price of the securities or foreign currency assets to be acquired for
its portfolio.
All call and put options written by the Fund are covered. A written call option
or put option may be covered by (i) maintaining cash or liquid securities,
either of which may be quoted or denominated in any currency, in a segregated
account maintained by the affected Fund's custodian with a value at least equal
to the Fund's obligation under the option, (ii) entering into an offsetting
forward commitment and/or (iii) purchasing an offsetting option or any other
option which, by virtue of its exercise price or otherwise, reduces the Fund's
net exposure on its written option position. A written call option on securities
is typically covered by maintaining the securities that are subject to the
option in a segregated account. Each Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index.
Each Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. A Fund would normally purchase call options in anticipation
of an increase, or put options in anticipation of a decrease ("protective
puts"), in the market value of securities or currencies of the type in which it
may invest. Each Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. A Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by a
Fund for the purpose of affirmatively benefiting from a decline in the price of
securities or currencies which it does not own. A Fund would ordinarily realize
a gain if, during the option period, the value of the underlying securities or
currency decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of a Fund's
portfolio securities.
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Each Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
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Futures Contracts and Options on Futures Contracts. To seek to increase total
return or hedge against changes in interest rates, securities prices or currency
exchange rates, each John Hancock Series Fund may purchase and sell various
kinds of futures contracts, and purchase and write call and put options on these
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of these contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
securities) and securities indices, foreign currencies and any other financial
instruments and indices. 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 interest rates are rising or 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 interest rates are
falling or 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 rise in
interest rates or decline in market prices or foreign currency rates that would
adversely affect the value of the Fund's portfolio securities. Such futures
contracts may include contracts for the future delivery of securities held by a
Fund or securities with characteristics similar to those of the Fund's portfolio
securities. Similarly, a Fund may sell futures contracts on any currencies in
which its portfolio securities are quoted or denominated or in one currency to
hedge against fluctuations in the value of securities denominated in a different
currency if there is an established historical pattern of correlation between
the two currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
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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. 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. Each John Hancock Series Fund may purchase and
write options on futures for the same purposes as its transactions in futures
contracts. The purchase of put and call options on futures contracts will give
the Fund the right (but not the obligation) for a specified price to sell or to
purchase, respectively, the underlying futures contract at any time during the
option period. As the purchaser of an option on a futures contract, the Fund
obtains the benefit of the futures position if prices move in a favorable
direction but limits its risk of loss in the event of an unfavorable price
movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium (upon exercise of
the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
a Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by each Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Other Considerations. Each John Hancock Series Fund will engage in futures and
related options transactions either for bona fide hedging purposes or to seek to
increase total return as permitted by the CFTC. To the extent that a Fund is
using futures and related options for hedging purposes, futures contracts will
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be sold to protect against a decline in the price of securities (or the currency
in which they are quoted or denominated) that the Fund owns or futures contracts
will be purchased to protect the Fund against an increase in the price of
securities or the currency in which they are quoted or denominated) it intends
to purchase. Each Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities held by the Fund or securities or
instruments which it expects to purchase. As evidence of its hedging intent,
each Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities in the cash market at the time when the futures or
option position is closed out. However, in particular cases, when it is
economically advantageous for the Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
To the extent that a Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. Each Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian 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. There are no futures contracts based upon
individual securities, except certain U.S. Government securities. The only
futures contracts available to hedge the Fund's portfolio are various futures on
U.S. Government securities and securities indices and foreign currencies. 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.
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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.
Short Sales. Small Capitalization Growth Fund, International Equity Fund and
Multi-Sector Growth Fund may engage in short sales in order to profit from an
anticipated decline in the value of a security. All of the John Hancock Series
Funds may also engage in short sales to attempt to limit their exposure to a
possible market decline in the value of their portfolio securities through short
sales of securities which the Adviser believes possess volatility
characteristics similar to those being hedged. To effect such a transaction, a
Fund must borrow the security sold short to make delivery to the buyer. The Fund
then is obligated to replace the security borrowed by purchasing it at the
market price at the time of replacement. Until the security is replaced, the
Fund is required to pay to the lender any accrued interest and may be required
to pay a premium.
A Fund will realize a gain if the security declines in price between the date of
the short sale and the date on which the Fund replaces the borrowed security. On
the other hand, the Fund will incur a loss as a result of the short sale if the
price of the security increases between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any premium
or interest or dividends the Fund may be required to pay in connection with a
short sale. The successful use of short selling as a hedging device may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
Under applicable guidelines of the staff of the SEC, if a Fund engages in short
sales of the type referred to in Fundamental Investment Restriction No. (2)
below, it must put in a segregated account (not with the broker) an amount of
cash or U.S. Government 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 required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until the Fund replaces the borrowed
security, it must daily maintain the segregated account at such a level that (1)
the amount deposited in it plus the amount deposited with the broker as
collateral will equal the current market value of the securities sold short, and
(2) the amount deposited in it plus the amount deposited with the broker as
collateral will not be less than the market value of the securities at the time
they were sold short.
Short selling may produce higher than normal portfolio turnover which may result
in increased transaction costs to a Fund and may result in gains from the sale
of securities deemed to have been held for less than three months, which gains
must be less than 30% of the Fund's gross income in order for the Fund to
qualify as a regulated investment company under the Internal Revenue Code of
1986, as amended.
Forward Commitment and When-Issued Securities. Each Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. A Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
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be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. When a Fund engages in forward commitment and
when-issued transactions, it relies on the seller to consummate the transaction.
The failure of the issuer or seller to consummate the transaction may result in
the Funds losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued and forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Short-Term Trading. Each John Hancock Series Fund may engage in short-term
trading. These Funds intend to use short-term trading of securities as a means
of managing their portfolio to achieve their respective investment objective. In
reaching a decision to sell one security and purchase another security at
approximately the same time, the Funds will take into account a number of
factors, including the quality ratings, interest rates, yields, maturity dates,
call prices, and refunding and sinking fund provisions of the securities under
consideration, as well as historical yield spreads and current economic
information. The success of short-term trading will depend upon the ability of
the Funds to evaluate particular securities, to anticipate relevant market
factors, including trends of interest rates and earnings and variations from
such trends, to obtain relevant information, to evaluate it promptly, and to
take advantage of its evaluations by completing transactions on a favorable
basis. It is expected that the expenses involved in short-term trading, which
would not be incurred by an investment company which does not use this portfolio
technique, will be less than the profits and other benefits which will accrue to
shareholders.
The Funds' portfolio turnover rates will depend on a number of factors,
including the fact that each Fund intends to elect to be treated and to qualify
as a regulated investment company under the Internal Revenue Code. Accordingly,
the Funds intend to limit short-term trading so that less than 30% of each
Fund's respective gross annual income (including all dividend and interest
income and gross realized capital gains, both short and long-term, without being
offset for realized capital losses) will be derived from gross realized gains on
the sale or other disposition of securities and certain other investments held
for less than three months. This limitation, which must be met by all regulated
investment companies in order to obtain such Federal tax treatment, at certain
times may prevent the Funds from realizing capital gains on some securities held
for less than three months.
Time Deposits. Global Bond Fund may invest in time deposits. Time deposits are
non-negotiable deposits maintained for a stated period of time at a stated
interest rate. All time deposits purchased which mature in seven (7) days or
more will be treated as illiquid.
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Although Diversified Core Equity Fund II may invest in certain types of
derivative securities, it has no current plans to do so. However, this policy
could change at any time in the future.
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.
Mortgage-Backed Securities. Each Fund that may invest in U.S. Government
securities, and in particular Dividend Performers Fund and Active Bond Fund, may
invest in mortgage pass-through certificates and multiple-class pass-through
securities, such as real estate mortgage investment conduits ("REMIC")
pass-through certificates, collateralized mortgage obligations ("CMOs") and
stripped mortgage-backed securities ("SMBS"), and other types of
"Mortgage-Backed Securities" that may be available in the future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to the GNMA, the FNMA and the FHLMC. GNMA certificates are
guaranteed by the full faith and credit of the U.S. Government for timely
payment of principal and interest on the certificates. FNMA certificates are
guaranteed by FNMA, a federally chartered and privately owned corporation, for
full and timely payment of principal and interest on the certificates. FHLMC
certificates are guaranteed by FHLMC, a corporate instrumentality of the U.S.
Government, for timely payment of interest and the ultimate collection of all
principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
lenders. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also
may be collateralized by other mortgage assets such as whole loans or private
mortgage pass-through securities. Debt service on CMOs is provided from payments
of principal and interest on collateral of mortgaged assets and any reinvestment
income thereon.
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A REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages primarily secured by interests in real property and
other permitted investments. Investors may purchase "regular" and "residual"
interest shares of beneficial interest in REMIC trusts although the Funds do not
intend to invest in residual interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the SEC
considers privately issued SMBS to be illiquid.
Structured or Hybrid Notes. Funds that may invest in mortgage-backed securities
may invest in "structured" or "hybrid" notes. The distinguishing feature of a
structured or hybrid note is that the amount of interest and/or principal
payable on the note is based on the performance of a benchmark asset or market
other than fixed-income securities or interest rates. Examples of these
benchmarks include stock prices, currency exchange rates and physical commodity
prices. Investing in a structured note allows a Fund to gain exposure to the
benchmark market while fixing the maximum loss that the Fund may experience in
the event that market does not perform as expected. Depending on the terms of
the note, a Fund may forego all or part of the interest and principal that would
be payable on a comparable conventional note; a Fund's loss cannot exceed this
foregone interest and/or principal. An investment in structured or hybrid notes
involves risks similar to those associated with a direct investment in the
benchmark asset.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
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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.
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.
21
<PAGE>
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Funds as initial criteria for the selection of portfolio securities.
Among the factors which will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends. Appendix A
contains further information concerning the rating of Moody's and S&P and their
significance.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by the
Fund, but the Adviser will consider the event in its determination of whether
the Fund should continue to hold the securities.
Lower Rated High Yield Debt Obligations. Active Bond Fund, Global Bond Fund and
Small Capitalization Value may invest in high yielding, fixed income securities
rated below investment grade (e.g., rated Baa or lower by Moody's Investors
Service, Inc. ("Moody's") or BBB or lower by Standard & Poor's Ratings Group
("S&P")). Active Bond Fund will not invest in securities rated below Ca by
Moody's or CC by S&P. Global Bond Fund may invest less than 35% of its total
assets in securities rated as low as Ca by Moody's or CC by S&P and their
equivalents. Small Capitalization Value may invest up to 15% of its net assets
in securities rated as low as Ca by Moody's or CC by S & P and their
equivalents.
Ratings are based largely on the historical financial condition of the issuer.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. See Appendix A to this SAI which describes
the characteristics of corporate bonds in the various ratings categories. The
Funds may invest in comparable quality unrated securities which, in the opinion
of the Adviser or Subadviser, offer comparable yields and risks to those
securities which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal. The high yield fixed income market is relatively new and
its growth occurred during a period of economic expansion. The market has not
yet been fully tested by an economic recession.
The market price and liquidity of lower rated fixed income securities generally
respond to short term corporate and market developments to a greater extent than
do the price and liquidity of higher rated securities because such developments
are perceived to have a more direct relationship to the ability of an issuer of
such lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of the
bonds and to value accurately the Funds' assets. The reduced availability of
reliable, objective data may increase the Funds' reliance on management's
judgment in valuing high yield bonds. In addition, the Funds' investments in
high yield securities may be susceptible to adverse publicity and investor
perceptions, whether or not justified by fundamental factors. A Fund's
22
<PAGE>
investments, and consequently its net asset value, will be subject to the market
fluctuations and risks inherent in all securities.
INVESTMENT RESTRICTIONS
A. Fundamental Investment Restrictions.
Each Fund has adopted the following fundamental investment restrictions which
may not be changed without approval of a majority of the applicable Fund's
outstanding voting securities. Under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used in the Prospectuses and this SAI, a
"majority of the outstanding voting securities" means the approval by the lesser
of (1) 67% or more of the shares of a Fund represented at a meeting if at least
50% of the outstanding shares of the Fund are present in person or by proxy or
(2) 50% of the outstanding shares of the Fund.
A Fund may not:
1. Issue senior securities, except as permitted by paragraphs 3, 6 and 7
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in
accordance with the Fund's investment policies or within the meaning of
paragraph 6 below, are not deemed to be senior securities.
2. Purchase securities on margin or make short sales, or unless, by virtue
of its ownership of other securities, the Fund has the right to obtain
securities equivalent in kind and amount to the securities sold and, if
the right is conditional, the sale is made upon the same conditions,
except (i) in connection with arbitrage transactions, (ii) for hedging
the Fund's exposure to an actual or anticipated market decline in the
value of its securities, (iii) to profit from an anticipated decline in
the value of a security, and (iv) obtaining such short-term credits as
may be necessary for the clearance of purchases and sales of
securities.
3. Borrow money, except for the following extraordinary or emergency
purposes: (i) from banks for temporary or short-term purposes or for
the clearance of transactions in amounts not to exceed 33 1/3% of the
value of the Fund's total assets (including the amount borrowed) taken
at market value; (ii) in connection with the redemption of Fund shares
or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets; (iii) in
order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets;
and (iv) in the case of Small Capitalization Growth Fund, in connection
with entering into reverse repurchase agreements and dollar rolls, but
only if after each such borrowing there is asset coverage of at least
300% as defined in the 1940 Act. A Fund, other than Small
Capitalization Growth Fund, may not borrow money for the purpose of
leveraging the Funds' assets. For purposes of this investment
restriction, the deferral of Trustees' fees and transactions in short
sales, futures contracts, options on futures contracts, securities or
indices and forward commitment transactions shall not constitute
borrowing. Small Capitalization Growth Fund has no current intention of
entering into reverse repurchase agreements or dollar rolls.
23
<PAGE>
4. Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purpose of the 1933 Act.
5. Purchase or sell real estate except that the Fund may (i) acquire or
lease office space for its own use, (ii) invest in securities of
issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein,
(iv) purchase and sell mortgage-related securities and (v) hold and
sell real estate acquired by the Fund as a result of the ownership of
securities.
6. Invest in commodities, except the Fund may purchase and sell options on
securities, securities indices and currency, futures contracts on
securities, securities indices and currency and options on such
futures, forward foreign currency exchange contracts, forward
commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment
policies.
7. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the
Fund's total assets taken at market value, (2) enter into repurchase
agreements, and (3) purchase all or a portion of an issue of debt
securities, bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
8. Purchase the securities of issuers conducting their principal activity
in the same industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets
taken at market value at the time of such investment. This limitation
does not apply to investments in obligations of the U.S. Government or
any of its agencies, instrumentalities or authorities.
9. For each Fund other than Global Bond Fund and Multi-Sector Growth Fund,
with respect to 75% of total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities), if:
(a) such purchase would cause more than 5% of the Fund's total
assets taken at market value to be invested in the securities
of such issuer; or
(b) such purchase would at the time result in more than 10% of
the outstanding voting securities of such issuer being held by
the Fund.
B. Non-Fundamental Investment Restrictions.
The following investment restrictions are designated as non-fundamental and may
be changed by the Trustees without shareholder approval.
A Fund may not:
24
<PAGE>
1. Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser or any Subadviser to save commissions or to
average prices among them is not deemed to result in a joint securities
trading account.
2. Purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in the securities of other investment
companies, (ii) the Fund would hold more than 3% of the total
outstanding voting securities of any one investment company, or (iii)
more than 5% of the Fund's total assets would be invested in the
securities of any one investment company. These limitations do not
apply to (a) the investment of cash collateral, received by the Fund in
connection with lending the Fund's portfolio securities, in the
securities of open-end investment companies or (b) the purchase of
shares of any investment company in connection with a merger,
consolidation, reorganization or purchase of substantially all of the
assets of another investment company. Subject to the above percentage
limitations the Fund may, in connection with the John Hancock Group of
Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John
Hancock Group of Funds.
3. Purchase any security, including repurchase agreements maturing in more
than seven days, which is not readily marketable, if more than 15% of
the net assets of the Fund taken at market value, would be invested in
such securities.
4. Purchase securities while outstanding borrowings exceed 5% of the
Fund's total assets.
5. Invest for the purpose of exercising control over or management of any
company.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the values of a Fund's assets will not be
considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Funds is managed by the Trustees of the Trust who elect
officers who are responsible for the day-to-day operations of the Funds and who
execute policies formulated by the Trustees. Several of the officers and
Trustees of the Trust are also officers or directors of the Funds' Adviser
and/or one or more or the Subadvisers, or officers and/or directors of the
Funds' principal distributor, John Hancock Funds, Inc. ("JH Funds").
The following table sets forth the principal occupation or employment of the
Trustees and principal officers of the Trust during the past five years.
25
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman and Chief Executive
101 Huntington Avenue Executive Officer (1, 2) Officer, the Adviser and The
Boston, MA 02199 Berkeley Financial Group ("Berkeley
October 1944 Group"); Chairman, NM Capital
Management, Inc. ("NM Capital") and
John Hancock Advisers International
Limited ("Advisers International");
Chairman, Chief Executive Officer
and President, John Hancock Funds,
Inc. ("John Hancock Funds"), First
Signature Bank and Trust Company
and Sovereign Asset Management
Corporation ("SAMCorp."); Director,
John Hancock Insurance Agency, Inc.
("Insurance Agency, Inc."), John
Hancock Capital Corporation and New
England/Canada Business Council;
Member, Investment Company
Institute Board of Governors;
Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of
Science; Vice Chairman and
President, the Adviser (until July
1992); Chairman, John Hancock
Distributors, Inc. (until April
1994); Director, John Hancock
Freedom Securities Corporation
(until September 1996); Director,
John Hancock Signature Services,
Inc. ("Signature Services") (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James F. Carlin Trustee (3) Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual Insurance Company
(insurance), Health Plan Services,
Inc., Massachusetts Health and
Education Tax Exempt Trust,
Flagship Healthcare, Inc., Carlin
Insurance Agency, Inc., West
Insurance Agency, Inc. (until May
1995) Uno Restaurant Corp.;
Chairman, Massachusetts Board of
Higher Education (since 1995);
Receiver, the City of Chelsea
(until August 1992).
William H. Cunningham Trustee (3) Chancellor, University of Texas
601 Colorado Street System and former President of the
O'Henry Hall University of Texas, Austin, Texas;
Austin, TX 78701 Lee Hage and Joseph D. Jamail
January 1944 Regents Chair of Free Enterprise;
Director, LaQuinta Motor Inns, Inc.
(hotel management company);
Director, Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Texas Commerce Bank - Austin.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Charles F. Fretz Trustee (3) Retired; self employed; Former Vice
RD #5, Box 300B President and Director, Towers,
Clothier Springs Road Perrin, Foster & Crosby, Inc.
Malvern, PA 19355 (international management
June 1928 consultants) (1952-1985).
Harold R. Hiser, Jr. Trustee (3) Executive Vice President,
123 Highland Avenue Schering-Plough Corporation
Short Hill, NJ 07078 (pharmaceuticals) (retired 1996);
October 1931 Director, ReCapital Corporation
(reinsurance) (until 1995).
Anne C. Hodsdon * Trustee and
President (1,2) President, Chief
Operating Officer 101 Huntington
Avenue and Director, the Adviser;
Director, Boston, MA 02199 The
Berkeley Group, John Hancock April
1953 Funds; Director, Advisers
International; Executive Vice
President, the Adviser (until
December 1994); Senior Vice
President, the Adviser (until
December 1993); Director, Signature
Services (until January 1997).
Charles L. Ladner Trustee (3) Director, Energy North, Inc. (public
UGI Corporation utility holding company) (until
P.O. Box 858 1992); Senior Vice President of UGI
Valley Forge, PA 19482 Corp. Holding Company Public
February 1938 Utilities, LPGAS; Vice President of
Amerigas Partners L.P.
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Leo E. Linbeck, Jr. Trustee (3) Chairman, President, Chief Executive
3810 W. Alabama Officer and Director, Linbeck
Houston, TX 77027 Corporation (a holding company
August 1934 engaged in various phases of the
construction industry and
warehousing interests); Former
Chairman, Federal Reserve Bank of
Dallas (1992, 1993); Chairman of
the Board and Chief Executive
Officer, Linbeck Construction
Corporation; Director, PanEnergy
Corporation (a diversified energy
company), Daniel Industries, Inc.
(manufacturer of gas measuring
products and energy related
equipment), GeoQuest International
Holdings, Inc. (a geophysical
consulting firm) (1980-1993);
Former Director, Greater Houston
Partnership (1980 -1995).
Patricia P. McCarter Trustee (3) Director and Secretary, The McCarter
1230 Brentford Road Corp. (machine manufacturer).
Malvern, PA 19355
May 1928
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
Steven R. Pruchansky Trustee (1, 3) Director and President, Mast
4327 Enterprise Avenue Holdings, Inc. (since 1991);
Naples, FL 33942 Director, First Signature Bank &
August 1944 Trust Company (until August 1991);
Director, Mast Realty Trust (until
1994); President, Maxwell Building
Corp. (until 1991).
Richard S. Scipione * Trustee (1) General Counsel, John Hancock Life
John Hancock Place Company; Director, the Adviser,
P.O. Box 111 Advisers International, John Hancock
Boston, MA 02117 Funds, John Hancock Distributors,
August 1937 Inc., Insurance Agency, Inc., John
Hancock Subsidiaries, Inc.,
SAMCorp. and NM Capital; Trustee,
The Berkeley Group; Director, JH
Networking Insurance Agency, Inc.;
Director, John Hancock Property and
Casualty Insurance and its
affiliates (until November 1993);
Director, Signature Services (until
January 1997).
Norman H. Smith Trustee (3) Lieutenant General, United States
243 Mt. Oriole Lane Marine Corps; Deputy Chief of Staff
Linden, VA 22642 for Manpower and Reserve Affairs,
March 1933 Headquarters Marine Corps;
Commanding General III Marine
Expeditionary Force/3rd Marine
Division (retired 1991).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
John P. Toolan Trustee (3) Director, The Smith Barney Muni Bond
13 Chadwell Place Funds, The Smith Barney Tax-Free
Morristown, NJ 07960 Money Funds, Inc., Vantage Money
September 1930 Market Funds (mutual funds), The
Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
Robert G. Freedman Vice Chairman and Chief Investment Vice Chairman and Chief Investment
101 Huntington Avenue Officer (2) Officer, the Adviser; Director, the
Boston, MA 02199 Adviser, Advisers International,
July 1938 John Hancock Funds, SAMCorp.,
Insurance Agency, Inc.,
Southeastern Thrift & Bank Fund and
NM Capital; Senior Vice President,
The Berkeley Group; President, the
Adviser (until December 1994);
Director, Signature Services (until
January 1997).
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupations(s)
Name and Address With the Company During the Past Five Years
- ---------------- ---------------- --------------------------
<S> <C> <C>
James B. Little Senior Vice President and Chief Senior Vice President, the Adviser,
101 Huntington Avenue Financial Officer The Berkeley Group, John Hancock
Boston, MA 02199 Funds.
February 1935
John A. Morin Vice President Vice President and Secretary, the
101 Huntington Avenue Adviser, The Berkeley Group,
Boston, MA 02199 Signature Services and John Hancock
July 1950 Funds; Secretary, SAMCorp.,
Insurance Agency, Inc. and NM
Capital; Counsel, John Hancock
Mutual Life Insurance Company (until
January 1996).
Susan S. Newton Vice President and Secretary Vice President, the Adviser; John
101 Huntington Avenue Hancock Funds, Signature Services
Boston, MA 02199 and The Berkeley Group; Vice
March 1950 President, John Hancock
Distributors, Inc. (until 1994).
James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, MA 02199
November 1946
- -------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined
in the Investment Company Act of 1940
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
(3) Member of the Audit Committee and the Administration Committee.
</TABLE>
All of the officers listed are officers or employees of the Adviser and
Affiliated Companies. Some of the Trustees and officers may also be officers
and/or directors and/or Trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
32
<PAGE>
Compensation of the Trustees. The following table provides information regarding
the compensation paid by the Funds and the other investment companies in the
John Hancock Funds Complex to the Independent Trustees for their services. Ms.
Hodsdon and Messrs. Boudreau and Scipione, non-Independent Trustees, and each of
the officers of the Trust, who are interested persons of the Adviser, are
compensated by the adviser or its affiliates and received no compensation from
the Funds for their services.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from the Funds and the
From the Funds' John Hancock Fund
fiscal year ended Complex
Independent Trustees February 28, 1997 to Trustees/Directors (1)
-------------------- ----------------- -------------------------
<S> <C> <C>
James F. Carlin $ 3,159 $ 74,250
William H. Cunningham (2) 3,253 74,250
Charles F. Fretz 3,160 74,500
Harold R. Hiser, Jr. (2) 3,019 70,250
Charles L. Ladner 3,160 74,500
Leo E. Linbeck, Jr. 3,254 74,250
Patricia P. McCarter (2) 3,160 74,250
Steven R. Pruchansky (2) 3,291 77,500
Norman H. Smith (2) 3,257 77,500
John P. Toolan (2) 3,160 74,250
------- --------
Totals $31,873 $745,500
</TABLE>
(1) The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees as of the calendar year ended December 31, 1996.
As of this date there were 67 funds in the John Hancock Fund Complex,
of which each of these Independent Trustees served on 32.
(2) As of December 31, 1996, the value of the aggregate deferred
compensation from all funds in the John Hancock Funds Complex for Mr.
Cunningham was $131,741, for Mr. Hiser was $90,972, for Ms. McCarter
was $67,548, for Mr. Pruchansky was $28,731, for Mr. Smith was $32,314
and for Mr. Toolan was $163,385 under the John Hancock Deferred
Compensation Plan for Independent Trustees.
As of March 31, 1997 the officers and trustees of the Trust as a group owned
6.0% of the outstanding shares of Active Bond Fund; 2.3% of the outstanding
shares of Global Bond Fund; 1.2% of the outstanding shares of Multi-Sector
Growth Fund; 3.6% of the outstanding shares of Small Capitalization Value Fund;
2.2% of the outstanding shares of International Equity Fund; 6.5% of the
outstanding shares of Small Capitalization Growth Fund; less than 1% of the
outstanding shares of Independence Diversified Core Equity Fund II, Dividend
Performers Fund, Independence Balanced Fund, Independence Value Fund,
33
<PAGE>
Independence Growth Fund and Independence Medium Capitalization Fund.
As of March 27, 1997 the following shareholders beneficially owned 5% of or more
of the outstanding shares of the Funds listed below:
<TABLE>
<CAPTION>
Percentage of
total
Number of shares outstanding
of beneficial shares of the
Name and Address of Shareholder Fund interest owned Fund
- ------------------------------- ---- -------------- ----
<S> <C> <C> <C>
Lathers' Local No. 144L Dividend Performers 104,821 13.87%
Pension Plan II (DC)
c/o Allied Administrators Inc.
P.O. Box 2500
San Francisco, CA 94126-2500
John Hancock Funds Dividend Performers 250,128 33.10%
Stinnes Corp P & S/Pension Plan
101 Huntington Avenue
Boston, Ma 02199-7603
John Hancock Funds Dividend Performers 75,644 10.01%
Shakpee Valley Printing
Attn: Sandra MaCarthur
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds Active Bond 81,969 23.06%
Cardiovascular Center Inc.
101 Huntington Avenue
Boston, MA 02199-7603
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Percentage of
total
Number of shares outstanding
OF beneficial shares of the
Name and Address of Shareholder Fund interest owned Fund
- ------------------------------- ---- -------------- ----
<S> <C> <C> <C>
John Hancock Funds Active Bond 90,827 25.55%
FBO Hartford Provisions
Attn: Institutional Ret. Services
101 Huntington Ave
Boston, MA. 02199-7603
John Hancock Advisers Inc. Global Bond 94,118 74.82%
101 Huntington Avenue
Boston, MA 02199-7603
Independence Investment Associates Attn Coleen Independence Mid-Cap 61,516 12.27%
Pink
53 State Street
Boston, MA 02109-2809
John Hancock Funds Inc Independence Mid-Cap 73,280 74.46%
FBO Gilbane Building Company
Attn Institutional Ret Services
101 Huntington Avenue
Boston, MA 02109-7603
Independence Investment Associates Attn: Independence Growth 59,172 75.50%
Colleen Pink
53 State Street
Boston, MA 02109-2809
John Hancock Funds Independence 18,671 23.14%
FBO Hartford Provisions Growth
Attn: Institutional Ret. Services
101 Huntington Ave
Boston, MA. 02199-7603
John Hancock Funds Inc. Small Capitalization 411,773 62.99%
FBO Gilbane Building Company Value
Attn: Institutional Ret Services
101 Huntington Avenue
Boston, MA 02199-7603
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Percentage
total
Number of shares outstanding
of beneficial shares of the
Name and Address of Shareholder Fund interest owned Fund
- ------------------------------- ---- -------------- ----
<S> <C> <C> <C>
Lathers' Local No. 144L Small Capitalization 83,915 12.84%
Pension Plan II (DB) Value
c/o Price Administrators Inc.
400 S. El Camino Real, Suite 950
San Mateo, CA 94402-1708
Independence Investment Associates Independence Value 62,755 18.85%
Attn: Colleen Pink
53 State Street
Boston, MA 02109-2809
John Hancock Funds Independence Value 23,118 6.94%
Aurora Electronics Inc.
Attn: Institutional Ret Services
c/o Geoffrey Hablow
101 Huntington Avenue
Boston, MA 02109-7603
John Hancock Funds Independence Value 210,861 63.32%
Cardiovascular Center Inc.
101 Huntington Avenue
Boston, MA 02109-7603
John Hancock Funds Independence Value 22,840 6.86%
FBO Resource Information
Attn: Institutional Ret. Services
101 Huntington Avenue
Boston, MA 02109-7603
Wachovia Bank of Georgia Independence 5,340,973 20.79%
National Service Industries Inc. Diversified Core
Defined Contribution Plans Equity II
Attn: Mr. W. Russell Watson
1420 Peachtree St N.E.
Atlanta, GA 30309-3002
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Percentage
total
Number of shares outstanding
of beneficial shares of the
Name and Address of Shareholder Fund interest owned Fund
- ------------------------------- ---- -------------- ----
<S> <C> <C> <C>
Weil Gotshal & Manges Independence 2,040,789 7.94%
401K Plan FBO The Plan Diversified Core
Attn: Mark A. Vogel Equity II
767 Fifth Avenue
New York, NY 10153-0001
Food Marketing Institute Independence Diversified 1,591,785 6.20%
Attn: Lisa Sally Core Equity II
800 Connecticut Avenue NW
Suite 400
Washington, DC 20006-4505
Charles Schwabb Trust Company FBO Independence Diversified 1,603,715 6.24%
Gaylord Entertainment Co Core Equity II
401(K) Savings Plan
1 Montgomery Street 7th Floor
San Francisco CA 94104-4505
John Hancock Funds Inc. Independence Balanced 401,608 19.88%
FPO Gilbane Building Company
Attn: Institutional Ret Services
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds Independence Balanced 158,515 7.85%
FBO Cape Ann Local Lodge
Attn: Institutional Ret Services
101 Huntington Avenue
Boston MA 02199-7603
John Hancock Funds Independence Balanced 112,360 5.56%
American College of Physicians Inc.
Defined Contribution Plan A
101 Huntington Avenue
Boston, MA 02199-7603
</TABLE>
37
<PAGE>
<TABLE>
Percentage
total
Number of shares outstanding
of beneficial shares of the
Name and Address of Shareholder Fund interest owned Fund
- ------------------------------- ---- -------------- ----
<S> <C> <C>
John Hancock Funds Independence Balanced 107,588 5.33%
O N E Color Communications 401(K)
Attn: Institutional Ret Services
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds Independence Balanced 513,104 25.40%
PB & S Chemical Company Inc.
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds Independence Balanced 243,689 12.06%
Stinnes Corp P & S Pension Plan
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds Inc. International Equity 170,478 33.18%
FBO Gilbane Building Company
Attn: Institutional Ret Services
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds International Equity 27,557 5.36%
Network Computing Devices
Attn: Institutional Ret Services
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds International Equity 67,742 13.18%
Stinnes Corp P & S./Pension Plan
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds International Equity 58,560 11.39%
PB & S Chemical Company Inc.
101 Huntington Avenue
Boston, MA 02199-7603
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Percentage
total
Number of shares outstanding
OF beneficial shares of the
Name and Address of Shareholder Fund interest owned Fund
- ------------------------------ ---- -------------- ----
<S> <C> <C> <C>
Investment Incentive Program For Multi-Sector Growth 1,728,728 66.58%
John Hancock Employees
John Hancock Place
PO Box 111
Boston, MA 02117-0111
John Hancock Funds Multi-Sector Growth 185,881 7.16%
PB & S Chemical Company Inc.
101 Huntington Avenue
Boston, MA 02199-7603
Stinnes Corp P & S/Pension Plan Multi-Sector 141,060 5.43%
101 Huntington Avenue Growth
Boston, MA 02199-7603
John Hancock Funds Small Capitalization 64,217 39.73%
Scholle Corporation Growth
101 Huntington Avenue
Boston, MA 02199-7603
John Hancock Funds Small Capitalization 14,936 9.24%
American College of Physicians, Inc. Growth
Defined Contribution Plan A
101 Huntington Ave
Boston, MA 02199-7603
John Hancock Funds Small Capitalization 13,865 8.58%
FBO Cape Ann Local Lodge Growth
Attn: Institutional Ret Services
101 Huntington Avenue
Boston, MA 02199-7603
</TABLE>
Shareholders of a Fund having beneficial ownership of more than 25% of the
shares of a Fund may be deemed for purposes of the Investment Company Act of
1940, as amended, to control that Fund.
39
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has over $22 billion in assets under management in its
capacity as investment adviser to the Funds and the other mutual funds and
publicly traded investment companies in the John Hancock group of funds having a
combined total of over 1,080,000 shareholders. The Adviser is an indirect
wholly-owned subsidiary of the Life Company, one of the nation's oldest and
largest financial services companies. With total assets under management of over
$100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries high ratings from Standard & Poor's
and A.M. Best. Founded in 1862, the Life Company has been serving clients for
over 130 years.
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with the Adviser. As the Fund's manager and investment adviser, the
Adviser will: (a) furnish continuously an investment program for the Fund and
determine, subject to the overall supervision and review of the Trustees, which
investments should be purchased, held, sold or exchanged, and (b) provide
supervision over all aspects of the Fund's operations except those which are
delegated to a custodian, transfer agent or other agent.
The Fund bears all costs of its organization and operation, including expenses
of preparing, printing and mailing all shareholders' reports, notices,
prospectuses, proxy statements and reports to regulatory agencies; expenses
relating to the issuance, registration and qualification of shares; government
fees; interest charges; expenses of furnishing to shareholders their account
statements; taxes; expenses or redeeming shares; brokerage and other expenses
connected with the execution of portfolio securities transactions; expenses
pursuant to the Fund's plan of distribution; fees and expenses of custodians
including those for keeping books and accounts and calculating the net asset
value of shares; fees and expenses of transfer agents and dividend disbursing
agents; legal, accounting, financial, management, tax and auditing fees and
expenses of the Fund (including an allocable portion of the cost of the
Adviser's employees rendering such services to the Fund; the compensation and
expenses of Trustees who are not otherwise affiliated with the Trust, the
Adviser or any of their affiliates; expenses of Trustees' and shareholders,
meetings; trade association membership; insurance premiums; and any
extraordinary expenses.
With respect to Dividend Performers Fund, the Adviser has entered into a
sub-investment management contract with SAMCorp. With respect to International
Equity Fund, the Adviser has entered into a sub-investment management contract
with JHAI. With respect to each Independence Fund, the Adviser has entered into
a sub-investment management contract with IIA. Under each respective
sub-investment management contract, the corresponding Subadviser, subject to the
review of the Trustees and the over-all supervision of the Adviser, is
responsible for managing the investment operations of the corresponding Fund and
the composition of the Fund's portfolio and furnishing the Fund with advice and
recommendations with respect to investments, investment policies and the
purchase and sale of securities. JHAI, located at 34 Dover Street, London,
England, W1X3RA, is a wholly owned subsidiary of the Adviser, formed in 1987 to
provide investment research and advisory services to U.S. institutional clients.
IIA, located at 53 State Street, Boston, Massachusetts 02109, and organized in
1982, is a wholly owned indirect subsidiary of John Hancock Subsidiaries, Inc.
SAMCorp, located at 1235 Westlakes Drive, Berwyn, Pennsylvania 19312, is a
40
<PAGE>
wholly owned subsidiary of The Berkeley Financial Group.
See "Organization and Management of the Funds" and "The Funds' Expenses" in the
Prospectuses for a description of certain information concerning each Fund's
investment management contract and the sub-investment management contracts of
Dividend Performers Fund, International Equity Fund and the Independence Funds.
As provided by the investment management contracts, each Fund pays the Adviser
an investment management fee, which is accrued daily and paid monthly in
arrears, equal on an annual basis to a stated percentage of the respective
Fund's average daily net asset value. The Adviser, not any Fund, pays the
subadvisory fees as described in the Prospectuses. See "Organization and
Management of the Funds" in the Prospectuses. For the period ended February 28,
1997, the Adviser waived the entire investment management fees for all Funds
except Multi-Sector Growth Fund and Diversified Core Equity Fund II. The Adviser
received $53,016 after expense limitation from Multi-Sector Growth Fund. The
Adviser received $1,280,296 from Diversified Core Equity Fund II and the
Advisers paid the subadviser $1,020,770.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
Securities held by the Funds may also be held by other funds or investment
advisory clients for which the Adviser, the Subadvisers or their respective
affiliates provide investment advice. Because of different investment objectives
or other factors, a particular security may be bought for one or more funds or
clients when one or more are selling the same security. If opportunities for
purchase or sale of securities by the Adviser or Subadviser for a Fund or for
other funds or clients for which the Adviser or Subadvisers render investment
advice arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds or
clients in a manner deemed equitable to all of them. To the extent that
transactions on behalf of more than one client of the Adviser, Subadvisers or
their respective affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
Pursuant to each investment management contract and, where applicable,
sub-investment management contract, the Adviser and Subadviser are not liable to
the Funds or their shareholders for any error of judgment or mistake of law or
for any loss suffered by the Funds in connection with the matters to which their
respective contracts relate, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser or Subadviser in the
performance of their duties or from their reckless disregard of the obligations
and duties under the applicable contract.
Under each investment management contract, each Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
investment management contract or any extension, renewal or amendment thereof
remains in effect. If a Fund's investment management contract is no longer in
effect, the Fund (to the extent that it lawfully can) will cease to use such
41
<PAGE>
name or any other name indicating that it is advised by or otherwise connected
with the Adviser. In addition, the Adviser or the Life Company may grant the
non-exclusive right to use the name "John Hancock" or any similar name to any
other corporation or entity, including but not limited to any investment company
of which the Life Company or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
Under the subadvisory contract of each Independence Fund, each Independence Fund
may use the name "Independence" or any name derived from or similar to it only
for so long as the subinvestment management contract is no longer in effect, the
Fund (to the extent that it lawfully can) will cease to use such name or any
other name indicating that it is advised by or other wise connected with IIA. In
addition, IIA or the Life Company may grant the non-exclusive right to use the
name "Independence" or any similar name to any other corporation or entity,
including but not limited to any investment company of which IIA or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
Each Advisory Agreement will continue in effect from year to year thereafter if
approved annually by a vote of a majority of the Trustees of the Trust who are
not interested persons of one of the parties to the contract, cast in person at
a meeting called for the purpose of voting on such approval, or by either the
Trustees or the holders of a majority of the applicable Fund's outstanding
voting securities. Each contract automatically terminates upon assignment and
may be terminated without penalty on 60 days' notice at the option of either
party to the respective contract or by vote of the holders of a majority of the
outstanding voting securities of the applicable Fund. Each sub-investment
management contract terminates automatically upon the termination of the
corresponding Advisory Agreement.
Accounting and Legal Services Agreement. The Trust, on behalf of the Funds, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal year ended February 28, 1997, the Fund paid
the Adviser the following for services under this agreement: Balanced Fund
$55,136, Growth Fund $129, Medium Capitalization Fund $820, Value Fund $176,
Diversified Core Equity Fund II $48,011, Active Bond Fund $308, Global Bond Fund
$190, Dividend Performers Fund $929, Multi-Sector Growth Fund $3,506, Small
Capitalization Value Fund $1,084, Small Capitalization Growth Fund $99 and
International Equity Fund $616.
In order to avoid conflicts with portfolio trades for the Funds, the Adviser,
the Sub-Adviser and the Funds have adopted extensive restrictions on personal
securities trading by personnel of the Adviser and its affiliates. In the case
of the Adviser, some of these restrictions are: Pre-clearance for all personal
trades and a ban on the purchase of initial public offerings as well as
contributions to specified charities of profits on securities held for less than
91 days. IIA has adopted similar restrictions which may differ where
appropriate, as long as they have the same intent. These restrictions are a
continuation of the basic principle that the interests of the Funds and their
shareholders come before those of management.
42
<PAGE>
DISTRIBUTION AGREEMENT
The Fund has a Distribution Agreement with JH Funds. Under the agreement, JH
Funds is obligated to use its best efforts to sell shares of each Fund. JH Funds
accepts orders for the purchase of the shares of the Funds which are continually
offered at net asset value next determined.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's shares, the
following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Equity securities traded on a principal exchange or NASDAQ National Market
Issues are generally valued at last sale price on the day of valuation.
Securities in the aforementioned category for which no sales are reported and
other securities traded over-the-counter are generally valued at the last
available bid price.
Short-term debt investments which have a remaining maturity of 60 days or less
are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the Adviser
any quotation or price is not representative of true market value, the fair
value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars by the custodian bank based
on London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,
New York time) on the date of any determination of the Fund's NAV. If quotations
are not readily available, or the value has been materially affected by events
occurring after the closing of a foreign market, assets are valued by a method
that the Trustees believe accurately reflects fair value.
The NAV for each Fund is determined each business day at the close of regular
trading on the New York Stock Exchange (typically 4 p.m. Eastern Time) by
dividing the net assets by the number of its shares outstanding. On any day an
international market is closed and the New York Stock Exchange is open, any
foreign securities will be valued at the prior day's close with the current
day's exchange rate. Trading of foreign securities may take place on Saturdays
and U.S. business holidays on which the Fund's NAV is not calculated.
Consequently, the Fund's portfolio securities may trade and the NAV of the
Fund's redeemable securities may be significantly affected on days when a
shareholder has no access to the Fund.
43
<PAGE>
SPECIAL REDEMPTIONS
Although no Fund would normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Board. When the shareholder sells portfolio
securities received in this fashion it would incur a brokerage charge. Any such
securities would be valued for the purposes of making such payment at the same
value as used in determining net asset value. Each Fund has, however, elected to
be governed by Rule 18f-1 under the 1940 Act. Under that rule, each Fund must
redeem its shares for cash except to the extent that the redemption payments to
any one shareholder during any 90-day period would exceed the lesser of $250,000
or 1% of the Fund's net asset value at the beginning of that period.
TAX STATUS
Each series of the Trust, including the Funds, is treated as a separate entity
for accounting and tax purposes. It is each Fund's intention to elect to be
treated and to qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), for each taxable
year. As such and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions, and the
diversification of its assets, a Fund will not be subject to Federal income tax
on taxable income (including net realized capital gains) which is distributed to
shareholders at least annually.
Distributions of net investment income (which includes accrued original issue
discount and accrued, recognized market discount) and any net realized capital
gains, as computed for Federal income tax purposes, will be taxable as described
in the Prospectuses whether made in shares or in cash. Shareholders electing to
receive distributions in the form of additional shares will have a cost basis
for Federal income tax purposes in each share so received equal to the amount of
cash they would have received had they taken the distribution in cash.
If a Fund invests (either directly or through depository receipts such as ADRs,
GDRs or EDRs) in certain non-U.S. corporations that receive at least 75% of
their annual gross income from passive sources (such as sources that produce
interest, dividend, rental, royalty or capital gain income) or hold at least 50%
of their assets in such passive sources ("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 Funds would
not be able to pass through to their respective shareholders any credit or
deduction for such a tax. In certain cases, an election may be available that
would ameliorate these adverse tax consequences. Accordingly, the Funds may
limit their investments in such passive foreign investment companies and will
undertake appropriate actions, including the consideration of any available
elections, to limit their tax liability, if any, with respect to such
investments.
Foreign exchange gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt securities, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
44
<PAGE>
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. Any such transactions that are not directly related to a Fund's
investment in stock or securities may increase the amount of gain it is deemed
to recognize from the sale of certain investments held for less than three
months, which gain is limited under the Code to less than 30% of its annual
gross income, and may under future Treasury regulations produce income not among
the types of "qualifying income" from which the Fund must derive at least 90% of
its annual gross income.
The amount of net realized capital gains, if any, in any given year will result
from sales of securities or transactions in options or futures contracts made
with a view to the maintenance of a portfolio believed by the respective Fund's
management to be most likely to attain such Fund's investment objective. Such
sales, and any resulting gains or losses, may therefore vary considerably from
year to year. Since, at the time of an investor's purchase of Fund shares, a
portion of the per share net asset value by which the purchase price is
determined may be represented by realized or unrealized appreciation in a Fund's
portfolio or undistributed taxable income of a Fund, subsequent distributions
(or portions thereof) on such shares may be taxable to such investor even if the
net asset value of his shares is, as a result of the distributions, reduced
below his cost for such shares and the distributions (or portions thereof) in
reality represent a return of a portion of the purchase price.
Upon a redemption of shares (including by exercise of the exchange privilege), a
shareholder will ordinarily realize a taxable gain or loss depending upon his
basis in his shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's holding period for the
shares. Any loss realized on a sale or exchange will be disallowed to the extent
the shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of, such as pursuant to
the Dividend Reinvestment Plan. 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.
The Funds reserve the right to retain and reinvest all or any portion of the
excess, as computed for Federal income tax purposes, of net long-term capital
gain over net short-term capital loss in any year. Although each Fund's present
intention is to distribute all net realized capital gains, if any, the Fund will
not in any event distribute net long-term capital gains realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. To the extent such excess was retained and not exhausted by the
carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Each shareholder would be treated for
Federal income tax purposes as if such Fund had distributed to him on the last
day of its taxable year his pro rata share of such excess, and he had paid his
pro rata share of the taxes paid by such Fund and reinvested the remainder in
the Fund. Accordingly, each shareholder would (a) include his pro rata share of
such excess as long-term capital gain income in his return for his taxable year
in which the last day of the Fund's taxable year falls, (b) be entitled either
to a tax credit on his return for, or a refund of, his pro rata share of the
taxes paid by the Fund, and (c) be entitled to increase the adjusted tax basis
for his Fund shares by the difference between his pro rata share of such excess
and his pro rata share of such taxes.
45
<PAGE>
For Federal income tax purposes, each Fund is permitted to carry forward a net
realized capital loss in any year to offset net realized capital gains of that
Fund, if any, during the eight years following the year of the loss. To the
extent subsequent net realized capital gains are offset by such losses, they
would not result in Federal income tax liability to a Fund and, as noted above,
would not be distributed as such to shareholders. As of February 28, 1997, Small
Capitalization Growth Fund had a capital loss carryforward of $29,711, which
will expire in 2005. Presently, there are no realized capital loss carryforwards
in any of the remaining Funds to offset against future net realized capital
gains.
With respect to any Fund that receives dividends from U.S. domestic
corporations, a portion of its distributions representing such dividend income
is normally eligible for the dividends-received deduction for corporations.
Distributions from other sources, including long-term capital gain
distributions, do not qualify for the dividends-received deduction allowable to
corporations. Corporate shareholders which borrow to acquire or retain Fund
shares will be denied a portion of the dividends-received deduction, and
corporate shareholders will not be eligible for any deduction if they fail to
meet applicable holding period requirements. The entire qualifying dividend,
including the otherwise deductible amount, will be included in determining the
excess (if any) of a corporation's adjusted current earnings over its
alternative minimum taxable income, which may increase a corporate shareholder's
alternative minimum tax liability, if any. Such shareholder's tax basis in its
Fund shares may also be reduced to the extent of any "extraordinary dividends,"
as determined under applicable Code provisions.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions, and certain
prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Certain entities otherwise exempt from federal income taxes (such as pension
plans, Individual Retirement Accounts and other exempt organizations) are
nevertheless taxable under Section 511 of the Code on unrelated business taxable
income ("UBTI"). UBTI is income from an unrelated trade or business (as defined
in Section 513 of the Code) regularly carried on. A tax-exempt entity is subject
to tax on UBTI in any taxable year at corporate tax rates or, in the case of
certain trusts, at the rates applicable to trusts. Tax-exempt entities with
gross income, included in computing UBTI, of $1,000 or more must report UBTI, if
any, on Form 990-T. Dividends, interest and capital gain realized on the sale of
property held for investment are generally excluded from UBTI. However, income
from such sources will be included in UBTI if "acquisition indebtedness" exists
with respect to the property generating such income. Acquisition indebtedness
ordinarily includes the unpaid amount of indebtedness incurred to acquire or to
continue to hold the property. Based on these rules, a tax-exempt investor
holding shares in the Funds for investment will not generally recognize
unrelated business taxable income from such investment in the Funds unless the
tax-exempt investor incurred indebtedness to acquire or to continue to hold Fund
shares and such indebtedness remains unpaid during the relevant period(s).
Each Fund that invests in securities of foreign issuers may be subject to
withholding and other taxes imposed by foreign countries with respect to its
investments in foreign securities. Tax conventions between certain countries and
the United States may reduce or eliminate such taxes. With respect to each Fund,
other than International Equity Fund and Global Bond Fund, because more than 50%
46
<PAGE>
of the Fund's total assets at the close of any taxable year will not consist of
stock or securities of foreign corporations, the Funds will not be able to pass
such taxes through to their shareholders, who in consequence will not be able to
include any portion of such taxes in their incomes and will not be entitled to
tax credits or deductions with respect to such taxes. However, such Funds will
be entitled to deduct such taxes in determining the amounts they must distribute
in order to avoid Federal income tax. If more than 50% of the value of the total
assets of International Equity Fund or Global Bond Fund at the close of any
taxable year consists of stock or securities of foreign corporations, the
applicable Fund may file an election with the Internal Revenue Service pursuant
to which shareholders of the Fund will be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by the Fund even though not actually
received, and (ii) treat such respective pro rata portions as foreign income
taxes paid by them.
If the election is made, shareholders of the applicable Fund may then deduct
such pro rata portions of foreign income taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for Federal income tax purposes will not, however,
be able to deduct their pro rata portion of foreign taxes paid by International
Equity Fund or Global Bond Fund, although such shareholders will be required to
include their shares of such taxes in gross income. Shareholders who claim a
foreign tax credit for such foreign taxes may be required to treat a portion of
dividends received from the relevant Fund as a separate category of income for
purposes of computing the limitations on the foreign tax credit. Tax-exempt
shareholders will ordinarily not benefit from this election. Each year that
International Equity Fund or Global Bond Fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of foreign income taxes paid by the Fund and (ii) the portion of
Fund dividends which represents income from each foreign country.
Each Fund that invests in zero coupon securities or certain PIK or increasing
rate securities and any other securities with original issue discount (or with
market discount if the Fund elects to include market discount in income
currently) accrues income on such securities prior to the receipt of the
corresponding cash payments. Each Fund must distribute, at least annually, all
or substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, a Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash,
or may have to leverage itself by borrowing the cash, to satisfy distribution
requirements.
Dividend Performers Fund, Active Bond Fund, Small Capitalization Value Fund and
Global Bond Fund may invest in debt obligations that are in the lower rating
categories or are unrated, including debt obligations of issuers not currently
paying interest as well as issuers who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Funds. Tax rules are not entirely clear about issues such as when the Funds may
cease to accrue interest, original issue discount, or market discount, when and
to what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by Dividend
Performers Fund, Active Bond Fund and Global Bond Fund, in the event they invest
in such securities, in order to ensure that they distribute sufficient income to
47
<PAGE>
preserve their status as regulated investment companies and to avoid becoming
subject to Federal income or excise tax.
With respect to each Fund that may enter into forwards, futures and options
transactions, limitations imposed by the Code on regulated investment companies
may restrict the Funds' ability to enter into such transactions. The options and
futures transactions undertaken by a Fund may cause the Fund to recognize gains
or losses from marking to market even though its positions have not been sold or
terminated and affect their character as long-term or short-term and timing of
some capital gains and losses realized by the Fund. Also, a Fund's losses on its
transactions involving options and futures contracts and/or offsetting portfolio
positions may be deferred rather than being taken into account currently in
calculating the Fund's taxable income. A Fund's foreign currency forward
contracts may also be subject to certain of these rules in addition to the
provisions of Section 988 of the Code, described above. These transactions may
thereafter affect the amount, timing and character of the Funds' distributions
to shareholders. The Funds will take into account the special tax rules
applicable to options, futures and forward transactions in order to minimize any
potential adverse tax consequences.
Each Fund will be subject to a four percent nondeductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. Each
Fund intends, under normal circumstances, to avoid liability for such tax by
satisfying such distribution requirements.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the exchange or redemption of Fund shares may also be subject to
state and local taxes. Shareholders should consult their own tax advisers as to
the Federal, state or local tax consequences of ownership of shares of the Fund
in particular circumstances.
Foreign investors not engaged in a U.S. trade or business with which their Fund
investment is effectively connected will be subject to U.S. Federal income tax
treatment that is different from that described above, including a possible 30%
U.S. withholding tax (or lower treaty rate) on dividends representing ordinary
income, and should consult their tax advisers regarding such treatment and the
application of foreign taxes to an investment in the Funds.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
Provided that the Funds qualify as regulated investment companies under the
Code, they will also not be required to pay any Massachusetts income tax.
DESCRIPTION OF THE TRUST'S SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Funds. The Declaration of Trust, dated October 31, 1994, as amended from
time to time, permits the Trustees to issue an unlimited number of full and
fractional shares of beneficial interest of the Funds, without par value. Under
48
<PAGE>
the Declaration of Trust, the Trustees have the authority to create and classify
shares of beneficial interest in separate series, without further action by
shareholders. As of the date of this SAI, the Trustees have authorized shares of
twelve series. Additional series may be added in the future. The Declaration of
Trust also authorizes the Trustees to classify and reclassify the shares of the
Funds, or any other series of the Trust, into one or more classes. As of the
date of this SAI, the Trustees have not authorized the issuance of additional
classes of shares.
Each share of a Fund represents an equal proportionate interest in the assets
belonging to that Fund. When issued, shares are fully paid and nonassessable
except as provided in the Prospectuses under the caption "Organization and
Management of the Funds." In the event of liquidation of a Fund, shareholders
are entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of the Trust are freely transferable
and have no preemptive, subscription or conversion rights.
In accordance with the provisions of the Declaration of Trust, the Trustees have
initially determined that shares entitle their holders to one vote per share on
any matter on which such shares are entitled to vote. The Trustees may determine
in the future, without the vote or consent of shareholders, that each dollar of
net asset value (number of shares owned times net asset value per share) will be
entitled to one vote on any matter on which such shares are entitled to vote.
Unless otherwise required by the 1940 Act or the Declaration of Trust, the Trust
has no intention of holding annual meetings of shareholders. Trust shareholders
may remove a Trustee by the affirmative vote of at least two-thirds of the
Trust's outstanding shares and the Trustees shall promptly call a meeting for
such purpose when requested to do so in writing by the record holders of not
less than 10% of the outstanding shares of the Trust. Shareholders may, under
certain circumstances, communicate with other shareholders in connection with
requesting a special meeting of shareholders. However, at any time that less
than a majority of the Trustees holding office were elected by the shareholders,
the Trustees will call a special meeting of shareholders for the purpose of
electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Liability is therefore limited to circumstances in which a
Fund itself would be unable to meet its obligations, and the possibility of this
occurrence is remote.
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 credit card checks. Use of 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.
49
<PAGE>
CALCULATION OF PERFORMANCE
Yield
For the 30-day period ended February 28, 1997, the yields of Active Bond Fund
and Global Bond Fund were 6.67% and 5.63%, respectively.
A Fund's yield is computed by dividing its net investment income per share
determined for a 30-day period by the maximum offering price per share on the
last day of the period, according to the following standard formula:
a - b
____ 6
Yield = 2 ( [ ( cd ) + 1 ] - 1)
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV).
Total Return
The average annual total return for the 1 year and life of that Fund for the
period ended February 28, 1997 is as follows:
50
<PAGE>
One Year Ended Commencement of Operations
February 28, 1997 to February 28, 1997
Active Bond Fund 6.17% 7.43% (c)
Global Bond Fund 3.39% 4.16% (d)
Small Capitalization Value Fund 13.78% 11.99% (d)
Dividend Performers Fund 21.26% 23.04% (c)
Multi-Sector Growth Fund 19.00% 24.03% (e)
Small Capitalization Growth Fund 8.89% (a)(b) --
International Equity Fund 2.79% 6.51% (c)
Balanced Fund 12.36% 13.96% (f)
Value Fund 21.36% 24.73% (g)
Diversified Core Equity Fund II 22.63% 26.79% (h)
Growth Fund 24.19% 24.72 % (g)
Medium Capitalization Fund 17.19% 19.51% (g)
(a) Not annualized
(b) From commencement of operations, May 2, 1996.
(c) Commencement of operations, March 30, 1995.
(d) Commencement of operations, April 19, 1995.
(e) Commencement of operations, April 11, 1995.
(f) Commencement of operations, July 6, 1995.
(g) From commencement of operations, October 2, 1995.
(h) Commencement of operations, March 10, 1995.
A Fund's total return is computed by finding the average annual compounded rate
of return over the indicated period that would equate the initial amount
invested to the ending redeemable value according to the following formula:
n_______
T = \/ERV / P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at
the beginning of indicated period.
51
<PAGE>
This calculation assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period.
In addition to average annual total returns, the Funds may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period.
From time to time, in reports and promotional literature, a Fund's total return
will be ranked or compared to indices of mutual funds and bank deposit vehicles.
Such indices may include Lipper Analytical Services, Inc.'s "Lipper-Mutual
Performance Analysis," a monthly publication which tracks net assets and total
return on equity mutual funds in the United States, as well as those published
by Frank Russell, Callan Associates, Wilshire Associates and SEI.
Performance rankings and ratings reported periodically in national financial
publications such as Money magazine, Forbes, Business Week, The Wall Street
Journal, Micropal, Inc., Morningstar, Stanger's, and Barron's. Pensions &
Investments and Institutional Investor may also be utilized. The 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 Funds is not fixed or guaranteed. Performance quotations
should not be considered to be representations of performance of any Fund for
any period in the future. The performance of a Fund is a function of many
factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease a
Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities of the Funds
are made by officers of the Adviser pursuant to recommendations made by an
investment policy committee of the Adviser, which consists of officers and
directors of the Adviser, corresponding Subadviser (if applicable), officers and
Trustees who are interested persons of the Trust. Orders for purchases and sales
of securities are placed in a manner, which, in the opinion of the officers of
the Trust, will offer the best price and market for the execution of each such
transaction. Purchases from underwriters of portfolio securities may include a
commission or commissions paid by the issuer and transactions with dealers
serving as market makers reflect a "spread." Debt securities are generally
traded on a net basis through dealers acting for their own account as principals
and not as brokers; no brokerage commissions are payable on such transactions.
Each Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
52
<PAGE>
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Funds as a factor in the selection of broker-dealers to
execute a Fund's portfolio transactions.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser and corresponding
Subadviser (if applicable) of the Funds. It is not possible to place a dollar
value on information and services to be received from brokers and dealers, since
it is only supplementary to the research efforts of the Adviser and
corresponding Subadviser (if applicable). The receipt of research information is
not expected to reduce significantly the expenses of the Adviser and Subadviser.
The research information and statistical assistance furnished by brokers and
dealers may benefit the Life Company or other advisory clients of the Adviser,
and, conversely, brokerage commissions and spreads paid by other advisory
clients of the Adviser may result in research information and statistical
assistance beneficial to the Funds. Similarly, research information and
assistance provided to a Subadviser by brokers and dealers may benefit other
advisory clients or affiliates of such Subadviser. The Funds will not make any
commitment to allocate portfolio transactions upon any prescribed basis. While
the Adviser, in connection with the corresponding Subadviser (if applicable),
will be primarily responsible for the allocation of the Funds' brokerage
business, the policies and practices of the Adviser in this regard must be
consistent with the foregoing and will, at all times, be subject to review by
the Trustees. For the year ended on February 28, 1996 and 1997, the Funds paid
negotiated brokerage commissions in the amount as follows: Independence
Diversified Core Equity Fund, $116,047 and $357,443, Independence Value Fund,
$361 and $335, Independence Medium Capitalization Fund, $1,885 and $3,963,
Independence Growth Fund, $310 and $917, Independence Balance Fund, $1,226 and
$4,063, Dividend Performers Fund, $8,269 and $10,194, Multi-Sector Fund, $29,262
and $164,166, Small Capitalization Value Fund $18,787 and $26,007, International
Equity, $16,778 and $17,069 and Small Capitalization Growth Fund for the year
ended 1997 was $1,275. Active Bond Fund and Global Bond had no negotiated
brokerage commissions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, each Fund
may pay to a broker which provides brokerage and research services to the Fund
an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that such price is
reasonable in light of the services provided and to such policies as the
Trustees may adopt from time to time. During the fiscal year ended February 28,
1997, Dividend Performers Fund, Multi-Sector Growth Fund, Small Capitalization
Value Fund, Global Bond and Small Capitalization Growth directed commissions in
the amount of $126, $16,790, $210, $4, and $70, respectively to compensate
brokers for research services such as industry, economics and company reviews
and evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder John Hancock Distributors, Inc.("J.H. Distributors"), a
broker-dealer. Pursuant to procedures adopted by the Trustees consistent with
the above policy of obtaining best net results, each Fund may execute portfolio
transactions with or through the J.H. Distributors. During the year ended
February 28, 1997, the Funds did not execute any portfolio transactions with
J.H. Distributors.
53
<PAGE>
J.H. Distributors may act as broker for the Funds on exchange transactions,
subject, however, to the general policy of the Funds set forth above and the
procedures adopted by the Trustees pursuant to the 1940 Act. Commissions paid to
J.H. Distributors 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 J.H. Distributor's if a Fund would have to
pay a commission rate less favorable than the J.H. Distributors contemporaneous
charges for comparable transactions for its other most favored, but
unaffiliated, customers except for accounts for which J.H. Distributors acts as
clearing broker for another brokerage firm, and any customers of J.H.
Distributors not comparable to the Fund as determined by a majority of the
Trustees who are not interested persons (as defined in the 1940 Act) of the
Funds, the Adviser, the corresponding Subadviser (if applicable) or J.H.
Distributors. Because the Adviser, which is affiliated with J.H. Distributors,
and the corresponding Subadviser (if applicable), have, as investment advisers
to the Funds, the obligation to provide investment management services, which
includes elements of research and related investment skills, such research and
related skills will not be used by J.H. Distributors' as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria. The Funds will not effect principal transactions with J.H.
Distributors.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Funds. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for the Funds with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc. P.O. Box 9296, Boston, MA 02205-9296, a
wholly-owned indirect subsidiary of the Life Company is the transfer and
dividend paying agent for each Fund. Each Fund pays Signature Services an annual
fee accrued daily of 0.05% of the its average daily net assets, plus certain
out-of-pocket expenses.
CUSTODY OF PORTFOLIO
Portfolio securities of International Equity Fund and Global Bond Fund are held
pursuant to a Master Custodian Agreement, as amended, between the Adviser and
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Portfolio securities of the other Funds are held pursuant to a Master
Custodian Agreement, as amended, between the Adviser and Investors Bank & Trust
Company, 200 Clarendon Street, Boston, Massachusetts 02116. Under the Master
Custodian Agreements, Investors Bank & Trust Company and State Street Bank and
Trust Company perform custody, portfolio and fund accounting services for their
respective Funds.
54
<PAGE>
INDEPENDENT AUDITORS
The independent auditors of the John Hancock Series Funds are Deloitte & Touche
LLP, 125 Summer Street, Boston, Massachusetts 02110. The independent auditors of
the Independence Funds are Arthur Andersen LLP, One International Place, Boston,
Massachusetts 02110-2640. Arthur Anderson LLP and Deloitte & Touche LLP audit
and render opinions on their respective Funds' annual financial statements and
review their respective Funds' annual Federal income tax returns.
After the completion of the February, 1997 audit, Deloitte & Touche LLP will be
auditing and rendering opinions on the Independence Funds also.
55
<PAGE>
APPENDIX A
Description of Securities Ratings1
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
- --------
1 The ratings described here are believed to be the most recent ratings
available at the date of this SAI for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating agencies
may from time to time revise these ratings, they undertake no obligation to do
so, and the ratings indicated do not necessarily represent those which would be
given to these securities on the date of a Fund's fiscal year-end.
The ratings described here are believed to be the most recent ratings available
at the date of this SAI for the securities listed. Ratings are generally given
to securities at the time of issuance. While the rating agencies may from time
to time revise these ratings, they undertake no obligation to do so, and the
ratings indicated do not necessarily represent those which would be given to
these securities on the date of a Fund's fiscal year-end.
A1
<PAGE>
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.
Absence of Rating: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or
companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue
or issuer.
4. The issue was privately placed, in which case the rating
is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Commercial Paper
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months.
A2
<PAGE>
Issuers rated Prime-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-I or P-1
repayment ability will often be evidenced by the following characteristics:
_ Leading market positions in well established industries.
_ High rates of return on funds employed.
_ Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
_ Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
_ Well established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2
Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong ability
for repayment of senior short-term obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Prime-3
Issuers (or supporting institutions) rated Prime-3 (P-3) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Standard & Poor's Ratings Group
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
A3
<PAGE>
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
A4
<PAGE>
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus of minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "P" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is insured by
the Federal Saving & Loan Insurance Corp. or the Federal Deposit Insurance Corp.
and interest is adequately collateralized. In the case of certificates of
deposit the letter "L" indicates that the deposit, combined with other deposits,
being held in the same right and capacity will be honored for principal and
accrued pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the deposit is
assumed by a successor insured institution, upon maturity.
NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Commercial Paper
Standard & Poor's describes its three highest ratings for commercial paper as
follows:
A-1. This designation indicated that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
********
Notes: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. A Portfolio is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by
a rating service may not reflect the effect of recent developments on the
issuer's ability to make interest and principal payments.
A5
<PAGE>
APPENDIX Active Bond
Quality Distribution
The average weighted quality distribution of the securities in the portfolio for
the year ended February 28, 1997:
<TABLE>
<CAPTION>
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Security Ratings Average % of Rating % of Rating % of
Value Portfolio Assigned Portfolio Assigned by Portfolio
<S> <C> <C> <C> <C> <C> <C>
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
AAA 885,979 55.0% 0% 885,979 55.0%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
AA 81,308 5.0% 0 81,308 5.0%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
A 121,036 7.5% 0 121,036 7.5%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
BBB 163,365 10.1% 0 163,365 10.1%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
BB 138,228 8.7% 0 138,228 8.7%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
B 60,289 3.7% 0 60,288 3.7%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
CCC 0 0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
CC 0 0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
C 0 0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
NR 0 0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Debt Securities 1,450,206 89.9% 0 1,450,205 89.9%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Options Securities 0 0.0%
- ---------------------- ----------------- --------------- --------------- ---------------- --- ------------ ---------------
Short-Term 163,000 10.1%
Securities
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Total Portfolio 1,613,205 100.0%
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Other Assets-Net 15,758
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Net Assets 1,628,961
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
</TABLE>
The ratings are described in the Statement of Additional Information *S&P,
Moody's and Fitch's.
B1
<PAGE>
APPENDIX Global Bond
Quality Distribution
<TABLE>
<CAPTION>
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Security Ratings Y-T-D Average % of Rating % of Rating % of
<S> <C> <C> <C> <C> <C> <C>
Value Portfolio Assigned Portfolio Assigned by Portfolio
by Adviser Service*
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
AAA 583,752 61.8% 0% 583,752 61.8%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
AA 228,672 24.2% 0 228,672 24.2%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
A 0 0.0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
BAA 0 0.0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
BA 27,233 2.9% 0 27,233 2.9%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
B 77,844 8.2% 0 77,844 8.2%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
CAA 0 0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
CA 0 0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
C 0 0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
D 0 0% 0 0.0%
0 0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Debt Securities 917,501 97.1% 0 917,501 97.1%
0
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Equity Securities 0 0.0%
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Short-Term 27,769 2.9%
Securities
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Total Portfolio 945,270 100.0%
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Other Assets-Net 19,578
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
Net Assets 964,848
- ---------------------- ----------------- --------------- --------------- ---------------- --------------- ---------------
</TABLE>
The ratings are described in the Statement of Additional Information *S&P,
Moody's and Fitch's.
B2
