JOHN HANCOCK INSTITUTIONAL SERIES TRUST
101 Huntington Avenue
Boston, Massachusetts 02199
John Hancock Active Bond Fund
John Hancock Dividend Performers Fund
John Hancock Medium Capitalization Growth Fund
John Hancock Small Capitalization Value Fund
John Hancock Small Capitalization Growth Fund-Class I
John Hancock International Equity Fund
John Hancock Independence Diversified Core Equity Fund II
John Hancock Independence Medium Capitalization Fund
John Hancock Independence Balanced Fund
(each, a "Fund" and collectively, the "Funds")
Statement of Additional Information
January 16, 2001
This Statement of Additional Information provides information about the Funds in
addition to the information that is contained in the John Hancock Series Funds'
current Prospectus and in the Independence Funds' current Prospectus (together,
the "Prospectuses").
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Funds' Prospectuses, copies of which can be obtained
free of charge by writing or telephoning:
John Hancock Signature Services, Inc.
P.O. Box 9296
Boston, Massachusetts 02205-9296
1-800-755-4371
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TABLE OF CONTENTS
Page
Organization of the Funds 2
Investment Objectives and Policies 2
-The John Hancock Series Funds 3
-The Independence Funds 3
Investment Restrictions 16
Those Responsible for Management 19
Investment Advisory and Other Services 30
Distribution Contract 34
Sales Compensation 34
Net Asset Value 34
Special Redemptions 35
Description of the Funds' Shares 35
Tax Status 37
Calculation of Performance 42
Brokerage Allocation 43
Transfer Agent Services 46
Custody of Portfolio 46
Independent Auditors 46
Appendix A--Description of Securities Ratings A-1
Financial Statements F-1
ORGANIZATION OF THE FUNDS
Each Fund is a series of John Hancock Institutional Series Trust (the "Trust")
an open-end investment management company organized as a Massachusetts business
trust on October 31, 1994 under the laws of the Commonwealth of Massachusetts.
Small Capitalization Growth Fund, Dividend Performers Fund, Active Bond Fund,
Medium Capitalization Growth Fund, Small Capitalization Value Fund and
International Equity Fund are sometimes referred to herein collectively as the
"John Hancock Series Funds." Independence Diversified Core Equity Fund II,
Independence Medium Capitalization Fund and Independence Balanced Fund are
sometimes referred to herein collectively as the "Independence Funds."
The investment adviser of each Fund is John Hancock Advisers, Inc. (the
"Adviser"). The Adviser is an indirect wholly-owned subsidiary of John Hancock
Life Insurance Company (formerly John Hancock Mutual Life Insurance Company)
(the "Life Company"), a Massachusetts life insurance company chartered in 1862,
with national headquarters at John Hancock Place, Boston, Massachusetts. The
Life Company is wholly owned by John Hancock Financial Services, Inc., a
Delaware corporation organized in February, 2000. The investment sub-adviser of
International Equity Fund is Nicholas-Applegate Capital Management
("Nicholas-Applegate") (the "Sub-Adviser"). The investment sub-adviser of each
Independence Fund is Independence Investment Associates, Inc. ("IIA"). Together,
IIA and Nicholas-Applegate are sometimes referred to herein collectively as the
"Sub-Advisers" or, individually, as the "Sub-Adviser." The Sub-Advisers are
responsible for providing investment advice to their respective funds, subject
to the review of the Trustees and overall supervision of the Adviser. IIA is an
affiliate of the Life Company.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's investment
objective and policies as discussed in the Prospectuses. There is no assurance
that any Fund will achieve its investment objective.
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Each Fund has adopted certain investment restrictions that are detailed under
"Investment Restrictions" in this Statement of Additional Information where they
are classified as fundamental or nonfundamental. Those restrictions designated
as fundamental may not be changed without shareholder approval. Each Fund's
investment objective, investment policies and nonfundamental restrictions,
however, may be changed by a vote of the Trustees without shareholder approval.
If there is a change in a Fund's investment objective, shareholders should
consider whether the Fund remains an appropriate investment in light of their
then current financial position and needs.
A. The John Hancock Series Funds.
For a further description of the John Hancock Series Funds' investment
objectives, policies and restrictions see "Goal and Strategy" and "Main Risks"
in the John Hancock Series Funds' Prospectus and "Investment Restrictions" in
this Statement of Additional Information. Effective November 15, 2000, existing
shares of Small Capitalization Growth Fund were designated as "Class I". See
Appendix A to this Statement of Additional Information for a description of the
quality categories of corporate bonds in which certain of the John Hancock
Series Funds may invest.
B. The Independence Funds.
For a further description of the Independence Funds' investment objectives,
policies and restrictions see "Goal and Strategy" and "Main Risks" in the
Independence Funds' Prospectus and "Investment Restrictions" in this Statement
of Additional Information. Effective October 1, 1999, existing shares of
Independence Diversified Core Equity Fund II were designated as "Class I"
shares.
Common stocks. Dividend Performers Fund, Medium Capitalization Growth Fund,
International Equity Fund, Small Capitalization Value Fund, Small Capitalization
Growth Fund and each Independence Fund may invest in common stocks. Common
stocks are shares of a corporation or other entity that entitle the holder to a
pro rata share of the profits of the corporation, if any, without preference
over any other shareholder or class of shareholders, including holders of such
entity's preferred stock and other senior equity. Ownership of common stock
usually carries with it the right to vote and, frequently, an exclusive right to
do so. Common stocks have the potential to outperform fixed-income securities
over the long term. Common stocks provide the most potential for growth, yet are
the more volatile of the two asset classes.
Debt securities. Active Bond Fund and Independence Balanced Fund may regularly
invest in debt obligations. Small Capitalization Value Fund invests primarily in
U.S. stocks, but may invest up to 15% of total assets in a combination of
foreign securities and/or bonds rated as low as CC/Ca and their unrated
equivalents. Under normal conditions, Dividend Performers Fund, International
Equity Fund, Medium Capitalization Growth Fund, and Small Capitalization Growth
Fund will not invest in any fixed income securities. However, in abnormal
conditions, Dividend Performers Fund, International Equity Fund, Medium
Capitalization Growth Fund, and Small Capitalization Growth Fund may temporarily
invest in U.S. Government securities and U.S. Government agency securities with
maturities of up to three years, and may also invest more than 10% of total
assets in cash and/or cash equivalents (including U.S. Government securities
maturing in 90 days or less.) Debt securities of corporate and governmental
issuers in which the Funds may invest are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations (credit
risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk).
Preferred stocks. Dividend Performers Fund, International Equity Fund, Medium
Capitalization Growth Fund, Small Capitalization Value Fund, Small
Capitalization Growth Fund and each Independence Fund may invest in preferred
stocks. Preferred stock generally has a preference to dividends and, upon
liquidation, over an issuer's common stock but ranks junior to debt securities
in an issuer's capital structure. Preferred stock generally pays dividends in
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cash (or additional shares of preferred stock) at a defined rate but, unlike
interest payments on debt securities, preferred stock dividends are payable only
if declared by the issuer's board of directors. Dividends on preferred stock may
be cumulative, meaning that, in the event the issuer fails to make one or more
dividend payments on the preferred stock, no dividends may be paid on the
issuer's common stock until all unpaid preferred stock dividends have been paid.
Preferred stock also may be subject to optional or mandatory redemption
provisions.
Convertible securities. Small Capitalization Value Fund and Independence
Balanced Fund may invest in convertible securities which may include corporate
notes or preferred stock. Active Bond Fund may invest in convertible debt
securities. Dividend Performers Fund, International Equity Fund, Medium
Capitalization Growth Fund, and Small Capitalization Growth Fund may invest in
convertible preferred stocks. Investments in convertible securities are not
subject to the rating criteria with respect to non-convertible debt obligations.
As with all debt securities, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. The market value of convertible securities can also be heavily
dependent upon the changing value of the equity securities into which such
securities are convertible, depending on whether the market price of the
underlying security exceeds the conversion price. Convertible securities
generally rank senior to common stocks in an issuer's capital structure and
consequently entail less risk than the issuer's common stock. However, the
extent to which such risk is reduced depends upon the degree to which the
convertible security sells above its value as a fixed-income security.
Investments in Foreign Securities and Emerging Countries. Each of the Funds may
invest in the securities of foreign issuers to the following extent:
o Each Independence Fund and Dividend Performers Fund may invest in U.S.
dollar denominated securities of foreign issuers and in American Depositary
Receipts. Independence Balanced Fund may also invest in Yankee Bonds.
o Medium Capitalization Growth Fund and Small Capitalization Growth Fund may
invest up to 10% of total assets in foreign securities. Foreign equities
include but are not limited to common stocks, convertible preferred stocks,
preferred stocks, warrants, American Depositary Receipts ("ADRs"), Global
Depositary Recepts ("GDRs"), and European Depositary Receipts ("EDRs").
o Small Capitalization Value Fund invests primarily in U.S. stocks, but may
invest up to 15% of total assets in a combination of foreign securities
and/or bonds rated as low as CC/Ca and their unrated equivalents.
o Active Bond Fund may invest up to 25% of total assets in Yankee Bonds, U.S.
dollar (excluding U.S. dollar denominated Canadian securities) and foreign
currency denominated securities of foreign issuers.
o International Equity Fund normally invests at least 80% of total assets in
a diversified portfolio of foreign stocks from both developed and emerging
countries. The fund may invest up to 30% of total assets in emerging
markets as classified by Morgan Stanley Capital International ("MSCI").
Foreign equities include but are not limited to common stocks, convertible
preferred stocks, preferred stocks, warrants, ADRs, GDRs and EDRs.
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.
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Because foreign securities may be denominated in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the Fund's net
asset value, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions undertaken in some
foreign markets may not be settled promptly so that the Fund's investments on
foreign exchanges may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities will be purchased in the best available market, whether
through over-the-counter markets or exchanges located in the countries where
principal offices of the issuers are located. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Fund will endeavor to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
than in the United States.
With respect to certain foreign countries, there is the possibility of adverse
changes in investment or exchange control regulations, expropriation,
nationalization or confiscatory taxation limitations on the removal of funds or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the United States' economy in terms of growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
The dividends, in some cases capital gains and interest payable on certain of
the Fund's foreign portfolio securities, may be subject to foreign withholding
or other foreign taxes, thus reducing the net amount of income or gains
available for distribution to the Fund's shareholders.
These risks may be intensified in the case of investments in emerging markets or
countries with limited or developing capital markets. These countries are
located in the Asia-Pacific region, Eastern Europe, Latin and South America and
Africa. Security prices in these markets can be significantly more volatile than
in more developed countries, reflecting the greater uncertainties of investing
in less established markets and economies. Political, legal and economic
structures in many of these emerging market countries may be undergoing
significant evolution and rapid development, and they may lack the social,
political, legal and economic stability characteristic of more developed
countries. Emerging market countries may have failed in the past to recognize
private property rights. They may have relatively unstable governments, present
the risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of property
rights than more developed countries. Their economies may be predominantly based
on only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of securities
and may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of substantial holdings difficult or
impossible at times. The Fund may be required to establish special custodial or
other arrangements before making certain investments in those countries.
Securities of issuers located in these countries may have limited marketability
and may be subject to more abrupt or erratic price movements.
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.
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The Fund's ability and decisions to purchase or sell portfolio securities may be
affected by laws or regulations relating to the convertibility and repatriation
of assets. Because the shares of the Fund are redeemable on a daily basis in
U.S. dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars. Under present conditions,
it is not believed that these considerations will have any significant effect on
its portfolio strategy.
Foreign Currency Transactions. Each John Hancock Series Fund, other than
Dividend Performers Fund, may engage in foreign currency transactions. Foreign
currency transactions may be conducted on a spot (i.e., cash) basis at the spot
rate for purchasing or selling currency prevailing in the foreign exchange
market.
Each John Hancock Series Fund, other than Dividend Performers Fund, may also
enter into forward foreign currency exchange contracts to hedge against
fluctuations in currency exchange rates affecting a particular transaction or
portfolio position. Forward contracts are agreements to purchase or sell a
specified currency at a specified future date and price set at the time of the
contract. Transaction hedging is the purchase or sale of forward foreign
currency contracts with respect to specific receivables or payables of a Fund
accruing in connection with the purchase and sale of its portfolio securities
quoted or denominated in the same or related foreign currencies. Portfolio
hedging is the use of forward foreign currency contracts to offset portfolio
security positions denominated or quoted in the same or related foreign
currencies. A Fund may elect to hedge less than all of its foreign portfolio
positions as deemed appropriate by the Adviser. The Funds will not engage in
speculative forward foreign currency exchange transactions.
If a Fund purchases a forward contract, the Fund will segregate cash or liquid
securities in a separate account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of such forward contract.
The assets in the segregated account will be valued at market daily and if the
value of the securities in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
be equal the amount of the Fund's commitment with respect to such contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency rises. Moreover, it may
not be possible for the Funds to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
Repurchase Agreements. Each Fund may enter into repurchase agreements. In a
repurchase agreement the Fund buys a security for a relatively short period
(usually not more than 7 days) subject to the obligation to sell it back to the
issuer at a fixed time and price plus accrued interest. The Fund will enter into
repurchase agreements only with member banks of the Federal Reserve System and
with "primary dealers" in U.S. Government securities. The Adviser will
continuously monitor the creditworthiness of the parties with whom the Fund
enters into repurchase agreements.
The Fund has established a procedure providing that the securities serving as
collateral for each repurchase agreement must be delivered to the Fund's
custodian either physically or in book-entry form and that the collateral must
be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities during the period in which the Fund seeks
to enforce its rights thereto, possible subnormal levels of income, decline in
value of the underlying securities or lack of access to income during this
period as well as the expense of enforcing its rights.
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
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
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proceeds of the transaction may decline below the repurchase price of the
securities sold by a Fund which it is obligated to repurchase. Each Fund will
also continue to be subject to the risk of a decline in the market value of the
securities sold under the agreements because it will reacquire those securities
upon effecting its repurchase. To minimize various risks associated with reverse
repurchase agreements, a Fund will establish a separate account consisting of
liquid securities, of any type or maturity, in an amount at least equal to the
repurchase prices of the securities (plus any accrued interest thereon) under
such agreements. In addition, a Fund will not enter into reverse repurchase
agreements or 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 Trustees, the Adviser will
monitor the creditworthiness of the banks involved.
Restricted Securities. Each Fund may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 ("1933 Act"),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act
and securities offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. Each Fund will not invest more than 15% of its net
assets in illiquid investments. If the Trustees determine, based upon a
continuing review of the trading markets for specific Section 4(2) paper or Rule
144A securities, that they are liquid, they will not be subject to the 15% limit
on illiquid investments. The Trustees may adopt guidelines and delegate to the
Adviser the daily function of determining the monitoring and liquidity of
restricted securities. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Trustees will
carefully monitor the Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund if qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
Options on Securities, Securities Indices and Currency. Active Bond Fund may
purchase and write (sell) call and put options on any securities in which it may
invest or on any securities index based on securities in which it may invest.
International Equity Fund may purchase and write (sell ) call and put options on
any securities in which it may invest, on any securities index based on
securities in which it may invest or on any currency in which Fund investments
may be demoninated. Each of Dividend Performers Fund, Small Capitalization Value
Fund, Small Capitalization Growth Fund and Medium Capitalization Growth Fund may
purchase and write (sell) call and put options on any securities index based on
securities in which it may invest. These options may be listed on national
domestic securities exchanges or foreign securities exchanges or traded in the
over-the-counter market. Each Fund may write covered put and call options and
purchase put and call options as a substitute for the purchase or sale of
securities (or, with respect to International Equity Fund, currency) or to
protect against declines in the value of portfolio securities and against
increases in the cost of securities to be acquired.
Writing Covered Options. A call option on a security or currency written by a
Fund obligates the Fund to sell specified securities or currency to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. A put option on securities or currency written by a Fund
obligates the Fund to purchase specified securities or currency from the option
holder at a specified price if the option is exercised at any time before the
expiration date. Options on securities indices are similar to options on
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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 with a value at least equal to the Fund's obligation under the option,
(ii) entering into an offsetting forward commitment and/or (iii) purchasing an
offsetting option or any other option which, by virtue of its exercise price or
otherwise, reduces the Fund's net exposure on its written option position. A
written call option on securities is typically covered by maintaining the
securities that are subject to the option in a segregated account. Each Fund may
cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index.
Each Fund may terminate its obligations under an exchange traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. A Fund would normally purchase call options in anticipation
of an increase, or put options in anticipation of a decrease ("protective
puts"), in the market value of securities or currencies of the type in which it
may invest. A Fund may also sell call and put options to close out its purchased
options.
The purchase of a call option would entitle a Fund, in return for the premium
paid, to purchase specified securities or currency at a specified price during
the option period. A Fund would ordinarily realize a gain on the purchase of a
call option if, during the option period, the value of such securities or
currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
The purchase of a put option would entitle a Fund, in exchange for the premium
paid, to sell specified securities or currency at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities or the
currencies in which they are denominated. Put options may also be purchased by a
Fund for the purpose of affirmatively benefiting from a decline in the price of
securities or currencies which it does not own. A Fund would ordinarily realize
a gain if, during the option period, the value of the underlying securities or
currency decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of a Fund's
portfolio securities.
Each Fund's options transactions will be subject to limitations established by
each of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
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.
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Risks Associated with Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options
depends in part on the Adviser's ability to predict future price fluctuations
and, for hedging transactions, the degree of correlation between the options and
securities or currency markets.
Futures Contracts and Options on Futures Contracts. International Equity Fund
may purchase and sell futures contracts based on various securities (such as
U.S. Government securities) and securities indices, foreign currencies and any
other financial instruments and indices and purchase and write call and put
options on these futures contracts. Active Bond Fund may purchase and sell
futures contracts based on various securities (such as U.S. Government
securities) and securities indices, and any other financial instruments and
indices and purchase and write call and put options on these futures contracts.
Dividend Performers Fund, Small Capitalization Value Fund, Small Capitalization
Growth Fund and Medium Capitalization Growth Fund may purchase and sell futures
contracts based on securities indices and purchase and write call and put
options on these futures contracts. Each Fund may purchase and sell futures and
options on futures for hedging or other non-speculative purposes. Each Fund may
also enter into closing purchase and sale transactions with respect to any of
these contracts and options. All futures contracts entered into by a Fund are
traded on U.S. or foreign exchanges or boards of trade that are licensed,
regulated or approved by the Commodity Futures Trading Commission ("CFTC").
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).
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Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the Fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
contracts are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging and Other Strategies. Hedging is an attempt to establish with more
certainty than would otherwise be possible the effective price or rate of return
on portfolio securities or securities that a Fund proposes to acquire or the
exchange rate of currencies in which the portfolio securities are quoted or
denominated. When securities prices are falling, a Fund can seek to offset a
decline in the value of its current portfolio securities through the sale of
futures contracts. When securities prices are rising, a Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases. A
Fund may seek to offset anticipated changes in the value of a currency in which
its portfolio securities, or securities that it intends to purchase, are quoted
or denominated by purchasing and selling futures contracts on such currencies.
A Fund may, for example, take a "short" position in the futures market by
selling futures contracts in an attempt to hedge against an anticipated decline
in market prices or foreign currency rates that would adversely affect the value
of the Fund's portfolio securities. Such futures contracts may include contracts
for the future delivery of securities held by a Fund or securities with
characteristics similar to those of the Fund's portfolio securities. Similarly,
a Fund may sell futures contracts on any currencies in which its portfolio
securities are quoted or denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies.
If, in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in the Fund's portfolio
may be more or less volatile than prices of such futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund's portfolio
securities.
When a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of the Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency rates then available in the applicable market to
be less favorable than prices that are currently available. Subject to the
limitations imposed on the funds, as described above, a Fund may also purchase
futures contracts as a substitute for transactions in securities or foreign
currency, to alter the investment characteristics of or currency exposure
associated with portfolio securities or to gain or increase its exposure to a
particular securities market or currency.
Options on Futures Contracts. The purchase of put and call options on futures
contracts will give a Fund the right (but not the obligation) for a specified
price to sell or to purchase, respectively, the underlying futures contract at
any time during the option period. As the purchaser of an option on a futures
contract, a Fund obtains the benefit of the futures position if prices move in a
favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
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The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium (upon exercise of
the option) to sell a futures contract if the option is exercised, which may
have a value higher than the exercise price. Conversely, the writing of a put
option on a futures contract generates a premium which may partially offset an
increase in the price of securities that the Fund intends to purchase. However,
a Fund becomes obligated (upon exercise of the option) to purchase a futures
contract if the option is exercised, which may have a value lower than the
exercise price. The loss incurred by each Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Other Considerations. Each John Hancock Series Fund will engage in futures and
related options transactions either for bona fide hedging or for other
non-speculative purposes as permitted by the CFTC. These purposes may include
using futures and options on futures as substitute for the purchase or sale of
securities or currencies to increase or reduce exposure to particular markets.
To the extent that a Fund is using futures and related options for hedging
purposes, futures contracts will be sold to protect against a decline in the
price of securities (or the currency in which they are quoted or denominated)
that the Fund owns or futures contracts will be purchased to protect the Fund
against an increase in the price of securities or the currency in which they are
quoted or denominated) it intends to purchase. Each Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the Fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
To the extent that a Fund engages in nonhedging transactions in futures
contracts and options on futures, the aggregate initial margin and premiums
required to establish these nonhedging positions will not exceed 5% of the net
asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, these transactions themselves entail certain other risks. For
example, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions.
Perfect correlation between a Fund's futures positions and portfolio positions
will be impossible to achieve. In the event of an imperfect correlation between
a futures position and a portfolio position which is intended to be protected,
the desired protection may not be obtained and the Fund may be exposed to risk
of loss. In addition, it is not possible to hedge fully or protect against
currency fluctuations affecting the value of securities denominated in foreign
currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
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Some futures contracts or options on futures may become illiquid under adverse
market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option,
which may make the instrument temporarily illiquid and difficult to price.
Commodity exchanges may also establish daily limits on the amount that the price
of a futures contract or related option can vary from the previous day's
settlement price. Once the daily limit is reached, no trades may be made that
day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Forward Commitment and When-Issued Securities. Each Fund may purchase securities
on a when-issued or forward commitment basis. "When-issued" refers to securities
whose terms are available and for which a market exists, but which have not been
issued. A Fund will engage in when-issued transactions with respect to
securities purchased for its portfolio in order to obtain what is considered to
be an advantageous price and yield at the time of the transaction. For
when-issued transactions, no payment is made until delivery is due, often a
month or more after the purchase. In a forward commitment transaction, a Fund
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. When a Fund engages in forward commitment and
when-issued transactions, it relies on the seller to consummate the transaction.
The failure of the issuer or seller to consummate the transaction may result in
the Funds losing the opportunity to obtain a price and yield considered to be
advantageous. The purchase of securities on a when-issued and forward commitment
basis also involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date.
On the date a Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid securities, of any type or maturity, equal in value to
the Fund's commitment. These assets will be valued daily at market, and
additional cash or securities will be segregated in a separate account to the
extent that the total value of the assets in the account declines below the
amount of the when-issued commitments. Alternatively, a Fund may enter into
offsetting contracts for the forward sale of other securities that it owns.
Warrants. Each John Hancock Series Fund may invest in warrants. Warrants entitle
the holder to buy equity securities at a specific price for a specific period of
time. Warrants tend to be more volatile than their underlying securities. Also,
the value of the warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not exercised
prior to the expiration date.
Government Securities. Each Fund may invest in government securities. However,
under normal conditions, Dividend Performers Fund, Small Capitalization Growth
Fund, Medium Capitalization Growth Fund and International Equity Fund will not
invest in any fixed income securities, with the exception of cash equivalents
(which include U.S. Government securities maturing in 90 days or less). In
abnormal conditions, these funds may temporarily invest in U.S. Government
securities and U.S. Government agency securities with maturities of up to three
years, and may also invest more than 10% of total assets in cash and/or cash
equivalents. Certain U.S. Government securities, including U.S. Treasury bills,
notes and bonds, and 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.
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Mortgage-Backed Securities. Active Bond Fund and each Independence Fund may
invest in mortgage pass-through certificates and multiple-class pass-through
securities, such as real estate mortgage investment conduits ("REMIC")
pass-through certificates, collateralized mortgage obligations ("CMOs") and
stripped mortgage-backed securities ("SMBS"), and other types of
"Mortgage-Backed Securities" that may be available in the future.
Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. Governmental or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities, including but
not limited to the GNMA, the FNMA and the FHLMC. GNMA certificates are
guaranteed by the full faith and credit of the U.S. Government for timely
payment of principal and interest on the certificates. FNMA certificates are
guaranteed by FNMA, a federally chartered and privately owned corporation, for
full and timely payment of principal and interest on the certificates. FHLMC
certificates are guaranteed by FHLMC, a corporate instrumentality of the U.S.
Government, for timely payment of interest and the ultimate collection of all
principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. Government agencies and instrumentalities as well as private
lenders. CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also
may be collateralized by other mortgage assets such as whole loans or private
mortgage pass-through securities. Debt service on CMOs is provided from payments
of principal and interest on collateral of mortgaged assets and any reinvestment
income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages primarily secured by interests in real property and
other permitted investments. Investors may purchase "regular" and "residual"
interest shares of beneficial interest in REMIC trusts although the Funds do not
intend to invest in residual interests.
Stripped Mortgage-Backed Securities. SMBS are derivative multiple-class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of interest and principal distributions on a pool
of mortgage assets. A typical SMBS will have one class receiving some of the
interest and most of the principal, while the other class will receive most of
the interest and the remaining principal. In the most extreme case, one class
will receive all of the interest (the "interest only" class) while the other
class will receive all of the principal (the "principal only" class). The yields
and market risk of interest only and principal only SMBS, respectively, may be
more volatile than those of other fixed income securities. The staff of the SEC
considers privately issued SMBS to be illiquid.
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
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benchmark market while fixing the maximum loss that the Fund may experience in
the event that market does not perform as expected. Depending on the terms of
the note, a Fund may forego all or part of the interest and principal that would
be payable on a comparable conventional note; a Fund's loss cannot exceed this
foregone interest and/or principal. An investment in structured or hybrid notes
involves risks similar to those associated with a direct investment in the
benchmark asset.
Risk Factors Associated with Mortgage-Backed Securities. Investing in
Mortgage-Backed Securities involves certain risks, including the failure of a
counter-party to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. Further, the yield
characteristics of Mortgage-Backed Securities differ from those of traditional
fixed income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of interest
rates, and the possibility that prepayments of principal may be made
substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. Under certain interest
rate and prepayment rate scenarios, a Fund may fail to recoup fully its
investment in Mortgage-Backed Securities notwithstanding any direct or indirect
governmental, agency or other guarantee. When a Fund reinvests amounts
representing payments and unscheduled prepayments of principal, it may receive a
rate of interest that is lower than the rate on existing adjustable rate
mortgage pass-through securities. Thus, Mortgage-Backed Securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of U.S. Government securities as a means of "locking
in" interest rates.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many Mortgage-Backed Securities. This
possibility is often referred to as extension risk. Extending the average life
of a Mortgage-Backed Security increases the risk of depreciation due to future
increases in market interest rates.
Risk Associated With Specific Types of Derivative Debt Securities. Different
types of derivative debt securities are subject to different combinations of
prepayment, extension and/or interest rate risk. Conventional mortgage
pass-through securities and sequential pay CMOs are subject to all of these
risks, but are typically not leveraged. Thus, the magnitude of exposure may be
less than for more leveraged Mortgage-Backed Securities.
The risk of early prepayments is the primary risk associated with interest only
debt securities ("IOs"), super floaters, other leveraged floating rate
instruments and Mortgage-Backed Securities purchased at a premium to their par
value. In some instances, early prepayments may result in a complete loss of
investment in certain of these securities. The primary risks associated with
certain other derivative debt securities are the potential extension of average
life and/or depreciation due to rising interest rates.
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.
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Planned amortization class ("PAC") and target amortization class ("TAC") CMO
bonds involve less exposure to prepayment, extension and interest rate risk than
other Mortgage-Backed Securities, provided that prepayment rates remain within
expected prepayment ranges or "collars." To the extent that prepayment rates
remain within these prepayment ranges, the residual or support tranches of PAC
and TAC CMOs assume the extra prepayment, extension and interest rate risk
associated with the underlying mortgage assets.
Other types of floating rate derivative debt securities present more complex
types of interest rate risks. For example, range floaters are subject to the
risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. X-reset
floaters have a coupon that remains fixed for more than one accrual period.
Thus, the type of risk involved in these securities depends on the terms of each
individual X-reset floater.
Ratings as Investment Criteria. In general, the ratings of Moody's and S&P
represent the opinions of these agencies as to the quality of the securities
which they rate. It should be emphasized however, that ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Funds as initial criteria for the selection of portfolio securities.
Among the factors which will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends. Appendix A
contains further information concerning the rating of Moody's and S&P and their
significance. Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither of these events will require the sale of the
securities by the Fund, but the Adviser will consider the event in its
determination of whether the Fund should continue to hold the securities.
Lower Rated High Yield Debt Obligations. Active Bond Fund and Small
Capitalization Value Fund may invest in high yielding, fixed income securities
rated below investment grade (e.g., rated 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. Small Capitalization Value Fund may invest up to 15% of
its net assets in securities rated as low as Ca by Moody's or CC by S & P and
their equivalents.
Ratings are based largely on the historical financial condition of the issuer.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. See Appendix A to this Statement of
Additional Information which describes the characteristics of corporate bonds in
the various ratings categories. The Funds may invest in comparable quality
unrated securities which, in the opinion of the Adviser or Subadviser, offer
comparable yields and risks to those securities which are rated.
Debt obligations rated in the lower ratings categories, or which are unrated,
involve greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal. The high yield fixed income market is relatively new and
its growth occurred during a period of economic expansion. The market has not
yet been fully tested by an economic recession.
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.
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Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations will make it more difficult to dispose of the
bonds and to value accurately the Funds' assets. The reduced availability of
reliable, objective data may increase the Funds' reliance on management's
judgment in valuing high yield bonds. In addition, the Funds' investments in
high yield securities may be susceptible to adverse publicity and investor
perceptions, whether or not justified by fundamental factors. A Fund's
investments, and consequently its net asset value, will be subject to the market
fluctuations and risks inherent in all securities.
Lending of Securities. The Funds may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Funds may reinvest any cash collateral in short-term securities and money market
funds. When a Fund lends portfolio securities, there is a risk that the borrower
may fail to return the securities involved in the transaction. As a result, the
Fund may incur a loss or, in the event of the borrower's bankruptcy, the Fund
may be delayed in or prevented from liquidating the collateral. Each Fund can
lend portfolio securities having a total value of 33 1/3% of its total assets.
Short-Term Trading. Each John Hancock Series Fund may engage in short-term
trading. These Funds intend to use short-term trading of securities as a means
of managing their portfolio to achieve their respective investment objective. In
reaching a decision to sell one security and purchase another security at
approximately the same time, the Funds will take into account a number of
factors, for fixed income funds. These include the quality ratings, interest
rates, yields, maturity dates, call prices, and refunding and sinking fund
provisions of the securities under consideration, as well as historical yield
spreads and current economic information. Equity funds may engage in short-term
trading for special situations. These special situations may include arbitrage
opportunities, extraordinary positive or negative earnings surprises, takeover
situations, spin-offs, asset plays, management changes or a reorganization. The
success of short-term trading will depend upon the ability of the Funds to
evaluate particular securities, to anticipate relevant market factors, including
trends of interest rates and earnings and variations from such trends, to obtain
relevant information, to evaluate it promptly, and to take advantage of its
evaluations by completing transactions on a favorable basis. It is expected that
the expenses involved in short-term trading, which would not be incurred by an
investment company which does not use this portfolio technique, will be less
than the profits and other benefits which will accrue to shareholders.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. Each Fund has adopted the following
investment restrictions which may not be changed without the approval of a
majority of the applicable Fund's outstanding voting securities which, as used
in the Prospectuses and this Statement of Additional Information means the
approval by the lesser of (1) the holders of 67% or more of a Fund's shares
represented at a meeting if more than 50% of a Fund's outstanding shares are
present in person or by proxy or (2) more than 50% of the outstanding shares.
A Fund may not:
1. Issue senior securities, except as permitted by paragraphs 3, 6 and 7
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in
accordance with the Fund's investment policies or within the meaning of
paragraph 6 below, are not deemed to be senior securities.
2. Purchase securities on margin or make short sales [see non-fundamental
investment restriction (f)], 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.
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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.
4. Act as an underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purpose of the 1933 Act.
5. Purchase or sell real estate except that the Fund may (i) acquire or
lease office space for its own use, (ii) invest in securities of
issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein,
(iv) purchase and sell mortgage-related securities and (v) hold and
sell real estate acquired by the Fund as a result of the ownership of
securities.
6. Invest in commodities, except the Fund may purchase and sell options on
securities, securities indices and currency, futures contracts on
securities, securities indices and currency and options on such
futures, forward foreign currency exchange contracts, forward
commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment
policies [see non-fundamental investment restriction (h)].
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 with respect to 75% of total assets [see non-fundamental
investment restriction (g)], purchase securities of an issuer (other
than the U.S. Government, its agencies, instrumentalities or
authorities), if:
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(a) such purchase would cause more than 5% of the Fund's total
assets taken at market value to be invested in the securities
of such issuer; or
(b) such purchase would at the time result in more than 10% of
the outstanding voting securities of such issuer being held by
the Fund.
Non-Fundamental Investment Restrictions. The following investment restrictions
are designated as non-fundamental and may be changed by the Trustees without
shareholder approval.
A Fund may not:
(a) 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.
(b) 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.
(c) Invest more than 15% of the net assets of the Fund, taken at market
value, in illiquid securities.
(d) Purchase securities while outstanding borrowings exceed 5% of the
Fund's total assets.
(e) Invest for the purpose of exercising control over or management of any
company.
In addition:
(f) Dividend Performers Fund, International Equity Fund, Medium
Capitalization Growth Fund, Small Capitalization Growth Fund, and Small
Capitalization Value Fund may not make short sales.
(g) Dividend Performers Fund, International Equity Fund, Medium
Capitalization Growth Fund, Small Capitalization Value Fund, and Small
Capitalization Growth Fund may not invest more than 5% of total assets
at time of purchase in any one security (other than U.S. Government
securities).
(h) Dividend Performers Fund, Medium Capitalization Growth Fund, Small
Capitalization Value Fund, and Small Capitalization Growth Fund may
only purchase or sell stock index options, stock index futures, and
stock index options on futures.
(i) Under normal conditions, Active Bond Fund, Dividend Performers Fund,
International Equity Fund, Medium Capitalization Growth Fund, Small
Capitalization Value Fund, and Small Capitalization Growth Fund may not
invest more than 10% of total assets in cash and/or cash equivalents
(except cash segregated in relation to futures, forward and option
contracts).
18
<PAGE>
(j) Under normal conditions Dividend Performers Fund, International Equity
Fund, Medium Capitalization Growth Fund, and Small Capitalization Growth
Fund will not invest in any fixed income securities. However, in abnormal
conditions, these funds may temporarily invest in U.S. Government
securities and U.S. Government agency securities with maturities of up to
three years, and may also invest more than 10% of total assets in cash
and/or cash equivalents (including U.S. Government securities maturing in
90 days or less).
(k) International Equity Fund normally invests at least 80% of total assets
in a diversified portfolio of foreign stocks from both developed and
emerging countries. The Fund may invest up to 30% of total assets in
emerging markets as classified by Morgan Stanley Capital International
("MSCI"). Foreign equities include but are not limited to common stocks,
convertible preferred stocks, preferred stocks, warrants, ADRs, GDRs and
EDRs.
(l) Small Capitalization Value Fund invests primarily in U.S. stocks, buy may
invest up to 15% of total assets in a combination of foreign securities
and/or bonds rated as low as CC/Ca and their unrated equivalents.
(m) Medium Capitalization Growth Fund and Small Capitalization Growth Fund
may invest up to 10% of total assets in foreign securities. Foreign
equities include but are not limited to common stocks, convertible
preferred stocks, preferred stocks, warrants, ADRs, GDRs and EDRs.
If a percentage restriction on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the values of a Fund's assets will not be
considered a violation of the restriction.
The Fund will invest only in countries on the Adviser's Approved Country
Listing.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Funds is managed by the Trustees who elect officers who are
responsible for the day-to-day operations of the Funds and who execute policies
formulated by the Trustees. Several of the officers and Trustees of the Funds
are also officers or directors of the Funds' Adviser and/or one or more or the
Subadvisers, or officers and/or directors of the Funds' principal distributor,
John Hancock Funds, Inc. ("John Hancock Funds").
19
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
---------------- ---------------- --------------------------
<S> <C> <C>
Stephen L. Brown* Trustee and Chairman Chairman and Director, John Hancock
John Hancock Place Life Insurance Company (CEO until
P.O. Box 111 June 2000), John Hancock Financial
Boston, MA 02117 Services, Inc. (CEO until June
July 1937 2000); John Hancock Advisers, Inc.
(the Adviser), John Hancock Funds,
Inc. (John Hancock Funds), The
Berkeley Financial Group, Inc. (The
Berkeley Group); Director, John
Hancock Subsidiaries, Inc.; John
Hancock Signature Services, Inc.
(Signature Services) (until January
1997); John Hancock Insurance
Agency, Inc.; (Insurance Agency),
(until May 1999); Independence
Investment Associates, Inc.,
Independence International
Associates, Inc,, Independence
Fixed Income Associates, Inc.;
Insurance Marketplace Standards
Association, Committee for Economic
Development, Ionics, Inc. (since
June 2000), Aspen Technology, Inc.
(since June 2000), Jobs for
Massachusetts, Federal Reserve Bank
of Boston (until March 1999);
Financial Institutions Center
(until May 1996), Freedom Trail
Foundation (until December 1996)
Beth Israel Hospital and
Corporation (until November 1996);
Director and Member (Beth
Israel/Deaconess Care Group),
Member, Commercial Club of Boston,
President (until April 1996);
Trustee, Wang Center for the
Performing Arts, Alfred P. Sloan
Foundation, John Hancock Asset
Management (until March 1997);
Member, Boston Compact Committee,
Mass. Capital Resource Company;
Chairman, Boston Coordinating
Committee ("The Vault") (until
April 1997).
Maureen R. Ford * Trustee, Vice Chairman, President, Broker/Dealer
101 Huntington Avenue President and Chief Distributor, John Hancock Life
Boston, MA 02199 Executive Officer (1,2) Insurance Company; Vice Chairman,
December 1953 Director, President and Chief
Executive Officer, the Adviser, The
Berkeley Group, John Hancock Funds;
Chairman, Director and President,
Insurance Agency, Inc.; Chairman,
Director and Chief Executive
Officer, Sovereign Asset Management
Corporation (SAMCorp.); Senior Vice
President, MassMutual Insurance Co.
(until 1999); Senior Vice
President, Connecticut Mutual
Insurance Co. (until 1996);
-------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
20
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
---------------- ---------------- --------------------------
<S> <C> <C>
James F. Carlin Trustee Chairman and CEO, Carlin
233 West Central Street Consolidated, Inc.
Natick, MA 01760 (management/investments); Director,
April 1940 Arbella Mutual (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 (until July 1999).
William H. Cunningham Trustee 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)
(1985-1998); Jefferson-Pilot
Corporation (diversified life
insurance company) and LBJ
Foundation Board (education
foundation); Advisory Director,
Chase Bank (formerly Texas Commerce
Bank - Austin).
Ronald R. Dion Trustee Chairman and Chief Executive
R.M Bradley & Co., Inc. Officer, R.M. Bradley & Co., Inc.;
73 Tremont Street, 7th Floor Director, The New England Council
Boston, MA 02108 and Massachusetts Roundtable;
March 1946 Trustee, North Shore Medical
Center, Director, BJ's Wholesale
Club, Inc. and a corporator of the
Eastern Bank; Trustee, Emmanuel
College.
Charles L. Ladner Trustee Senior Vice President and Chief
P.O. Box 697 Financial Officer, UGI Corporation
444 Chandlee Drive (Public Utility Holding Company)
Berwyn, PA 19312 (retired 1998); Vice President and
February 1938 Director for AmeriGas, Inc.
(retired 1998); Vice President of
AmeriGas Partners, L.P. (until
1997); Director, EnergyNorth, Inc.
(until 1995).
-------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
21
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
---------------- ---------------- --------------------------
<S> <C> <C>
Steven R. Pruchansky Trustee (1) Chief Executive Officer, Mast
4327 Enterprise Avenue Holdings, Inc. (since June 1, 2000)
Naples, FL 34104 Director and President, Mast
August 1944 Holdings, Inc. (until May 31,
2000); Director, First Signature
Bank & Trust Company (until August
1991); Director, Mast Realty Trust
(until 1994); President, Maxwell
Building Corp. (until 1991).
Norman H. Smith Trustee Lieutenant General, United States
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).
John P. Toolan Trustee Director, The Smith Barney Muni
13 Chadwell Place Bond Funds, The Smith Barney
Morristown, NJ 07960 Tax-Free Money Funds, Inc., Vantage
September 1930 Money Market Funds (mutual funds),
The Inefficient-Market Fund, Inc.
(closed-end investment company) and
Smith Barney Trust Company of
Florida; Chairman, Smith Barney
Trust Company (retired December,
1991); Director, Smith Barney,
Inc., Mutual Management Company and
Smith Barney Advisers, Inc.
(investment advisers) (retired
1991); Senior Executive Vice
President, Director and member of
the Executive Committee, Smith
Barney, Harris Upham & Co.,
Incorporated (investment bankers)
(until 1991).
William L. Braman Executive Vice Executive Vice President and Chief
101 Huntington Avenue President and Chief Investment Officer, each of the
Boston, MA 02199 Investment Officer (2) John Hancock Funds; Executive Vice
December 1953 President and Chief Investment
Officer, Barring Asset Management,
London UK (until May 2000).
-------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
22
<PAGE>
Positions Held Principal Occupation(s)
Name and Address With the Company During the Past Five Years
---------------- ---------------- --------------------------
<S> <C> <C>
Osbert M. Hood Executive Vice Executive Vice President and Chief
101 Huntington Avenue President and Chief Financial Officer, each of the John
Boston, MA 02199 Financial Officer (2) Hancock Funds; Executive Vice
August 1952 President, Treasurer and Chief
Financial Officer of the Adviser,
the Berkeley Group, John Hancock
Funds, SAMCorp. and NM Capital;
Senior Vice President, Chief
Financial Officer and Treasurer,
Signature Services; Director
Indocam Japan Limited; Vice
President and Chief Financial
Officer, John Hancock Mutual Life
Insurance Company, Retail Sector
(until 1997).
Susan S. Newton Vice President, Vice President and Chief Legal
101 Huntington Avenue Secretary and Chief Officer the Adviser; John Hancock
Boston, MA 02199 Legal Officer Funds; Vice President, Signature
March 1950 Services (until May 2000), The
Berkeley Group, NM Capital and
SAMCorp.
James J. Stokowski Vice President, Vice President, the Adviser.
101 Huntington Avenue Treasurer and Chief
Boston, MA 02199 Accounting Officer
November 1946
Thomas H. Connors Vice President and Vice President and Compliance
101 Huntington Avenue Compliance Officer Officer, the Adviser; Vice
Boston, MA 02199 President, John Hancock Funds, Inc.
September 1959
-------------------
* Trustee may be deemed to be an "interested person" of the Fund as defined in
the Investment Company Act of 1940.
(1) Member of the Executive Committee. The Executive Committee may generally
exercise most of the powers of the Board of Trustees.
(2) A member of the Investment Committee of the Adviser.
</TABLE>
23
<PAGE>
The following table provides information regarding the compensation paid by the
Fund and other investment companies in the John Hancock Fund Complex to the
Independent Trustees for their services. Messrs. Brown and Scipione and Ms.
Ford, each a non-Independent Trustee, and each of the officers of the Fund are
interested persons of the Adviser, and/or affiliates are compensated by the
Adviser and receive no compensation from the Fund for their services.
James F. Carlin $3,781 $ 72,600
William H. Cunningham* 3,781 72,250
Ronald R. Dion* 3,780 72,350
Harold R. Hiser, Jr.* (3) 809 68,450
Charles L. Ladner 3,958 75,450
Leo E. Linbeck, Jr.(3) 681 68,100
Steven R. Pruchansky* 3,952 75,350
Norman H. Smith* 4,124 78,500
John P. Toolan* 3,952 75,600
--------- ----------
Total $28,818 $658,650
(1) Compensation is for fiscal period ended February 29, 2000.
(2) Total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is for the calendar year ended December 31,
1999. As of that date, there were sixty-five funds in the John
Hancock Fund Complex, with each of these Independent Trustees
serving on thirty-four funds.
(3) Effective December 31, 1999, Messrs. Hiser and Linbeck resigned as
Trustees of the Complex.
(*) As of December 31, 1999 the value of the aggregate accrued deferred
compensation from all Funds in the John Hancock fund complex for
Mr. Cunningham was $440,889, for Mr. Dion was $38,687, for Mr.
Hiser was $166,369, for Ms. McCarter was $208,971 (resigned as
Trustee as of October 1, 1998), for Mr. Pruchansky was $125,715,
for Mr. Smith was $149,232 and for Mr. Toolan was $607,294 under
the John Hancock Deferred Compensation Plan for Independent
Trustees (the "Plan").
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the Trustees and officers may also be officers
and/or Directors and/or Trustees of one or more other funds for which the
Adviser serves as investment adviser.
As of June 2, 2000, the officers and trustees of the Trust as a group owned 0%
of the outstanding shares of Active Bond Fund; 0% of the outstanding shares of
Medium Capitalization Growth Fund; 1.81% of the outstanding shares of Small
Capitalization Value Fund; 0% of the outstanding shares of International Equity
Fund; 2.34% of the outstanding shares of Small Capitalization Growth Fund; 0% of
the outstanding shares of Independence Diversified Core Equity Fund II, 1.59% of
the outstanding shares of Dividend Performers Fund, 0% of the outstanding shares
of Independence Balanced Fund, and 0% of the outstanding shares of Independence
Medium Capitalization Fund and as of that date, the following shareholders
beneficially owned 5% of or more of the outstanding shares of the Funds listed
below:
24
<PAGE>
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
------------------------------- ---- ------------------
Southern Industrial Active Bond 5.25%
20 Ponte Vedra Park Drive
Ponte Vedra Beach, CA 32082
The Investment Incentive Plan Active Bond 29.49%
101 Huntington Avenue
Boston MA 02199-7603
Hartford Provision Co Active Bond 14.05%
Retirement & Savings Plan
205 Enterprise Drive
Bristol CT 0610-8410
The Chase Manhattan Bank Active Bond 24.53%
450 West 33rd Street
New York, New York 10001
The Arden Group, Inc. Active Bond 5.77%
401(k) Retirement Savings Plan
2020 South Central Avenue
Compton CA 90220-5302
Gilbane International Equity 27.63%
Gilbane Profit Sharing Plan
7 Jackson Walkway
Providence RI 02902-3623
Southern Industrial International Equity 5.25%
20 Ponte Vedra Park Drive
Ponte Vedra Beach, CA
Mendes & Mount LLP International Equity 17.78%
750 South Avenue
New York NY 10019-6834
The Investment Incentive Plan International Equity 14.50%
101 Huntington Avenue
Boston MA 02199-7603
25
<PAGE>
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
------------------------------- ---- ------------------
P. B. & S. Chemical Company International Equity 5.85%
Retirement Plan
1405 Highway 136 West
PO Box 20
Henderson KY 42420-0020
Texon USA, Inc. International Equity 5.39%
Savings Plan for Employees of
Texon USA
1190 Huntington Road
Russell MA 01071
Invesco Retirement Plan Services Independence Diversified Core 21.32%
400 Colony Square Ste 2100 Equity Fund II
1201 Peachtree Street NE
Atlanta GA 30361-3500
Weil Gotshal & Manges Section Independence Diversified Core 10.02%
401K Savings & Investment Trust Equity Fund II
767 Fifth Avenue
New York NY 10153-0023
Independence Investment Associates Independence Medium Capitalization 7.89%
53 State Street
Boston MA 02109-2809
Hancock Investment Subsidiaries Independence Medium Capitalization 9.93%
401K Plan & Trust
Independence Investment Assoc Ttee
53 State Street
Boston MA 02109-2809
Independence Investment Associates Independence Medium 5.31%
Employee Deferred Compensation Capitalization
53 State Street
Boston MA 02109-2809
26
<PAGE>
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
------------------------------- ---- -------------------
Gilbane Independence Medium 57.15%
Gilbane Profit Sharing Plan Capitalization
7 Jackson Walkway
Providence RI 02902-3623
Dan River, Inc. Independence Medium 9.47%
401K Plan Capitalization
917 West Main Street
Pepperell MA 01463-1563
The Investment Incentive Plan Dividend Performers 23.60%
101 Huntington Avenue
Boston MA 02199-7603
Stinnes Corp. Dividend Performers 23.96%
Profit Sharing Plan
120 White Plains Road
Tarrytown NY 10591-5522
Mendes & Mount LLP Dividend Performers 24.59%
750 South Avenue
New York NY 10019-6834
Delta Distributors, Inc. Dividend Performers 6.62%
401K & Profit Sharing Plan
610 Fisher Road
Longview TX 75604-5201
Gilbane Independence Balanced 9.22%
Gilbane Profit Sharing Plan
7 Jackson Walkway
Providence RI 02902-3623
Mendes & Mount LLP Independence Balanced 5.20%
750 South Avenue
New York NY 10019-6834
Stinnes Corp. Independence Balanced 5.75%
Profit Sharing Plan
120 White Plains Road
Tarrytown NY 10591-5522
27
<PAGE>
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
------------------------------- ---- ------------------
Dan River, Inc. Independence Balanced 9.54%
401K Plan
917 West Main Street
Pepperell MA 01463-1563
P. B. & S. Chemical Co. Independence Balanced 9.41%
Retirement Plan
1405 Highway 136 West
PO Box 20
Henderson KY 42420-0020
Boeing Defense and Space Irving Independence Balanced 8.44%
Boeing - Irving Vol Savings Plan
3131 Story Road West
Irving TX 75038-3514
The Investment Incentive Plan Medium Capitalization Growth 14.55%
101 Huntington Avenue
Boston MA 02199-7603
P. B. & S. Chemical Co. Medium Capitalization Growth 14.21%
Retirement Plan
1405 Highway 136 West
PO Box 20
Henderson KY 42420-0020
Mendes & Mount LLP Medium Capitalization Growth 26.00%
750 South Avenue
New York NY 10019-6834
Stinnes Corp Medium Capitalization Growth 8.61%
Profit Sharing Plan
120 White Plains Road
Tarrytown NY 10591-5522
28
<PAGE>
Percentage of Total
Name and Address of Shareholder Fund Outstanding Shares
------------------------------- ---- ------------------
Globe Manufacturing Co Medium Capitalization Growth 7.03%
401K Plan
456 Bedford Street
Fall River MA 02720-4802
Gilbane Small Capitalization Value 66.82%
Gilbane Profit Sharing Plan
7 Jackson Walkway
Providence RI 02902-3623
The Investment Incentive Plan Small Capitalization Value 24.03%
101 Huntington Avenue
Boston MA 02199-7603
Bay Environmental Retirement Plan Small Capitalization Value 5.51%
C/O The Mechanics Bank
3170 Hilltop Mall Road
Richmond CA 94806
The Investment Incentive Plan Small Capitalization Growth 40.00%
101 Huntington Avenue -Class I
Boston MA 02199-7603
Cape Ann Local Lodge #2654 Small Capitalization Growth 12.85%
401K Plan -Class I
c/o Gloucester Engineering
PO Box 900
Gloucester MA 01931-0900
Manistique Papers, Inc. Small Capitalization Growth 6.27%
453 S. Mackinac Avenue -Class I
Manistique, MI. 49854
CG Enterprises Inc Small Capitalization Growth 5.51%
12001 Guilford road -Class I
Annapolis Junction, MD
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.
29
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,
was organized in 1968 and has more than $30 billion in assets under management
in its capacity as investment adviser to the Funds and the other funds and
publicly traded investment companies in the John Hancock group of funds as well
as retail and institutional privately managed accounts. The Adviser is an
affiliate of the Life Company, one of the most recognized and respected
financial institutions in the nation. With total assets under management of more
than $100 billion, the Life Company is one of the ten largest life insurance
companies in the United States, and carries a high rating from Standard & Poor's
and A.M. Best. Founded in 1862, the Life Company has been serving clients for
over 130 years. The Small Capitalization Value Fund is managed by Timothy E.
Quinlisk, CFA. Mr. Quinlisk is a Senior Vice President of the Adviser and has
managed the Fund since 1998 except between January and March 2000.
The Fund has entered into an investment management contract (the "Advisory
Agreement") with the Adviser which was approved by the Funds' shareholders.
Pursuant to the Advisory Agreement, the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, and (b) provide supervision over all aspects of the
Fund's operations except those which are delegated to a custodian, transfer
agent or other agent.
The Fund bears all costs of its organization and operation, including but not
limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies; expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses or redeeming shares;
brokerage and other expenses connected with the execution of portfolio
securities transactions; expenses pursuant to the Fund's plan of distribution;
fees and expenses of custodians including those for keeping books and accounts,
maintaining a committed line of credit and calculating the net asset value of
shares; fees and expenses of transfer agents and dividend disbursing agents;
legal, accounting, financial, management, tax and auditing fees and expenses of
the Fund (including an allocable portion of the cost of the Adviser's employees
rendering such services to the Fund); the compensation and expenses of Trustees
who are not otherwise affiliated with the Trust, the Adviser or any of their
affiliates; expenses of Trustees' and shareholders, meetings; trade association
membership; insurance premiums; and any extraordinary expenses.
As of December 14, 2000, with respect to International Equity Fund, the Adviser
has entered into a sub-investment management contract (the "sub-advisory
agreement") with Nicholas-Applegate under which, subject to the review of the
Trustees and the overall supervision of the Adviser, Nicholas-Applegate is
responsible for providing the Fund with investment advice. Nicholas-Applegate
will also provide the Fund on a continuous basis with economic, financial and
political information, research and assistance concerning international markets.
As compensation for its services under the Sub-Advisory Agreement, the Adviser
will pay Nicholas-Applegate quarterly, in arrears, a fee at the annual rate of
55% of the investment advisory fee received by the Adviser. Nicholas-Applegate
is a California limited partnership, with offices at 600 West Broadway, 30th
Floor, San Diego, California 92101. Nicholas-Applegate was organized in August
1984 to manage discretionary accounts investing primarily in publicly traded
equity securities and securities convertible into or exercisable for publicly
traded equity securities, with the goal of capital appreciation. On January 31,
2001, Nicholas-Applegate was acquired by Allianz of America, Inc. ("AZOA").
Allianz AG, the parent of AZOA, is a German Aktiengesellschaft, a German
publicly traded company, which, together with its subsidiaries, comprises the
world's largest insurance group (the "Allianz Group"). Allianz Group currently
has assets under management of approximately $690 billion, and in its last
fiscal year wrote approximately $50 billion in gross insurance premiums. Allianz
AG's address is: Koeniginstrasse 28, D-80802, Munich, Germany.
30
<PAGE>
Until December 14, 2000, the Sub-Adviser to the Internation Equity Fund was
Indocam International Investment Services ("IIIS"). IIIS is organized under the
laws of France and is a wholly owned subsidiary of Indocam, the asset management
affiliate of Credit Agricole, a French banking group. Indocam is an indirect
subsidiary of certain holding companies of Caisse Nationale de Credit Agricole
("CNCA"), 91-93 Boulevard Pasteur, Paris, France 75015, one of the largest
financial and industrial groups in Europe. Until March 1, 2000, International
Equity Fund had another Sub-Adviser, John Hancock Advisers International Limited
("JHAI"), located at 6th Floor, Duke's Court, 32-36 Duke Street, St. James's,
London SWIY 6DF, England. JHAI is a wholly owned subsidiary of the Adviser
formed in 1987 to provide investment research and advisory services to U.S.
institutional clients. The Sub-Advisory Agreement with JHAI was terminated
effective March 1, 2000.
With respect to each Independence Fund, the Adviser has entered into a
Sub-Advisory Agreement with Independence Investment Associates, Inc. ("IIA").
IIA, located at 53 State Street, Boston, Massachusetts 02109, and organized in
1982, is a wholly owned indirect subsidiary of John Hancock Subsidiaries, Inc.
Under each respective Sub-Advisory Agreement, the corresponding Sub-Adviser,
subject to the review of the Trustees and the over-all supervision of the
Adviser, is responsible for managing the investment operations of the
corresponding Fund and the composition of the Fund's portfolio and furnishing
the Fund with advice and recommendations with respect to investments, investment
policies and the purchase and sale of securities.
As compensation for its services under the Advisory Agreement, each Fund pays
the Adviser monthly a fee based on a stated percentage of the average daily net
assets of each Fund.
Funds Rate
----- ----
Active Bond Fund .50% of average daily net assets up to $1.5 billion
.45% of such assets in excess of $1.5 billion
Small Capitalization Value Fund .70% of average daily net assets up to
$500 million
.65% of such assets in excess of $500 million
Dividend Performers Fund .60% of average daily net assets up to
$500 million
.55% of such assets in excess of $500 million
Medium Capitalization Growth Fund .80% of average daily net assets up to
$500 million
.75% of such assets in excess of $500 million
Small Capitalization Growth Fund .80% of average daily net assets
International Equity Fund .90% of average daily net assets up to
$500 million
.65% of such assets in excess of $500 million
Balanced Fund .70% of the average daily net assets up to
$500 million
.65% of such assets in excess of $500 million
Diversified Core Equity Fund II .50% of the average daily net assets up to
$1 billion
.45% of such assets in excess of $1 billion
Medium Capitalization Fund .80% of the average daily net assets up to
$500 million
.75% of such assets in excess of $500 million
31
<PAGE>
The advisory fees paid by Small Capitalization Growth Fund and International
Equity Fund are greater than those paid by most funds. Due to the added
complexity of managing funds with investment strategies similar to these Funds,
advisory fees of similar funds tend to be higher than those paid by most funds.
Also, the advisory fees paid by Medium Capitalization Fund are greater, but they
are comparable to those paid by many investment companies with similar
investment objectives and policies.
Under each Sub-Advisory Agreement, the Adviser (not the Fund) pays a portion of
its fee to the corresponding Sub-Adviser. Sub-Advisory fees are paid at the
following rates: Diversified Core Equity Fund II, 80% of the advisory fee
payable on the Fund's average daily net assets; Medium Capitalization Fund, 55%
of the advisory fee payable on the Fund's average daily net assets and Balanced
Fund, 60% of the advisory fee payable on the Fund's average daily net assets.
With respect to International Equity Fund, the Adviser pays Nicholas-Applegate a
Sub-Advisory fee equal to 55% of the gross management fee received by the
Adviser with respect to the International Equity Fund's average daily net
assets. Until December 14, 2000 with respect to International Equity Fund, the
Adviser paid IIIS a Sub-Advisory fee equal to 55% of the gross management fee
received by the Adviser with respect to the International Equity Fund's average
daily net assets. For International Equity Fund, the Adviser also paid JHAI a
Sub-Advisory fee equal to 70% of the advisory fee payable on the Fund's average
daily net assets up to $500 million and 90% of the advisory fee payable on the
Fund's assets exceeding $500 million. JHAI agreed to waive all but 0.05% of this
fee beginning January 1, 2000. The Sub-Advisory Agreement with JHAI was
terminated effective March 1, 2000.
For the period ended February 29, 2000, the Adviser waived the entire investment
management fee for all Funds except Small Capitalization Value Fund, Dividend
Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified
Core Equity Fund II and Medium Capitalization Fund. For the period ended
February 29, 2000, the Adviser received $2,775, $42,132, $89,049, $479,968,
$2,710,449 and $31,290 after expense limitation from Small Capitalization Value
Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced
Fund, Diversified Core Equity Fund II and Medium Capitalization Fund,
respectively.
For the period ended February 28, 1999, the Adviser waived the entire investment
management fee for all Funds except Small Capitalization Value Fund, Dividend
Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified
Core Equity Fund II and Medium Capitalization Fund. For the period ended
February 28, 1999, the Adviser received $3,095, $69,056, $189,005, $511,989,
$2,716,529 and $20,569 after expense limitation from Small Capitalization Value
Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced
Fund, Diversified Core Equity Fund II and Medium Capitalization Fund,
respectively.
For the period ended February 28, 1998, the Adviser waived the entire investment
management fee for all Funds except Small Capitalization Value Fund, Dividend
Performers Fund, Medium Capitalization Growth Fund, Balanced Fund, Diversified
Core Equity Fund II and Medium Capitalization Fund. For the period ended
February 28, 1998, the Adviser received $5,528, $43,601, $225,934, $245,098,
$2,212,037 and $31,293 after expense limitation from Small Capitalization Value
Fund, Dividend Performers Fund, Medium Capitalization Growth Fund, Balanced
Fund, Diversified Core Equity Fund II and Medium Capitalization Fund,
respectively.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit the Fund's expenses to a specified percentage of average daily net assets.
The Adviser retains the right to reimpose a fee and recover any other payments
to the extent that, at the end of any fiscal year, the Fund's annual expenses
fall below this limit.
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Securities held by the Funds may also be held by other funds or investment
advisory clients for which the Adviser, the Sub-Advisers or their respective
affiliates provide investment advice. Because of different investment objectives
or other factors, a particular security may be bought for one or more funds or
clients when one or more are selling the same security. If opportunities for
purchase or sale of securities by the Adviser or Sub-Adviser for a Fund or for
other funds or clients for which the Adviser or Sub-Advisers render investment
advice arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds or
clients in a manner deemed equitable to all of them. To the extent that
transactions on behalf of more than one client of the Adviser, Sub-Advisers or
their respective affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
Pursuant to each Advisory Agreement, where applicable, Sub-Advisory Agreement,
the Adviser and Sub-Adviser are not liable for any error of judgment or mistake
of law or for any loss suffered by the Funds in connection with the matters to
which their respective Agreements relate, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser or
Sub-Adviser in the performance of their duties or from their reckless disregard
of the obligations and duties under the applicable Agreement.
Under each Advisory Agreement, each Fund may use the name "John Hancock" or any
name derived from or similar to it only for as long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If a Fund's
Advisory Agreement is no longer in effect, the Fund (to the extent that it
lawfully can) will cease to use such name or any other name indicating that it
is advised by or otherwise connected with the Adviser. In addition, the Adviser
or the Life Company may grant the non-exclusive right to use the name "John
Hancock" or any similar name to any other corporation or entity, including but
not limited to any investment company of which the Life Company or any
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
Under the Sub-Advisory Agreement of each Independence Fund, each Independence
Fund may use the name "Independence" or any name derived from or similar to it
only for as long as the Sub-Advisory Agreement is effect. When the Sub-Advisory
Agreement is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use any name indicating that it is advised by or otherwise
connected with 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.
The continuation of the Advisory Agreement, the Sub-Advisory Agreements and the
Distribution Agreement was approved by all of the Trustees in June of 2000. On
December 12, 2000, the Trustees approved the termination of IIIS as Sub-Adviser
and appointed Nicholas-Applegate as Sub-Adviser effective December 14, 2000.
This appointment is subject to shareholder approval before May 12, 2001. The
Advisory Agreement, the Nicholas-Applegate Sub-Advisory Agreement and the
Distribution Agreement, will continue in effect from year to year, provided that
its continuance is approved annually both (i) by the holders of a majority of
the outstanding voting securities of the Trust or by the Trustees, and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. Each of these Agreements may be terminated on 60
days written notice by any party or by vote of a majority of the outstanding
voting securities of the Fund and will terminate automatically if assigned.
Accounting and Legal Services Agreement. The Trust, on behalf of the Funds, is a
party to an Accounting and Legal Services Agreement with the Adviser. Pursuant
to this Agreement, the Adviser provides the Fund with certain tax, accounting
and legal services. For the fiscal years ended February 28, 1998, 1999 and
February 29, 2000, the Fund paid the Adviser the following for services under
this Agreement: Balanced Fund $8,091 $12,152 and $13,666, Medium Capitalization
Fund $1,287, $1,587, and $2,048, Diversified Core Equity Fund II $79,447,
$84,538 and $98,578, Active Bond Fund $658, $858 and $902, Dividend Performers
Fund $2,742, $3,109 and $3,096, Medium Capitalization Growth Fund $6,771, $5,047
and $3,853, Small Capitalization Value Fund $1,308, $1,235 and $2,289, Small
Capitalization Growth Fund $420, $352 and $752 and International Equity Fund
$1,232, $1,324 and $1,587.
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Personnel of the Adviser and its affiliates may trade securities for their
personal accounts. The Funds also may hold, or may be buying or selling, the
same securities. To prevent the Fund from being disadvantaged, the adviser and
its affiliates and the Fund have adopted a code of ethics which restricts the
trading activity of those personnel.
DISTRIBUTION CONTRACT
The Fund has a Distribution Agreement with John Hancock Funds. Under the
Agreement, John Hancock Funds is obligated to use its best efforts to sell
shares of each Fund. Shares of the Fund are also sold by selected broker-dealers
(the "Selling Brokers") which have entered into selling agency agreements with
John Hancock Funds. These Selling Brokers are authorized to designate other
intermediaries to receive purchase and redemption orders on behalf of the Fund.
John Hancock Funds accepts orders for the purchase of the shares of the Funds
which are continually offered at net asset value next determined.
SALES COMPENSATION
As part of its business strategy, John Hancock Funds may pay compensation to
financial services firms that sell the Fund's shares. These firms typically pass
along a portion of this compensation to your financial representative.
John Hancock Funds may make a one-time payment at the time of initial purchase
out of its own resources to a Selling Broker who sells shares of the Fund. This
payment may not exceed 0.15% of the amount invested.
In addition, from time to time, John Hancock Funds, at its expense, may provide
significant additional compensation to financial services firms which sell or
arrange for the sale of shares of the Fund. Such compensation provided by John
Hancock Funds may include, for example, financial assistance to financial
services firms in connection with their conferences or seminars, sales or
training programs for invited registered representatives and other employees,
payment for travel expenses, including lodging, incurred by registered
representatives and other employees for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding one or more
Funds, and/or other financial services firms-sponsored events or activities.
Other compensation, such as asset retention fees, finder's fees and
reimbursement for wire transfer fees, may be offered to the extent not
prohibited by law or any self-regulatory agency, such as the NASD.
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's shares, the
following procedures are utilized wherever applicable.
Debt investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
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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.
SPECIAL REDEMPTIONS
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, the shareholder will incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. Each Fund has,
however, elected to be governed by Rule 18f-1 under the Investment Company Act.
Under that rule, each Fund must redeem its shares for cash except to the extent
that the redemption payments to any shareholder during any 90-day period would
exceed the lesser of $250,000 or 1% of the Fund's net asset value at the
beginning of that period.
DESCRIPTION OF THE FUNDS' SHARES
The Trustees of the Trust are responsible for the management and supervision of
the Funds. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of the Funds,
without par value. Under the Declaration of Trust, the Trustees have the
authority to create and classify shares of beneficial interest in separate
series, without further action by shareholders. As of the date of this Statement
of Additional Information, the Trustees have authorized shares of eleven series
of which nine series are described herein. Additional series may be added in the
future. The Declaration of Trust also authorizes the Trustees to classify and
reclassify the shares of the Funds, or any other series of the Trust, into one
or more classes. Effective October 1, 1999, the Trustees authorized the issuance
Class P shares for Independence Diversified Core Equity Fund II. Existing shares
of the Fund were designated "Class I" shares. Class P shares are discussed in a
separate Statement of Additional Information. Effective November 15, 2000, the
Trustees authorized the issuance of Class A, Class B, and Class C shares for
Small Capitalization Growth Fund. Existing shares of small Capitalization Growth
Fund were designated "Class I" shares. Class A, Class B and Class C shares are
discussed in a separate Statement of Additional Information.
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Each share of a Fund represents an equal proportionate interest in the assets
belonging to that Fund. When issued, shares are fully paid and nonassessable. In
the event of liquidation of a Fund, shareholders are entitled to share pro rata
in the net assets of the Fund available for distribution to such shareholders.
Shares of the Trust are freely transferable and have no preemptive, subscription
or conversion rights.
In accordance with the provisions of the Declaration of Trust, the Trustees have
initially determined that shares entitle their holders to one vote per share on
any matter on which such shares are entitled to vote. The Trustees may determine
in the future, without the vote or consent of shareholders, that each dollar of
net asset value (number of shares owned times net asset value per share) will be
entitled to one vote on any matter on which such shares are entitled to vote.
Unless otherwise required by the Investment Company Act or the Declaration of
Trust, the Funds have no intention of holding annual meetings of shareholders.
Each Fund's shareholders may remove a Trustee by the affirmative vote of at
least two-thirds of the Trust's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Trust.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for acts or obligations
of the trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Trust. The Declaration of Trust also provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. The Declaration of Trust
also provides that no series of the Trust shall be liable for the liabilities of
any other series. Liability is therefore limited to circumstances in which a
Fund itself would be unable to meet its obligations, and the possibility of this
occurrence is remote.
A Fund reserves the right to reject any application which conflicts with a
Fund's internal policies or the policies of any regulatory authority. John
Hancock Funds does not accept starter, credit card or third party checks. All
checks returned by the post office as undeliverable will be reinvested in the
fund or funds from which a redemption was made or dividend paid. Information
provided on the account application may be used by a Fund to verify the accuracy
of the information or for background or financial history purposes. A joint
account will be administered as a joint tenancy with right of survivorship,
unless the joint owners notify Signature Services of a different intent. A
shareholder's account is governed by the laws of The Commonwealth of
Massachusetts. For telephone transactions, the transfer agent will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or other taxpayer ID number and other relevant information. If
appropriate measures are taken, the transfer agent is not responsible for any
losses that may occur to any account due to an unauthorized telephone call. Also
for your protection telephone transactions are not permitted on accounts whose
names or addresses have changed within the past 30 days. Proceeds from telephone
transactions can only be mailed to the address of record.
Selling activities for the Fund may not take place outside the U.S. except with
U.S. military bases, APO addresses and U.S. diplomats. Brokers of record on
Non-U.S. investors' accounts with foreign mailing addresses are required to
certify that all sales activities have occurred, and in the future will occur,
only in the U.S. A Foreign corporation may purchase shares of the Fund only if
it has a U.S. mailing address.
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TAX STATUS
Each Fund is treated as a separate entity for accounting and tax purposes, has
qualified as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") and intends to continue to qualify
for each taxable year. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, a Fund will not be subject
to Federal income tax on its taxable income (including net realized capital
gains) which is distributed to shareholders in accordance with the timing
requirements of the Code.
Each Fund will be subject to a 4% nondeductible Federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. Each Fund
intends, under normal circumstances, to seek to avoid or minimize liability for
such tax by satisfying such distribution requirements.
Distributions from each Fund's current or accumulated earnings and profits
("E&P") will be taxable under the Code for investors who are subject to tax. If
these distributions are paid from a Fund's "investment company taxable income,"
they will be taxable as ordinary income; and if they are paid from the Fund's
"net capital gain," they will be taxable as long-term capital gain. (Net capital
gain is the excess (if any) of net long-term capital gain over net short-term
capital loss, and investment company taxable income is all taxable income and
capital gains, other than those gains and losses included in computing net
capital gain, after reduction by deductible expenses.) Some distributions may be
paid in January but may be taxable to shareholders as if they had been received
on December 31 of the previous year. The tax treatment described above will
apply without regard to whether distributions are received in cash or reinvested
in additional shares of the Fund.
Distributions, if any, in excess of E&P will constitute a return of capital
under the Code, which will first reduce an investor's federal tax basis in Fund
shares and then, to the extent such basis is exceeded, will generally give rise
to capital gains. Shareholders who have chosen automatic reinvestment of their
distributions will have a federal tax basis in each share received pursuant to
such a reinvestment equal to the amount of cash they would have received had
they elected to receive the distribution in cash, divided by the number of
shares received in the reinvestment.
Foreign exchange gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt securities, certain
foreign currency options and futures, foreign currency forward contracts,
foreign currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gains and
losses to be treated as ordinary income and losses and may affect the amount,
timing and character of distributions to shareholders. Transactions in foreign
currencies that are not directly related to a Fund's investment in stock or
securities, including speculative currency positions, could under future
Treasury regulations produce income not among the types of "qualifying income"
from which the Fund must derive at least 90% of its annual gross income for each
taxable year. If the net foreign exchange loss for a year treated as ordinary
loss under Section 988 were to exceed a Fund's investment company taxable income
computed without regard to such loss, the resulting overall ordinary loss for
such year would not be deductible by a Fund or its shareholders in future years.
If a Fund invests (either directly or through depository receipts such as ADRs,
GDRs or EDRs) in stock (including an option to acquire stock such as is inherent
in a convertible bond) of certain foreign corporations that receive at least 75%
of their annual gross income from passive sources (such as interest, dividends,
certain rents and royalties, or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to Federal income tax and additional
interest charges on "excess distributions" received from these passive foreign
investment companies or gain from the sale of stock in such companies, even if
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all income or gain actually received by the Fund is timely distributed to its
shareholders. The Funds would not be able to pass through to their respective
shareholders any credit or deduction for such a tax. An election may be
available to ameliorate these adverse tax consequences, but could require the
Funds to recognize taxable income or gain without the concurrent receipt of
cash. These investments could also result in the treatment of associated capital
gains as ordinary income. Each Fund may limit and/or manage its investments in
passive foreign investment companies to minimize its tax liability or maximize
its return from these investments.
The amount of a Fund's net realized capital gains, if any, in any given year
will vary depending upon the current investment strategy of the Adviser and
Subadvisers and whether the Adviser and the Subadvisers believes it to be in the
best interest of the Funds to dispose of portfolio securities and/or engage in
options, futures or forward transactions that will generate capital gains. At
the time of an investor's purchase of Fund shares, a portion of the purchase
price is often attributable to realized or unrealized appreciation in a Fund's
portfolio or undistributed taxable income of a Fund. Consequently, subsequent
distributions on those shares from such appreciation or income may be taxable to
such investor even if the net asset value of the investor's shares is, as a
result of the distributions, reduced below the investor's cost for such shares,
and the distributions in reality represent a return of a portion of the purchase
price.
Upon a redemption or other disposition of shares of a Fund (including by
exercise of the exchange privilege), in a transaction that is treated as a sale
for tax purposes, a shareholder may realize a taxable gain or loss depending
upon the amount of the proceeds and the investor's basis in his shares. Such
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. Any loss realized on a redemption or exchange
may be disallowed to the extent the shares disposed of are replaced with other
shares of the same Fund within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of, such as pursuant to the
automatic dividend reinvestments. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
Also, any loss realized upon the redemption of shares with a tax holding period
of six months or less will be treated as a long-term capital loss to the extent
of any amounts treated as distributions of long-term capital gain with respect
to such shares. Shareholders should consult their own tax advisers regarding
their particular circumstances to determine whether a disposition of Fund shares
is properly treated as a sale for tax purposes, as is assumed in the foregoing
discussion.
The Funds reserve the right to retain and reinvest all or any portion of the
excess, as computed for Federal income tax purposes, of net long-term capital
gain over net short-term capital loss in any year. Although each Fund's present
intention is to distribute all net capital gains, if any, the Fund will not in
any event distribute net capital gains realized in any year to the extent that a
capital loss is carried forward from prior years against such gain. To the
extent such excess was retained and not exhausted by the carryforward of prior
years' capital losses, it would be subject to Federal income tax in the hands of
the Fund. Upon proper designation of this amount by the Fund, each shareholder
would be treated for Federal income tax purposes as if such Fund had distributed
to him on the last day of its taxable year his pro rata share of such excess,
and he had paid his pro rata share of the taxes paid by such Fund and reinvested
the remainder in the Fund. Accordingly, each shareholder would (a) include his
pro rata share of such excess as long-term capital gain in his return for his
taxable year in which the last day of the Fund's taxable year falls, (b) be
entitled either to a tax credit on his return for, or a refund of, his pro rata
share of the taxes paid by the Fund, and (c) be entitled to increase the
adjusted tax basis for his Fund shares by the difference between his pro rata
share of such excess and his pro rata share of such taxes.
For Federal income tax purposes, each Fund is permitted to carry forward a net
realized capital loss in any year to offset net capital gains of that Fund, if
any, during the eight years following the year of the loss. To the extent
subsequent net capital gains are offset by such losses, they would not result in
Federal income tax liability to a Fund and, as noted above, would not be
distributed as such to shareholders. As of February 29, 2000, Active Bond Fund
had a capital loss carryforwards of $49,819 which will expire in 2008. The
remaining Funds do not have any capital loss carryforwards.
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For purposes of dividends received deduction available to corporations,
dividends received by a Fund, if any, from U.S. domestic corporations in respect
of any share of stock held by the Fund, for U.S. Federal income tax purposes,
for at least 46 days (91 days in the case of certain preferred stock) during a
prescribed period extending before and after such dividend and distributed and
properly designated by the Fund may be treated as qualifying dividends.
Corporate shareholders must meet the holding period requirements stated above
with respect to their shares of the applicable Fund for each dividend in order
to qualify for the deduction and, if they have any debt that is deemed under the
Code directly attributable to such shares, may be denied a portion of the
dividends-received deduction. The entire qualifying dividend, including the
otherwise deductible amount, will be included in determining alternative minimum
tax liability, if any. Additionally, any corporate shareholder should consult
its tax adviser regarding the possibility that its tax basis in its shares may
be reduced, for Federal income tax purposes, by reason of "extraordinary
dividends" received with respect to the shares and, to the extent such basis
would be reduced below zero, that current recognition of income would be
required.
Each Fund that invests in securities of foreign issuers may be subject to
withholding and other taxes imposed by foreign countries with respect to its
investments in foreign securities. Some tax conventions between certain
countries and the United States may reduce or eliminate such taxes. With respect
to each Fund, other than International Equity Fund, because more than 50% of the
Fund's total assets at the close of any taxable year will not consist of stock
or securities of foreign corporations, the Funds will not be able to pass such
taxes through to their shareholders, who in consequence will not include any
portion of such taxes in their incomes and will not be entitled to tax credits
or deductions with respect to such taxes. However, such Funds will be entitled
to deduct such taxes in determining the amounts they must distribute in order to
avoid Federal income tax. If more than 50% of the value of the total assets of
International Equity Fund at the close of any taxable year consists of stock or
securities of foreign corporations, the International Equity Fund may file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to (i) include in ordinary gross income (in addition to
taxable dividends and distributions actually received) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received, and
(ii) treat such respective pro rata portions as foreign taxes paid by them.
If the election is made, shareholders of the International Equity Fund may then
deduct such pro rata portions of qualified foreign taxes in computing their
taxable incomes, or, alternatively, use them as foreign tax credits, subject to
holding period requirements and other limitations, against their U.S. federal
income taxes. Shareholders who do not itemize deductions for Federal income tax
purposes will not, however, be able to deduct their pro rata portion of
qualified foreign taxes paid by International Equity Fund, although such
shareholders will be required to include their shares of such taxes in gross
income. Shareholders who claim a foreign tax credit for such foreign taxes may
be required to treat a portion of dividends received from International Equity
Fund as a separate category of income for purposes of computing the limitations
on the foreign tax credit. Tax-exempt shareholders will ordinarily not benefit
from this election. Each year (if any) that International Equity Fund files the
election described above, its shareholders will be notified of the amount of (i)
each shareholder's pro rata share of qualified foreign taxes paid by the Fund
and (ii) the portion of Fund dividends which represents income from each foreign
country. If the Fund cannot or does not make this election, the Fund will deduct
the foreign taxes it pays in determining the amount it has available for
distribution to shareholders, and shareholders will not include these foreign
taxes in their income, nor will they be entitled to any tax deductions or
credits with respect to such taxes.
Each Fund that invests in zero coupon securities or certain PIK or increasing
rate securities and any other securities with original issue discount (or with
market discount if the Fund elects to include market discount in income
currently) accrues income on such securities prior to the receipt of the
corresponding cash payments. The mark to market or constructive sale rules
applicable to certain options, futures, forwards, short sales or other
transactions, may also require the Fund to recognize income or gain without a
concurrent receipt of cash. Additionally, some countries restrict repatriation
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which may make it difficult or impossible for the Fund to obtain cash
corresponding to its earnings or assets in those countries. Each Fund must
distribute, at least annually, all or substantially all of its net income and
net capital gains, including such accrued income or gain, to shareholders to
qualify as a regulated investment company under the Code and avoid Federal
income and excise taxes. Therefore, a Fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash, or may have to
borrow cash, to satisfy these distribution requirements.
Active Bond Fund and Small Capitalization Value Fund may invest in debt
obligations that are in the lower rating categories or are unrated, including
debt obligations of issuers not currently paying interest as well as issuers who
are in default. Investments in debt obligations that are at risk of or in
default present special tax issues for the Funds. Tax rules are not entirely
clear about issues such as when the Funds may cease to accrue interest, original
issue discount, or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by Active Bond Fund and Small Capitalization
Value Fund in the event they invest in such securities, in order to seek to
ensure that they distribute sufficient income to preserve their status as
regulated investment companies and to avoid becoming subject to Federal income
or excise tax.
The Federal income tax rules applicable to certain structured or hybrid
securities, currency swaps, interest rate swaps, caps, floors and collars, and
possibly other investments or transactions are or may be unclear in certain
respects, and each Fund will account for these investments or transactions in a
manner intended to preserve its qualification as a regulated investment company
and avoid material tax liability.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions, and certain
prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
With respect to each Fund that may enter into foreign currency positions,
forwards, futures and options transactions, limitations imposed by the Code on
regulated investment companies may restrict the Funds' ability to enter into
options, futures, foreign currency positions, and forward foreign currency
contracts.
Certain options, futures and forward foreign currency contracts undertaken by a
Fund may cause the Fund to recognize gains or losses from marking to market even
though its positions have not been sold or terminated and affect their character
as long-term or short-term (or in the case of certain foreign currency
contracts, as ordinary income or loss) and timing of some capital gains and
losses realized by the Fund. Additionally, the Fund may be required to recognize
gain, but not loss, if an option, futures contract, short sale or other
transaction is treated as a constructive sale of an appreciated financial
position in the Fund's portfolio. Also, certain of a Fund's losses on its
transactions involving options, futures or forward contracts and/or offsetting
or successor portfolio positions may be deferred rather than being taken into
account currently in calculating the Fund's taxable income or gains. Certain of
such transactions may also cause the Fund to dispose of investments sooner than
would otherwise have occurred. These transactions may therefore affect the
amount, timing and character of the Funds' distributions to shareholders. A Fund
will also take into account the special tax rules (including consideration of
available elections) applicable to options, futures and forward contracts in
order to minimize any potential adverse tax consequence.
40
<PAGE>
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent (if any) a Fund's distributions
are derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The Funds will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although a Fund may in its sole discretion provide relevant
information to shareholders.
Each Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions to shareholders, as well as gross proceeds from the redemption
or exchange of Fund shares, except in the case of certain exempt recipients,
i.e., corporations and certain other investors distributions to which are exempt
from the information reporting provisions of the Code. Under the backup
withholding provisions of Code Section 3406 and applicable Treasury regulations,
all such reportable distributions and proceeds may be subject to backup
withholding of federal income tax at the rate of 31% in the case of non-exempt
shareholders who fail to furnish a Fund with their correct taxpayer
identification number and certain certifications required by the IRS or if the
IRS or a broker notifies the Fund that the number furnished by the shareholder
is incorrect or that the shareholder is subject to backup withholding as a
result of failure to report interest or dividend income. The Funds may refuse to
accept an application that does not contain any required taxpayer identification
number or certification that the number provided is correct. If the backup
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability. Investors should consult their
tax advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain types of
investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Funds is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to a non-resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from a Fund and unless an effective IRS Form W-8, Form
W-8BEN, or other authorized withholding certificate on file, to 31% back up
withholding on certain other payments from the Fund. Non U.S. investors should
consult their tax advisers regarding such treatment and the application of
foreign taxes to an investment in the Funds.
The Funds are not subject to Massachusetts corporate excise or franchise taxes.
The Funds anticipate that, provided that the Funds qualify as regulated
investment companies under the Code, they will also not be required to pay any
Massachusetts income tax.
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<PAGE>
CALCULATION OF PERFORMANCE
Yield
For the 30-day period ended February 29, 2000, the yield of Active Bond Fund was
7.16%.
A Fund's yield is computed by dividing its net investment income per share
determined for a 30-day period by the maximum offering price per share on the
last day of the period, according to the following standard formula:
6
Yield = 2 ( [ ( a - b ) + 1 ] - 1 )
-------
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during
the period that would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period (NAV).
Total Return
------------
The average annual total return for the 1 year and life of that Fund for the
period ended February 29, 2000 is as follows:
One Year Ended Commencement of Operations
February 29, 2000 to February 29, 2000
----------------- --------------------------
Active Bond Fund 1.83% 6.78% (c)
Small Capitalization Value Fund 124.33% 29.83% (d)
Dividend Performers Fund 4.17% 18.14% (c)
Medium Capitalization Growth Fund 98.13% 27.69% (e)
Small Capitalization Growth Fund 136.18% 37.89% (b)
International Equity Fund 38.84% 11.74% (c)
Balanced Fund 1.83% 12.68% (f)
Diversified Core Equity Fund II 1.99% 21.12% (a)
Medium Capitalization Fund 14.18% 17.49% (g)
(a) Commencement of operations, March 10, 1995.
(b) From commencement of operations, May 2, 1996.
(c) Commencement of operations, March 30, 1995.
(d) Commencement of operations April 19, 1995.
(e) Commencement of operations, April 11, 1995.
(f) Commencement of operations, July 6, 1995.
(g) From commencement of operations, October 2, 1995.
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<PAGE>
A Fund's total return is computed by finding the average annual compounded rate
of return over the indicated period that would equate the initial amount
invested to the ending redeemable value according to the following formula:
n ______
T = \ / ERV/P - 1
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the one year and life of fund periods.
This calculation assumes that all dividends and distributions are reinvested at
net asset value on the reinvestment dates during the period.
In addition to average annual total returns, the Funds may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Cumulative total returns may be quoted as a percentage or
as a dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period.
From time to time, in reports and promotional literature, a Fund's total return
will be ranked or compared to indices of mutual funds and bank deposit vehicles.
Such indices may include Lipper Analytical Services, Inc.'s "Lipper-Mutual
Performance Analysis," a monthly publication which tracks net assets and total
return on equity mutual funds in the United States, as well as those published
by Frank Russell, Callan Associates, Wilshire Associates and SEI.
Performance rankings and ratings reported periodically in, and excerpts from,
national financial publications such as Money magazine, Forbes, Business Week,
The Wall Street Journal, Micropal, Inc., Morningstar, Stanger's, and Barron's,
Pensions & Investments and Institutional Investor may also be utilized. The
Funds' promotional and sales literature may make reference to a Fund's "beta".
Beta is a reflection of the market related risk of the Fund by showing how
responsive the Fund is to the market.
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.
43
<PAGE>
Each Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Funds as a factor in the selection of broker-dealers to
execute a Fund's portfolio transactions.
To the extent consistent with the foregoing, each Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and to a
lesser extent statistical assistance furnished to the Adviser and corresponding
Subadviser (if applicable) of the Funds. It is not possible to place a dollar
value on information and services to be received from brokers and dealers, since
it is only supplementary to the research efforts of the Adviser and
corresponding Subadviser (if applicable). The receipt of research information is
not expected to reduce significantly the expenses of the Adviser and Subadviser.
The research information and statistical assistance furnished by brokers and
dealers may benefit the Life Company or other advisory clients of the Adviser,
and, conversely, brokerage commissions and spreads paid by other advisory
clients of the Adviser may result in research information and statistical
assistance beneficial to the Funds. Similarly, research information and
assistance provided to a Subadviser by brokers and dealers may benefit other
advisory clients or affiliates of such Subadviser. The Funds will not make any
commitment to allocate portfolio transactions upon any prescribed basis. While
the Adviser, in connection with the corresponding Subadviser (if applicable),
will be primarily responsible for the allocation of the Funds' brokerage
business, the policies and practices of the Adviser in this regard must be
consistent with the foregoing and will, at all times, be subject to review by
the Trustees. For the fiscal years ended on February 28, 1998, 1999 and February
29, 2000, the Funds paid negotiated brokerage commissions in the amount as
follows: Independence Diversified Core Equity Fund II $617,705, $559,111 and
$711,968, Independence Medium Capitalization Fund $6,324, $8,985 and $16,377,
Independence Balanced Fund $30,186, $49,743 and $51,745, Dividend Performers
Fund $39,778, $32,953 and $22,210, Medium Capitalization Growth Fund $338,119,
$96,224 and $51,580, Small Capitalization Value Fund $45,691, $39,784 and
$42,422 International Equity $57,083, $38,053 and $62,440, Small Capitalization
Growth Fund $5,896, $5,313 and $9,166. Active Bond Fund 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 29,
2000, Dividend Performers Fund, Medium Capitalization Growth Fund, Small
Capitalization Value Fund, Small Capitalization Growth, Diversified Core Equity
Fund II and International Equity directed commissions in the amount of $667,
$9962, $14,551, $1,164, $17,390 and $111, respectively to compensate brokers for
research services such as industry, economics and company reviews and
evaluations of securities.
The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Credit
Agricole, IIIS parent, has several affiliates engaged in the brokerage business
in Europe and Asia: Credit Agricole Indosuez Cheuvreux; CPR Action (ex-Schelcher
Prince Cheuvreux de Virieu International Ltd), London; Cheuvreux de Virieu,
Nordic AB, Stockholm, Cheuvreux de Virieu, Espana, Madrid, Credit Agricole
44
<PAGE>
Indosuez Cheuvreux Deutschland GMBH, Frankfourt/ Main; Caboto Sim in Italy; Carr
Securities; Carr Futures SNC. (Paris) and Carr Futures PTE, Singapore (all
"Affiliated Brokers"). Pursuant to procedures determined by the Trustees and
consistent with the above policy of obtaining best net results, the Fund may
execute portfolio transactions with or through Affiliated Brokers. During the
fiscal years ending October 31, 1998, 1999 and 2000, the Fund did not execute
any portfolio transactions with Affiliated Brokers.
Signator may act as broker for the Funds on securities or commodities exchange
transactions, subject, however, to the general policy of the Funds set forth
above and the procedures adopted by the Trustees pursuant to the Investment
Company Act. Commissions paid to an Affiliated Broker must be at least as
favorable as those which the Trustees believe to be contemporaneously charged by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold. A transaction would not be placed with an
Affiliated Broker if a Fund would have to pay a commission rate less favorable
than the Affiliated Broker's contemporaneous charges for comparable transactions
for its other most favored, but unaffiliated, customers except for accounts for
which the Affiliated Broker acts as clearing broker for another brokerage firm,
and any customers of the Affiliated Broker not comparable to the Fund as
determined by a majority of the Trustees who are not interested persons (as
defined in the Investment Company Act) of the Funds, the Adviser, the
corresponding Subadviser (if applicable) or the Affiliated Broker. Because the
Adviser, which is affiliated with the Affiliated Broker, and the corresponding
Subadviser (if applicable), have, as investment advisers to the Funds, the
obligation to provide investment management services, which includes elements of
research and related investment skills, such research and related skills will
not be used by the Affiliated Broker as a basis for negotiating commissions at a
rate higher than that determined in accordance with the above criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Funds. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtainable for it. On the other
hand, to the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for the Funds with those to be sold or purchased for
other clients managed by it in order to obtain best execution.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each account pro rata based on the order
size. For high demand issues (for example, initial public offerings), shares
will be allocated pro rata by account size as well as on the basis of account
objective, account size ( a small account's allocation may be increased to
provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, duration benchmarks and credit and sector exposure. For example,
value funds will likely not participate in initial public offerings s frequently
as growth funds. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtainable for it. On the other hand, to the extent permitted by law, the
Adviser may aggregate securities to be sold or purchased for the Fund with those
to be sold or purchased for other clients managed by it in order to obtain best
execution.
45
<PAGE>
TRANSFER AGENT SERVICES
John Hancock Signature Services, Inc.,101 Huntington Avenue, Attn: Participant
Service Center, Boston, MA 02199, a wholly-owned indirect subsidiary of the Life
Company is the transfer and dividend paying agent for each Fund. Each Fund pays
Signature Services a fee of 0.05% of its average daily net assets.
CUSTODY OF PORTFOLIO
Portfolio securities of International Equity Fund are held pursuant to a Master
Custodian Agreement, as amended, between the Adviser and State Street Bank and
Trust Company, 200 Berkeley Street, Boston, Massachusetts 02116. Portfolio
securities of the other Funds are held pursuant to a Master Custodian Agreement,
as amended, between the Adviser and Investors Bank & Trust Company, 200
Clarendon Street, Boston, Massachusetts 02116. Under the Master Custodian
Agreements, Investors Bank & Trust Company and State Street Bank and Trust
Company perform custody, portfolio and fund accounting services for their
respective Funds.
INDEPENDENT AUDITORS
The independent auditors of the Funds are Deloitte & Touche LLP, 200 Berkeley
Street, Boston, Massachusetts 02116. Deloitte & Touche LLP audits and renders
opinions on the Funds' annual financial statements and reviews the Funds' annual
Federal income tax returns.
46
<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 Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise these ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent those which would be given to these securities on the date
of a Fund's fiscal year-end.
A-1
<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.
Issuers rated Prime-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-I or P-1
repayment ability will often be evidenced by the following characteristics:
_ Leading market positions in well established industries.
_ High rates of return on funds employed.
_ Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
_ Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
_ Well established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2
Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong ability
for repayment of senior short-term obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
A-2
<PAGE>
Prime-3
Issuers (or supporting institutions) rated Prime-3 (P-3) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Standard & Poor's Ratings Group
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
A-3
<PAGE>
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus of minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "P" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is insured by
the Federal Saving & Loan Insurance Corp. or the Federal Deposit Insurance Corp.
and interest is adequately collateralized. In the case of certificates of
deposit the letter "L" indicates that the deposit, combined with other deposits,
being held in the same right and capacity will be honored for principal and
accrued pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the deposit is
assumed by a successor insured institution, upon maturity.
NR: NR indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Commercial Paper
Standard & Poor's describes its three highest ratings for commercial paper as
follows:
A-1. This designation indicated that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
********
Notes: Bonds which are unrated expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. A Portfolio is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.
A-4
<PAGE>
FINANCIAL STATEMENTS
The financial statements listed below are included in the Fund's 2000 Annual
Report to Shareholders for the year ended February 29, 2000; (filed
electronically on April 28, 2000, accession number 0000928816-00-000213) and are
included in and incorporated by reference into Part B of the Registration
Statement for John Hancock Institutional Series Trust (file nos. 33-86102 and
811-8852).
John Hancock Institutional Series Trust
John Hancock Active Bond Fund
John Hancock Dividend Performers Fund
John Hancock Medium Capitalization Growth Fund
John Hancock Small Capitalization Value Fund
John Hancock Small Capitalization Growth Fund
John Hancock International Equity Fund
John Hancock Independence Diversified Core Equity Fund II
John Hancock Independence Medium Capitalization Fund
John Hancock Independence Balanced Fund
Statement of Assets and Liabilities as of February 29, 2000 (audited).
Statement of Operations for the year ended February 29, 2000 (audited).
Statement of Changes in Net Asset for each of the two years in the period
ended February 29, 2000 (audited).
Financial Highlights for each of the 5 years in the period ended
February 29, 2000 (audited).
Schedule of Investments as of February 29, 2000 (audited).
Notes to Financial Statements.
Report of Independent Auditors.
